While FATF has addressed a ‘perceptive leniency’ in the fight against money laundering, much needs to be done at ground level to control operational risks.
AML (Anti-Money Laundering) and KYC (Know Your Customer) processes are meant to ease risks, but are themselves fraught with operational risks. Money laundering plagues financial institutions globally. AML measures have attempted to mitigate such activities with stringent policies.
KYC compliance comes with its own set of unique challenges. While KYC has become part of the foundation to forge any kind of banking relationship; regulatory requirements have added to the burden faced by treasurers. The truth is, AML and KYC processes are not infallible matrices.
Stories of accounts being opened in a few hours are well in the past. Corporates have to face delays opening financial accounts owing to greater compliance needs, and the need to disclose an increased amount of sensitive information.
The duplication of effort involved in KYC clearance is an issue since a customer has to repeatedly provide the same information for different accounts. Since KYC is considered to be “just a compliance requirement”, banks are understaffed thereby aggravating AML and KYC risks.
Privacy is an issue with sensitive customer data, including financial and demographic data with institutions. There is little guarantee on the safety of data. Financial institutions are considered to be vulnerable to data and information breaches. Data privacy laws in India are currently in their nascent stages and yet to evolve both as legislation and as judicial precedents. Due to lack of proper laws, it becomes imperative for banks to draft KYC/AML policies prudently.
‘Know Your Customer’ guidelines are set basis the recommendations made by the Financial Action Task Force (FATF) on Anti Money Laundering standards. The objective of KYC/AML guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements or ‘politically exposed’ fraudsters disguised as customers for money laundering or terrorist financing activities.
KYC procedures enable banks to ascertain their high and low-risk customers and their financial dealings better to help them manage risk prudently. Banks should frame their KYC policies to exceed FATF guidelines, incorporating four key elements:
1. Customer Acceptance Policy
2. Customer Identification Procedures
3. Monitoring of Transactions
4. Risk Management
Banks can effectively control and reduce risk by identifying transactions that fall outside the regular pattern of activity, depending on the risk sensitivity of the account. By paying special attention to complex or unusually large transactions, banks can determine if such patterns have viable economic or lawful purpose.
Before starting any new relationship, a bank needs to take appropriate and relevant steps to independently identify the background of the individual customer and corporate client such as country of origin, source of funds, and the type of transaction or relationship proposed, which indicates the intensity of potential risk.
In India, Aadhaar (individual biometric identification system) has been made mandatory for most financial transactions, and this may create a veritable pool of data for malicious entities. Yet, all is not lost as measures to combat this malaise may be on the horizon with block-chain technologies, where banks and financial institutions can operate in a decentralized framework, functioning as a public ledger, and where transfer of funds can be traced. However it may take some time for such technology to become main stream in the Indian scenario.
While the FATF has addressed a ‘perceptive leniency’ in the fight against money laundering, much needs to be done at ground level to control operational risks. Third-party firms provide independent and relevant KYC and AML reports, which may serve to prevent banks from being charged and/or fined by regulatory bodies in jurisdictions where they operate. Such focused low-cost high-volume reports help banks and financial institutions limit compliance costs, work within recommendations of the FATF, and maintain the ability to demonstrate prudent action. Third party-provided AML and KYC checks can also assist in protecting against being significantly penalized by international regulatory bodies.
(By Deepak Bhawnani, Founder & CEO, Alea Consulting)