Banks must check the identity of their clients at the time of onboarding.  In other words, they must make sure that clients are genuine.  They must also identify the risk they represent as clients to the banking system.  Different types of clients come with different levels of risk. The level of risk determines the frequency of ongoing monitoring and transactional screening that must be conducted throughout the client relationship. 

Lets take a look at high risk clients, and how to identify them.

Sanctioned Persons and Entities

These are the individuals, companies, and organizations that are persona non grata.  They are prohibited counter-parties. You should not be doing business with them.  Depending on your jurisdiction, dealing with them can incur severe penalties.  

Most government bodies and regulatory authorities publish these lists.  These are generally knows as sanction lists.  Sanction lists are regularly updated and you must continually screen your customers against these lists as part of your KYC process. 

PEP’s

Politically Exposed Persons usually have a high profile political role or serve in public office. They may be at increased risk of involvement in money laundering or even terrorist financing based on their position. 

Companies looking to do business with PEP’s need to disclose this and continuously monitor their transactions to ensure they are compliant and not engaging in nefarious activities.

Who can fall into this category?

Here is a list people can make the PEP list.

• Government officials, Presidents, Prime Ministers, and even cabinet members of countries.
• The second tiers are the officials of the ruling parties and their opposition parties.
• Any senior executives and board members of government-controlled entities. Any relatives or close associates of any of the people mentioned above.

Often, nepotism is the easiest way to move government funds to relatives. While employing family members into positions of power may buy loyalty, these appointments often lack the required auditing when going through procurement or tender processes.

Criminal Organizations

Money laundering happens through seemingly legitimate companies. Directors or owners can often be persons of interest who hide criminal activity behind the legitimate business. Your company must do regular screenings of customers against global watchlists and negative news as part of your KYC checks. This will ensure your company remains alert to any underhanded activities that could be funding crime.

Financial Institutions should report any activity identified as possible money laundering or criminal funding activities and will freeze customer accounts until investigations are complete.

Terrorist Activities

Governments release sanction lists that include terrorist activities. Financial Institutions use the lists for sanction screening of individuals, companies, and organizations as part of their KYC process. There are almost daily updates on the targeted financial sanctions lists. They are critical to limit criminal funds’ movement to terrorist organizations to help them fund arms deals and terrorist activities.

Transaction monitoring and ongoing sanction screening of new or existing customers is a minimum requirement for any KYC process. The frequency of ongoing monitoring will depend on the AML risk profile and the risk-based approach of the company.

Reduce the risk of non-compliance

Thanks to regulation technology (RegTech), quality and affordable solutions for KYC check and AML compliance are available to your company. For large financial institutions or small non-financial firms, ensure you stay on the right side of the law. Proper compliance reduces the risk of fines and warnings. Non-compliance, especially as it relates to sanctions screening for KYC, can be costly – not to mention the long-lasting reputational damage for your business.

KYC2020 is one of the world’s 100 most innovative regulation technology solution providers as ranked by RegTech Analyst. For a demo or appointment with KYC2020, please click here.

The anti-money laundering regulations and controls are in place to identify these activities and alert financial institutions. Reporting red-flags is critical to preventing and reducing these criminal activities, and ultimately stop the source of funds for criminals.

Criminals use “layering” to hide their funds. They move money in-between accounts and companies. The more layers, the harder it is for the crime divisions to track the source of funds.

Layering allows the criminal to remove themselves from the source, and each transaction helps add another layer of the legitimacy to the funds.

Placement of the funds

The first step in the layering process is called “placement.” This happens after the criminals have illegally acquired the funds from their activities. The most common way criminals do this is by moving money through a legitimate business often owned by the criminals or their families. This initial funneling of funds usually occurs through cash-heavy operations and companies like casinos.

The aim is to manage large volumes of smaller transactions that do not trigger deposit alerts at the banks. These reporting thresholds are common knowledge, and the criminals ensure that their transactions are always below these threshold alerts.

Moving money from these companies to suppliers and other criminal associates via false invoices and payments is standard practice.

This first layer of money laundering is only the beginning. Criminals add many more layers to reduce traceable funds.

How to identify money laundering activity

 Reg flags for layering by criminal organizations include:

• Large cash deposits into a variety of bank accounts
• Making international transfers in and out of offshore accounts
• Investing in and reselling high-value items like jewelry or art
• Purchasing property and real estate
• Investing in companies and legitimate businesses
• Using shell companies to move money in and out of accounts
• Multiple transactions via different banks and financial institutions

Banks, FIs, and even many non-financial firms such as charities, universities, MSBs, and even real-estate brokers, are regulated entities and must report suspicious activity (SAR) that indicates money laundering.  Banks are required to have transaction monitoring systems in place to monitor and alert for suspicious activity.  Additional suspicious activities include:

• Prominent transactions: Cash deposits into an account and immediately withdrawn.
• Regular transactions and deposits that are exact amounts or add up to an identical amount will raise a flag as layering.
• Transactions from high-risk countries can also trigger an alert.

With the use of services offered by AML Compliance companies like KYC2020, you can get to know your customer and identify business risks related to money-laundering and financial crime.

KYC2020 provides affordable and effective AML compliance solutions. Our comprehensive databases offer the best global sanction, PEP, HIO, and criminal watchlist data. We offer AI-based sanction screening and adverse media monitoring solutions to complement our data. KYC2020 is recognized as one of the world’s most innovative regulation technology solution providers by RegTech Analyst.

For a consultation or to book a demo, please click here.

For more than 30 years, the Financial Action Task Force (FATF) has been the global standard by which many countries have wholeheartedly adopted the measure to combat Money Laundering and Terrorist Financing(ML/TF). Since the FATF first started in the late 1980’s, many countries have come a long way in adopting FATF regulations and limiting the spread of ML/TF. While the primary G37 members have strict adherences and enforcement to the FATF 40 “Recommendations”, other members follow the guidelines with more leniency. When FATF was first founded,  there were only 7 pages of the 40 “Recommendations”. A mere 7 pages!  On the other hand, there are now a staggering 127 pages printed In the recently published June 2019 version of the “Recommendations”. Let that sink in.

Similarly, the original version only mentioned “policies” once, while in the latest version these policies are mentioned 30 times. This means that new “policies” were added almost 10 times per decade, resulting in about 42 new pages per decade.  This progression is not lost on most Compliance Officers, nor is it unexpected whenever regulations come into play.  So, when one may I ask, “Why is an AML Policy so important?” The answer to the question comes down to, its required by law!

Seriously though, WHY! Apart from the legal aspect there are many more important reasons why AML policy is becoming so crucial.  To be able to combat ML/TF risk, one needs to understand the risk which can come from all types of criminal individuals and organizations.  From the lone wolf to the entrepreneurial criminal enterprises, criminals launder trillions of dollars in drugs, human trafficking, bribery and the like according to a UN study in 2011. The FATF states “The possible social and political costs of money laundering, if left unchecked or dealt with ineffectively, are serious. Organized crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments.”

For some companies it can be complicated to build and maintain an AML Policy. AML regulations are constantly being updated as seen by the FATF example over a 30+ year period. In addition, some of these businesses operate in more than one jurisdiction, and often there is more than one regulator. If you think you have what it takes to build your own AML Policy, take our CAMLO quiz and see if you have what it takes.

If not, our team at KYC2020 has set out to create a tool to help with the development and support of an AML policy.  It was built with templating in mind to have a base to start with and then customize for each entities specific lines of business.  The first version was focused on FINRA regulated entities in the US.  Now we have two more in production for Money Service Businesses (MSB) and Dealers in Virtual Currencies (DIVC) in Canada and the US. The AML Policy template mechanism is structured to allow for flexible sections and content to be tailored to the specific activities of the Regulated Entities (REs).

Once a template is chosen, the RE works through the various sections answering the questions related to the particular component of a standard AML Policy, while customizing the components and sections specifically related to their business.  Once done, the RE can request to have a certified CAMS (or equivalent) person review it and provide additional feedback or suggestions on updates and changes.

When the RE is satisfied with the results, the AML Policy can be frozen, and version control kicks in.

As with FATF and their 40+ recommendations, it is the same idea with the RE’s AML Policy.  It will be a living breathing document that expands and changes over time.   The constant transformation of the document is a good thing, it demonstrates that the REs AML regime is maturing over time to deal with new risk, regulations, and changes to the business to fight ML/TF.

Want to find out more about our AML Policy tool?  Click here and sign up for this and all the other offerings at KYC2020.

AML Training Program and Strong Internal Controls

AML compliance cannot be confined to a single department. It is an organization-wide process. If you want to have a proper AML Compliance program in place, then you must carry out training sessions with all of your employees. Make sure they are aware of good AML practices and also play an active role in implementing them. A lot of suspect organizations and individuals will look legitimate to your system and pass security checks, setting up ‘checkpoints’ in the form of diligent employees can prevent this.

Independent Audits

Besides the inclusion of AML policies and procedures within the company, you must also be open to independent audits. These are conducted by qualified teams and can help identify any inconsistencies in the company’s financial records. Audits tend to feel invasive, but they are in everyone’s best interests. They also help make sure that your system of internal controls is working.

Open Communication

Communication is one of the requirements of AML Compliance. You must try and propagate a culture where your employees can approach the senior management and the appointed compliance officer regarding anti-money laundering.  The resulting trust and transparency will encourage the employees to take AML practices more seriously. It will also help identify any existing drawbacks in your current AML compliance program.

Use Technology

This is extremely important. AML compliance does not come cheap. There are significant costs attached to it, which is why a number of small businesses may fail to implement sound AML practices in their company. Technological solutions can help you out in this regard. These not only make it easier to follow AML guidelines, but they also reduce compliance issues. In case any discrepancies are detected, these solutions also enable you to respond quickly and resolve the situation. Let’s take a look at some of the tools you can consider using:

Global Watch Lists and Screening Solutions:

One of the most useful digital solutions for AML compliance is accessing a global watch list. This helps you access a database carrying more than 900 international watch lists. Using this can help speed up your screening process.

There are also screening solutions available that are designed to minimize the chances of false positives. You can look for an option that suits your budget. The best digital solutions providers will offer you flexible packages.

Screening Decisions and Risk Assessment Tools

Carrying out a manual risk assessment and then taking a decision can be extremely time-consuming. Fortunately, you can use software that can take a decision on your behalf. This will ensure that you remain compliant while also speed things up.

The Final Word

AML compliance is not easy, but it is not impossible either. All you really need to do is strike a balance between an organization-wide commitment and seeking aid from technology. If you’re looking for strong AML compliance tools, we suggest you contact the team at KYC2020.

The chance of becoming an unwitting conduit for a money laundering scheme is becoming greater for small and medium-sized enterprises (SMEs) recently. Criminals are adopting more sophisticated means of circumventing the traditional defenses against money laundering. SMEs can become easy targets if they don’t keep up their guard. At the same time, regulatory requirements have gotten tighter and the consequences for failing to comply have become more harsh.

Companies with in-house solutions are at increased liability when it comes to these regulations. So how can you minimize your liability and improve your AML regime? Outsourcing your AML compliance solution is one idea. This method is cost efficient and works to mitigate company liability. But outsourcing isn’t without its risks. Sharing confidential data with a third-party can be risky, if you aren’t careful.

Here are a few things to consider before your organization makes the plunge into third-party compliance solutions.

Improvements in AML Policies and Infrastructure

Traditional enterprise AML compliance solutions require a lot of investment and ongoing manpower to run effectively. These systems were not developed for SMEs and as such, and can be difficult for small companies for small companies to source the resources to run them. In-house AML compliance regimes need to be maintained. For smaller companies, this can be a huge disruption. Outsourcing your AML compliance alleviates these potential stressors by taking the onus off of the company and putting it in the hands of experienced professionals. A team that can handle:

• Reviewing your existing AML controls
• Preparing and helping with the implementation of a robust AML compliance program
• Preparing your organization for audits

Access to CAMLO Services

Every organization should have a chief AML officer (CAMLO) to head its AML compliance program. These individuals receive regular training on anti-money laundering practices. They also stay up-to-date with money laundering trends and use this information to align the existing AML regime of an organization with changing laws and regulations. However, acquiring the services of a chief AML officer is considered a luxury that most SMEs cannot afford. If you’re considering outsourcing your AML compliance, check that the service provider offers you the equivalent of a CAMLO. The addition of a CAMLO can improve the quality of your AML compliance program and help you meet global compliance standards.

Access to Technology

Some AML compliance firms make use of technological solutions that help automate AML procedures. This can prove to be extremely cost-effective for small organizations that that use/employ manual methods. These tools also help improve the accuracy and speed of AML-related screening and decision-making. You can process new clients much faster and stick to the pre-requisites of your AML regime without inconveniencing a client.

To Sum It Up

Some organizations cannot outsource their compliance activities due to the nature of their operations. For others, outsourcing is definitely an alternative. However, it’s important that you understand the security risks of outsourcing your AML compliance. Opting for a reputable company with positive reviews is one way to avoid a breach of security.

KYC2020 isn’t just an AML Software solutions provider. Our team of CAMS and VSkills certified AML specialists can help you with your consulting and outsourcing needs. We have experience working with, and understand, the unique needs of SMEs, virtual currency operators, ICOs, Charities, and MSBs. Learn more about our consulting services by clicking here.

Historically, SMEs have been at a disadvantage when it comes to Anti Money Laundering (AML) compliance solutions. Often times SMEs don’t have the infrastructure to do effective sanction screening. And for the companies that can accommodate the traditional process, it still may move too slowly for it to be truly efficient for their purposes. After all, when you sign up for a service online the expectation is to move through the process as quickly as possible. SMEs, particularly emerging payment innovators, need an AML compliance process that can match the speed of their businesses. As new markets emerge these emerging payment innovators grow more influential and thus come under greater scrutiny from regulatory bodies. As that pressure mounts, SMEs must strengthen their AML compliance regimes. They need the right tools for the job.

Why not Just use the Existing Tools?

Large financial institutions, particularly large banks, aren’t strangers to the process of KYC and AML compliance. They are the largest influencers on the third-party AML compliance solution marketplace. The tools to tackle these issues have existed for a while now so why can’t SMEs just repurpose these systems for their own usage?

These tools are built for major financial institutions with whole departments dedicated to operating these programs. They need an abundance of staff and cash to run and it’s simply overkill for most SMEs. It’s like using a sledgehammer where a thumbtack would do. Ostensibly they do the same thing but the sledge hammer requires a lot more energy to operate and creates a huge margin of error. While large banks can afford the labor to use these systems, they simply aren’t feasible options for smaller companies. Moreover, the level of scrutiny most SMEs require isn’t on the same level as massive financial institutions.

Picking the Right Tool for the Job

Let’s put it this way. If you screen every sanctions list in existence, you’ve done everything possible to stay compliant with AML sanctions screening regulations. It’s more labor intensive but every imaginable base is covered. Major banks need this type of functionality. They risk massive repercussions if they make a mistake as wrong doers are constantly trying to take advantage of them. SMEs don’t have the same risk factors. They don’t need the same level of scrutiny as large financial institutions. This is where a ‘risk based’ approach comes in.

That is to say, a solution that matches the level of risk a SME takes on. Businesses conducting low risk transactions, don’t need to cover every base imaginable. Using strategic analysis, they choose to screen, not just the right number of lists but, instead, the lists that are mostly likely to yield results. This approach assures that level of labor required stays within the bounds of what is necessary for an SME to conduct their business responsibly.

AML Screening for the Next Generation

In order to keep up with the evolving markets and rising amounts of financial crime, SMEs need a new approach to sanctions screening. Decisioning systems are built with online businesses in mind. They are intelligent, self learning programs which can render 95% of all verification decisions automatically, within a 60-second time frame. They are easy to integrate into transaction workflow processes which are fast, effective, and self-perpetuating.

This approach lowers the frequency of false positives. Regardless, even the most highly tuned systems will have false positives to process and require a trained expert to handle. The fact of the matter is that human oversight is required in these processes but who has time for that when the marketplace is moving so quickly? Well, there’s a solution for that too. But we’ve talked a lot about problems at this point so let’s jump into the solution, DecisionIQ.

KYC2020 offers an easy, inexpensive way for SMEs to access and incorporate an appropriate level of screening for their purposes. DecisionIQ is a service built to be affordable, accurate, and transparent. If you want more information, check out our white paper.

Use Cases Included:

• CIBC presenting a use case for AI/ML for streaming the onboarding process to near 89% that of human capabilities.
• KYC2020 use case on how using its DecisionIQ reduced the overall burden of reviewing false positives from 8 hours down to 30 minutes.
• AML professionals reported that AI/ML from AML had many applications in non-compliance functions including training, marketing, sales, and improved customer service.
• That all solutions are not a 100% replacement of human functions, rather, and an enhancement to extend beyond human insights.

There seemed to be a consensus among attendees that adaption of AI/ML tools will continue to move slowly. When asked about some of their reasons they said:

• A limited understanding of AI/ML application in the context of AML compliance programs.
• The idea that AI/ML is a “black-box” that isn’t easy to understand for executives, regulators, and compliance officers.
• The scrutiny of AML compliance programs by regulators to be able to demonstrate an understanding of what the AI/ML is doing to come up with the results.
• The actual cost savings and/or efficiency benefits brought on by using AI/ML.

To the last point, a recent report by PwC indicates that “While many favour the use of technology in combating fraud and/or economic crime, 37% of respondents believes that it produces too many alerts or false positives. This can lead to customer friction – a growing challenge for organizations as they seek to strike the right balance.” This balance is the key to delivering on the promise that AI and ML will reduce alerts and false positives.

Surmounting the False Positive Problem

While designing DesicionIQ, KYC2020 encountered similar challenges. We needed to determine what constituted the “right balance.” That meant we had to cast a wide net while KYC searching to insure we caught the maximum amount of hits. We needed to create AI/ML models that emulated the process a person would go through to clear the false positives. The difference being on a significantly larger scale than a human would be capable of reviewing. And in a matter of seconds.

But making a screening decision isn’t the only thing that matters here. Our CAMS(tm) certified AML specialists made sure that our system’s decision process are easily auditable in the same way you’d audit a human’s. To accomplish that, DecisionIQ provides all of its decision processes in a clear, readable “Proof of Work (POW)” format. The files are securely stored and easily accessible by compliance staff, auditors, or anyone else.

A Penny Poorer, a Pound Richer

Next-generation solutions that use AI/ML systems deliver overall cost savings and a more effective compliance regime. It can be challenging to convince management that that the initial investment is worth the spend. Yet, that thinking creates situations where a company is a penny richer and a pound poorer in the end. Advances in AI/ML will allow compliance professionals to make greater strides and reduce overall spending for management teams.

Over the years, we have seen the regulatory landscape of list screening expand from the usual sanctions lists to:

• Foreign (Politically Exposed Persons)
• Domestic PEPs
• Heads of International Organizations (HIOs)
• Relatives & Close Associates (RCAs)
• most recently adverse media

These lists and sources will only continue to expand. Consider the recent inclusion of digital currencies, such as Bitcoin or Ethereum into address into the OFAC as a searchable field. Pretty soon we will see other G38 members of the FATF do the same. There is no doubt this trend will continue to be a focal point for regulators to ensure regulated entities include more and more sources.

Regulators continue to push forward to the notion that more tools are needed to tackle these issues. A recent joint publication from the Fed Reserve, FDIC, FinCEN and the National Credit Union Association states that the joint agencies are committed to supporting “innovative efforts in combating money laundering, terrorist financing and other illicit financial activity.” This is a strong statement encouraging all those governed by the BSA that the use of AI and ML learning is an acceptable approach to “enhancing the effectiveness and efficiencies” of the financial sector the point where Fincen is willing to consider “exceptive relief under 31 CFR 1010.970 to facilitate the testing and potential use of new technologies and other innovations”.

Here in Canada, the Financial Stability Board (FSB) has also recognized in a 2017 report that AI and ML is playing a critical role in driving “to increase productivity and simultaneously reduce costs and risks, while complying with regulations”.

The Take Away

AI and ML capabilities have been steadily increasing over the last few years and to ignore them much longer would be at an organizations peril. It will not only affect its bottom line, but will most likely cost more due to the shear amount of data, alerts, and false positives that are increasing every day. It’s time to take a leap forward in AML compliance and start investigating the use of AI and ML to drive efficiencies and meaningful results.