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Introduction
The global shift towards digital banking and e-commerce has been accelerated by the pandemic in the last two years. This has necessitated the rapid development of a new ecosystem where the key stakeholders include banks, mobile and online payment systems, financial service providers, brands across all industries, and the shoppers or consumers themselves.
Recent research found that half of the consumers increased the use of online or mobile banking between July 2020 and July 2021. Young adults and affluent consumers—expecting superior customer experiences from their digital banks, payment apps; and digital wallets—have increased the use of these services by 31% and 28%, respectively.
In this rapidly changing scenario, the onus is on banks, financial service providers such as credit cards, digital wallets, mobile payment companies, and private brands. They have to know their customers and keep their data safe and private. The adoption of customer due diligence (CDD) and related procedures to steadily improve the level of transparency of transactions has led to some gains. However, manual KYC processes are expensive and time and resource-intensive at the best of times.
Effects of digital expansion
While advancements in technology have presented many new opportunities and conveniences for various stakeholders, it has also led to increased complexity for the ecosystem. As in-person CDD procedures for customer onboarding and service access give way to digital systems, new security concerns have emerged, including greater risks of online identity theft and cyber fraud.
Specifically, two of the prevalent dangers or challenges to the digital financial landscape are money laundering and terrorist financing. Bad players such as financial and cyber criminals, terrorist financiers, and money launderers are finding newer and more sophisticated ways to take advantage of the system and misuse digital financial systems.
What is money laundering?
Money laundering is technically defined as the deliberate process of ‘washing’ or turning large amounts of illegitimately, illegally, or unlawfully gained money into money that appears to have come from legitimate sources. In other words, money generated through methods such as tax evasion, financial crime, trafficking, and fraud is put back into the mainstream financial system through the process of laundering.
What is terrorist financing?
Terrorist financing is a serious offence. It involves the provision or usage of funds with the intention or awareness that they will be employed to carry out an act of terrorism or for the benefit and use of a terrorist group. Conversely, in money laundering, the funds are illegally created. In terrorist financing, the source of the funds does not matter to the commission of the crime.
How can KYC Help with Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT)?
Cyber criminals who help money launderers and terrorist financiers cover their tracks can easily impersonate a business or individual to commit financial crimes. Customer identification/verification/monitoring and due diligence processes are all wrapped under the umbrella term of KYC or Know Your Customer. They are acknowledged as key pillars in the AML/CFT framework for both public and private sector stakeholders.
All stakeholders, such as banks, NBFCs, fintechs, payments, insurance, wealth management, crypto, e-commerce firms, mobile wallets, etc., need to make a thorough upgrade in digital or eKYC solutions. They do this to keep pace with the complex new security demands of the current landscape. Existing technologies and processes and legacy systems cannot adequately address these dynamic new challenges.
When powered by new technologies such as artificial intelligence (AI), machine learning (ML), biometrics and natural language processing (NLP), etc., KYC has the potential to make anti-money laundering (AML) and counter-terrorist financing measures (CFT) faster, cheaper and more effective. It can also mitigate the unintended consequences of AML and CFT initiatives, such as financial exclusion or negative customer experiences.
For example, KYC processes for opening new accounts include digital identity verification using facial recognition or comparison technology. These have proven effective in new customer verification and onboarding. Banks are also exploring advanced technologies like behavioral biometrics and behavioral analytics to pinpoint anomalies in typical user swipe patterns, triggering additional authentication requirements if any red flags are raised by the system.
AML and CFT are public and private concerns
AML and CFT are the aspects of security that must be addressed at both the public and private sector levels. It should be done in terms of better identification of risks and monitoring of suspicious activity. Weak AML and CFT provisions can give the impression of poor law enforcement at the national and private-sector levels. The threat of criminals breaching unintelligent KYC systems is very real. Advanced AI, ML, crypto, and NLP technologies can enable stronger and more reliable risk assessments, onboarding processes, auditability, accountability, and overall good governance, along with enabling operational and cost efficiencies.
KYC has been made mandatory because it can make a significant impact at various stages of the banking cycle, mitigating its exposure to money laundering or terrorist financing risks. The benefits of KYC are the following:
1. Customer acceptance: KYC helps identify and flag high-risk customers and smooth the process for low-risk customers.
2. Customer identification: It eases the onboarding of new customers and maintains a complete set of officially valid documents (OVDs).
3. Ongoing monitoring: It allows close examination and keeping tabs on ongoing transactions. This ensures that they are consistent with the customer’s profile and source of funds, and do not show any unusual activity.
4. Risk management: KYC helps in closely tracking the dynamic business relationship with existing clients. It also ensures that all transactions are consistent with the clients’ business, risk profile, and funding sources.
Conclusion
Any inability to identify, assess and mitigate money laundering and terrorist financing risks, in the context of customer identification, verification, and monitoring of transactions can pose an obstacle to the effectiveness of the AML/CFT framework. This is where new technologies can provide the most value, making it harder for criminals and terrorist financiers to misuse global digital financial systems. Steady advancements in technology mean that KYC can help banks remain AML/KYC compliant and customers safe. It also allows AML and CFT measures to remain robust in terms of implementation and effectiveness for public and private good. Join us to know more!
