Know Your Customer (KYC)/ Anti-Money Laundering (AML) has and is an established norm in financial services industry. AML is assuming a global importance due to several negative factors such as money laundering and terrorist financing, crime and corruption. Recently many financial institutions have been punished and penalized with million dollar fines and some were even subjected to closure or �cease and desist�. �Through a wide analysis, it was confirmed that these AML programs don�t follow regulations and are deficient in many ways. These deficiencies were widely identified to –
- Deficiencies in Transaction Monitoring and SAR Processing
- High Risk Products Dealings
- High Risk Country Dealings
- Group Compliance
- High Risk Customer Dealings
- Dealings with Sanctioned Countries/Parties
The efficacy and enforceability of AML regulations would be easier only and only if regulators choose to bring more transparency into methodology and application of these regulations. AML regulations are majorly influenced by European Union (EU) AML Directive IV. Some of the highlights of this EU AML Directive IV are as follows-
- Minimization of compliance arbitrage
- Adoption of harmonization and consistency etc.
- Acceptance of risk based approach
- Sources of efficiency
The regulators understand that financial institutions have to overcome business pressures and meet compliance costs, if they need to be in compliance with regulations. The regulators are openly favoring ‘risk based approach� over ‘rule based approach’ so that they can channelize their resources in identifying high risk customers, countries and products, rather than spanning the broad customer base. Going forward, RBA will assume a key role in AML programs.
It is recommendable to differentiate customers into entities and natural customers because assessment parameters would be different in both categories. The financial institutions need to identify factors on the basis of customer type. The AML risk can be minimized by relying on standalone ratings according to product, customer and country, where combining any two aspects will work the other way around. Hence, it is always efficient to consider a combined rating of these three elements. The customer due diligence (CDD) should be considered on the basis of customer score. Before crafting these models, the financial institutions need to use statistical techniques, parameter weights, testing and validation techniques. The institutions should prioritize RBA to identify customers under standard CDD and their transactions, if they wish to gain efficiencies in an AML program.
The financial institutions can gain efficiency by maintaining AML effectiveness through
- Data quality
- Sing application with multiple DB
- Customer satisfaction
- Reducing false positives
- Improved assurance
The major challenges posed in AML compliance lies with its true implementation, documentation and mapping. Entities operating in varied geographical landscape still face major problem of data protection and sharing. In future, some of these challenges can be downsized by addressing through niche groups, regulators and major financial institutions will aim through craft co-operation and change.
