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.

Over the past few years complying with anti-money laundering (AML) regulation has become increasingly difficult for many credit unions in the United States and Canada. With the rapid expansion of new technologies, industries, business models and cross-border transactions, regulators have ramped up their AML compliance demands.

While big banks have their own AML departments and are investing big bucks in their digital infrastructure, smaller credit unions generally lack the funds and other resources to keep up with it all. This shortfall in turn becomes a major impediment to complying with AML/CFT regulations.

In this three-part series we are going to take a closer look at AML/CFT compliance among credit unions. Specifically, we’ll examine the current cost of not being able to comply, some new compliance challenges and threats, the most essential elements that today’s credit union AML/CFT compliance programs need to have, and the easiest, most cost-effective solutions to actualize such changes.

The High Cost of AML/CFT Compliance

In a recent survey by CU Service Network of over 60 executives from credit unions ranging in size from $30M to $1.6B in total assets, a whopping 98% identified compliance as being their primary operational concern.

It’s not hard to see why. According to another study, this time from the Government Accountability Office (GAO), US credit unions spent up to 2.4% of their total 2018 operating expenses on AML/BSA compliance.

For smaller credit unions that percentage is likely higher since they do not have the same economies of scale or investment in IT infrastructure that bigger credit unions enjoy.

Yet, these numbers still don’t accurately reflect the true cost of compliance among credit unions.

At KYC2020, we offer consulting services to our clients to help them develop and employ a customized AML compliance program. During the risk assessment and workflow analysis, we will consider numerous indirect costs that may increase risk while reducing efficiency. For example:

• When first-line staff are tasked with duties related to regulation, reporting and record-keeping requirements that add to their regular responsibilities. This takes them away from their regular jobs and makes them less efficient.

• When compliance programs rely heavily on manual and repetitive procedures. This increases the chance of errors and omissions. Even small errors, such as incorrectly labeling a document, can lead to fines and costly downtime.

• When the credit union’s senior leaders are pouring majority of their time and money into cybersecurity and compliance rather than strategic initiatives and goals. This lack of strategic focus can lead to missed opportunities.

On the other hand, when credit unions are unable to prevent fraud and money laundering activities, they will inevitably suffer from declining revenues, lack of customer satisfaction, debilitating fines, and damage to their reputation.

It doesn’t have to be this way! There are proven methods for credit unions to get back all the wasted time and money.

The most successful credit union leaders are those who seek to understand the role that effective compliance management plays in the institution’s overall strategy. They make an effort to consider the impact of compliance on operations as well as customer acquisition and retention. Finally, they recognize their unique needs and circumstances and then implement the most appropriate tools to help them optimize their compliance activity.

By doing so, these leaders will be best positioned to help their credit unions grow and prosper, now and in the future.

Rethinking Credit Union AML Compliance

As the financial services industry continues to evolve and expand and new compliance rules emerge, many credit unions have been content to simply make tweaks to their current compliance programs, policies and procedures. This only leads to greater inefficiencies over time.

Instead, senior leaders need to completely rethink how compliance happens along four key verticals:

1. Conducting an Audit and Risk Assessment

Risk assessment is a pillar of AML compliance and generally is a crucial first step in building an effective AML/CFT program. Yet, many senior management teams get derailed when they try to rubber stamp a solution or a mix of solutions on to their legacy systems.

The problem with this is that there is no one-size-fits-all solution to fulfilling compliance requirements. While each financial institution must fulfill certain legal obligations, it is essential that the program be tailored to their unique needs in addition to the identified risks and vulnerabilities of their clients and third party suppliers

In practice, this means that an AML/CFT program must take into account factors related to their product and service offerings, their size and geographic location of the branches, the business activities, and knowledge of its customers activities.

Finally, another often overlooked factor is the ability to scale and adapt as the credit union matures and grows. A credit union’s AML/CFT program should have the built-in flexibility to adapt to changes in compliance requirements, technology, and its target market while maintaining strict data security and information management controls.

2. Establishing Internal Controls

A credit union’s compliance obligations include not only federal and state laws, but also the expectations of regional, and at times, international regulators. For example, the General Data Protection Regulation (GDPR), which requires businesses to protect the personal data and privacy of European Union citizens, could apply to a credit union with members from multi-national businesses.

Few credit union leaders would fail to acknowledge that their AML/CFT compliance program should focus on internal controls and systems to detect and report financial crime. But at the same time, several other items should be taken into consideration based on the modern realities of AML/CFT programs today. These include:

• The increasing number of mobile payments that significantly reduce financial transaction times.

• The impact of customer experience and expectations on revenues and customer retention. A recent study conducted by Forrester, revealed that customer experience is the most highly valued quality consumers are looking for in a financial institution. Many studies show the same results for business customers too.

• Cybersecurity and financial fraud have grown in scope and complexity in recent years. Fraudulent activity is getting increasingly more difficult to recognize and contain. When suspicious activity is identified, the response needs to be data-driven, intuitive, and happen in real-time.

3. Providing Continual Employee Training and Education

AML/CFT compliance always extends to a credit union’s employees. In fact, employees tend to be the weakest link in data security and compliance procedures. Staff members need to be aware of their roles and responsibilities within the system. They should know how to conduct due diligence and navigate the various organizational policies and procedures that help to ensure on-going compliance.

But given that compliance should be a dynamic system, employee compliance training and the communication of new systematic threats must also be dynamic and dealt with swiftly before becoming too much to bear.

4. Monitoring the Results

Although AML/CFT compliance programs require and independent review, the credit union should also involve a regular internal review of compliance controls in order to measure their effectiveness not just in meeting compliance standards but in achieving strategic business goals. Identifying the institution’s strategic goals while focusing on compliance is a core competency that will drive success among today’s credit unions.

In short, today’s credit unions are in need of dynamic and customized AML/CFT compliance programs. Achieving such a goal is actually easier and more cost-effective than it seems given the rise in regulation technology (RegTech) and vendor based compliance solutions.

Before we can take a look at these vendor based solutions, we need a deeper understanding of the challenges credit unions are currently facing when it comes to AML/CFT compliance.

We’ll discuss that in part two of this series.

About the Author

KYC2020 is a Chicago-based global regulation technology company.  KYC2020’s team of CAMS certified AML specialists have combined next-generation technology with their deep understanding of Banks, MSBs, Credit Unions, and Cryptocurrency operations to deliver compliant AML solutions that are low friction and cost effective. KYC2020 is recognized as one of the world’s most innovative regulation technology solution providers by RegTech Analyst magazine.  To learn more about the author, visit www.kyc2020.com

Monetary Fines

If the cost of compliance is high, it’s nothing compared to the fines that result from non-compliance. Last year, the ING group, a Dutch bank, was fined $900 million for failing to comply with AML legislation. The investment bank, Morgan Stanley, also received a fine of $10 million for compliance failures. They failed to monitor low-priced securities worth around $2.7 billion and that became an easy way for criminals to launder money.

In 2017, FinCEN fined Lone Star National bank, an independent community bank $2 million for “willfully violating” AML requirements. Also in 2017 FinCEN issued an $8 million fine to The California Card Club for similar reasons.Even in the case of small institutions, the cost of non-compliance is astronomical but it doesn’t end with fining institutions.

In April 2019, Eric Powers, a currency exchange operator was personally assessed a civil penalty for violating BSA reporting requirements. He was issued a $35,000 fine and was barred from any activity that would make him a “money service business” per FinCEN regulatory definition.

Whether you are a major bank, casino, or an individual operator, willful non-compliance, negligence, or even inadequate compliance, can be very costly.  And claiming ignorance or incompetence is no excuse.

Acting as a Conduit to Criminal Activities

Non-compliance with AML regulations can make you part of criminal activities such as financing terrorism. Non-compliance may also adversely impact international relationships. For instance, Standard Chartered was fined $1.1 billion for failing to observe US sanctions against Iran. According to the charges drawn, they also had inadequate controls against financial crimes. Lack of AML compliance also has a destabilizing effect on financial markets. It influences the flow of funds and investments and that can disrupt the inner workings of the market. Finally, it also influences economic policies which can have a country-wide impact.

Loss of Trust

The financial repercussions aside, failing to comply with AML regulations also ruins the public image of an organization. It automatically places a question mark on the integrity of the business and forces clients to consider other options. This loss of trust can be difficult to recover from, especially for companies still establishing their brand.

Businesses may also lose their investment partners, who no longer want to be associated with an organization that is being scrutinized for non-compliance.

Increasingly Stringent Auditing Processes

Once a company makes the news for failing to comply with rules and regulations, it is likely to be subjected to increased scrutiny during audits. Not only is this time-consuming, but you also have to be prepared to answer obscure questions or risk facing a fine. Most businesses cannot afford to take a second hit to their reputation or the additional fine. The only way to ensure your company doesn’t end up in this difficult situation is to never be caught non-compliant.

To Sum It Up

There are several financial, reputational, and personal repercussions for non-compliance with AML regulations. Small and medium-sized enterprises (SMEs) that are unable to cope with the cost of manual compliance can consider using technological tools instead. These tools improve the efficiency of AML compliance processes while remaining cost-effective for your business.

Need some help?

Contact the team at KYC2020. They can offer you the best solutions for AML compliance and introduce you to some top-notch next-generation technology tools to automate and reduce friction in your sanction screening workflows.