Money laundering continues to be a major problem for the UK Government and the overall economy. To tackle this, in 2022 over two-thirds of FCA fines were related to money laundering and compliance. And with the sheer number of ongoing KYC and AML failures, not only in the UK but worldwide, this comes as no surprise.
In 2020, Skandinaviska Ensikda Banken, was fined $107.3 million for falling short on their AML measures. This followed a review which found that the SEB was failing to meet the expected legal compliance regulations. They were ordered to improve their KYC and transaction monitoring system to better identify customers classified as high-risk.
Know your customer (KYC) is a significant tool in the fight against money laundering and other financial crime. Regulated businesses must take steps to verify the identity of those they work with, investigate the sustainability, and manage the risks involved, whilst maintaining a business relationship with them.
There are stringent AML procedures within UK regulations that must be followed. KYC standards are a necessary tool designed to protect financial institutions against fraud, corruption, money laundering, and terrorist financing. It helps organisations to identify and verify customers whilst protecting themselves from risk.
Ensuring regulatory compliance
The main UK law relating to money laundering and KYC is the Money Laundering Regulations 2007.
Due to the ongoing risk that financial crime presents, and the number of regulations that have been put in place, the Financial Action Task Force named the UK a global leader in promoting corporate transparency.
To ensure compliance with UK AML requirements, businesses develop and implement policies, controls, and procedures to reduce the risk of being connected with financial crime. Regulated organisations, such as financial institutions and payment companies, must verify individuals and business identities through KYC.
Consequences of non-compliance include hefty fines and reputational damage. For major infractions, the primary money laundering offences under POCA carry a maximum penalty of 14 years imprisonment and an unlimited fine.
Preventing financial crime
Know Your Customer acts as a powerful tool to prevent financial crimes such as money laundering and fraud.
Customer verification is an additional step that deter criminals with illicit intensions from your organisation. KYC helps financial institutions establish proof of a customer's legal identity, and any evidence provided will need to go through a verification process.
If a customer is found to present any fake or forged documents (including those related to identity), they can be fined, imprisoned, and damage the reputation of the business they’re connected with.
Some of the most recent examples of businesses fined for involvement in financial crime from ineffective KYC procedures include:
- Deutsche Bank AG was fined 163 million pounds by FCA.
- Commerzbank AG fined 38 million pounds by FCA.
- BitMex fined $100 million to settle civil charges with FinCEN.
- Goldman Sachs, where the fine reached over 2.9 billion.
- Westpac fined $900 million.
Mitigating risks for businesses
By carrying out customer due diligence and identity verification, the risk of unwittingly working with people or organisations involved in illegal activity or money laundering is minimised, making the procedures invaluable in helping businesses assess and manage risks associated with their customers.
An added benefit of KYC is enabling a better customer onboarding compliance program. By adopting a risk-based approach you can adjust verification levels based on risk factors; low-risk customers are accepted more quickly, whereas higher-risk customers may require additional verification procedures, allowing you to allocate resources effectively.
Building trust and reputation
These procedures will help verify clients’ identities and examine the probabilities of any illegal wrongdoings. They also help prevent criminal activities like money laundering, bribery, fraud, and black money.
The prevention of money laundering and other illicit activities, the ability to track transactions for tax purposes, and the capability to verify identities, not only help reduce fraud but also establish trust between the business and their customer by promoting transparency and accountability.
Improving customer experience
Some businesses believe out-dated KYC procedures slow down internal processes and make customer onboarding difficult. However, when operated correctly, KYC can have a positive impact on the customer onboarding experience.
Automation of the KYC process ensures faster and more accurate digitisation, effective verification, and shorter processing time. This provides an improves customer experience, and a seamless processing of required KYC documents.
Streamlined KYC processes through Red Flag Alert reduce customer friction and streamline onboarding, helping you achieve a balance between compliance and a user-friendly experience.
How can Red Flag Alert help?
Know Your Customer is a critical process in today’s business landscape. Prioritising robust KYC practices as part of your risk management and compliance strategies is crucial to protecting your business from risk – Red Flag Alert makes it easy, so you have more time and resources to put back into your business.
- Perform fast, accurate customer IDV checks using biometric facial recognition.
- Check and monitor clients against international blacklists for sanctions, politically exposed persons (PEPs) and more.
- Obtain information on company directors, ultimate beneficial owners, and PSCs, including their other business interests.
- Generate customer due diligence programme reports so that you have a verifiable audit trail that meets regulatory requirements.
- Set up monitoring alerts so you know as soon as customer risk profiles change.