Knowledge Series: What is the need of AML and KYC? How is it Monitored?

Knowledge Series: What is the need for AML and KYC? How is it Monitored?

If you are familiar with the financial sector, then terms like AML (Anti Money Laundering) and KYC (Know Your Customer) would be common to you. For many financial institutions and for organisations working in the financial sectors, AML and KYC are initiatives which have emerged as vital focus areas. Organisations in the financial sectors need to adopt initiatives like AML and KYC, as not doing so could attract hefty penalties. In addition to this, applying initiatives like AML and KYC gives these institutions a chance to overcome the challenges of acquiring the ‘Right’ set of clients, there are certain factors like digitally emerging competitors and low-profit margins that are forcing institutions to rethink their AML and KYC programs. Read on to understand the nature of these programs and their importance in recent times.

What is KYC?

Know your customer as the name suggest is a set of procedures and screening criteria that a financial institution invests in, to identify and understand the customer. It is a set of steps as per the law to basically assess and monitor any customer risk and any legal requirement, to comply with anti-money laundering Law (AML). KYC procedures are also important to mitigate any risks of fraud and losses due to illegal funds and their transactions.
Financial institutions take steps like

  1. Putting in place a Customer Identification Program (CIP), under which they can establish a customer identity so that they can evaluate that the source of the customer’s fund is not illegal.
  2. Customer Due Diligence is essentially done to build trust with a potential client. This becomes a critical element for banks to protect themselves from terrorists, criminals and Politically Exposed Persons (PEP).
  3. Continuous Monitoring mitigates risk as ongoing monitoring of the customer and their transactions will identify financial oversights in transactions if any.

An example of KYC according to the Government of India, is the requirement of six Officially Valid Documents as proof of identity, like Passport, Driving License, Voters Identity Card, Pan Card, Aadhaar Card and NREGA Job Card.

What is AML?

Anti Money Laundering like KYC is also a set of procedures and regulations that have come into existence to eliminate any illegal actions used to generate income. AML essentially targets activities that include any trade of illegitimate goods, market manipulation, tax evasions and corruption of public funds. It also includes any act or effort to hide the aforesaid activities. Illegal activities generate illegal income that further needs to be cleaned, money launderers use a series of steps to create a mirage, such that it seems the money is sourced legitimately.
The onus of identifying any potential risk factors is on financial institutions that issue a credit to customers. They need to ensure that the finances are not being used as a part of any money laundering scheme. Financial institutions should not only follow the AML laws but should also guide their customers on it.
Both KYC and AML monitoring is the financial institution's responsibility. Monitoring differs in the jurisdiction and is country-specific. Since the risk of non-compliance is very genuine, there is an increased business pressure on financial institutions to be compliant on AML and KYC.
Advanced analytical solutions using Descriptive, Prescriptive and Predictive Analysis in AML and KYC have emerged thus reducing the costs significantly. There are some obvious and clear benefits of leveraging analytics to support KYC and AML, it is still considered in the nascent stage.

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