The process of verifying a customer's identification is known as Know Your Customer (KYC). Every organization should undertake KYC to verify who their clients and staff are before engaging in a commercial connection. Each client is needed to give credentials such as ID papers in order to utilize a company's service. Regardless of whether Anti Money Laundering requirements exist, KYC or Customer Due Diligence (CDD) should be conducted.
Technology has not only enabled society a better and more comfortable life, but it has also enabled criminals in devising new and more effective means of committing crimes and concealing their tracks, making it more challenging for law enforcement authorities to detect and fight them. Money laundering crimes are primarily committed to conceal the source of illicit funds and to legalize illegal financial transactions so that the funds can be easily transferred to various locations around the world to fund and support illegal activities such as terrorism financing and human trafficking.
As a consequence, financial organizations such as banks, financial institutions, and institutions, as well as other financial bodies dealing and engaged to financial transactions, must establish a reliable system of controls and procedures so that they can detect unusual money flows and transactions used by criminal elements to circumvent rules.
The Financial Action Task Force (FATF) is a global regulatory organization investigating money laundering trends and developing appropriate regulations and procedures to combat all forms of money laundering. It has developed a set of protocols for member nations to follow to regulate and reduce money laundering over time.
Even though each nation adapts the FATF principles to create legislation that best addresses money laundering threats in their jurisdictions, it's crucial to remember that KYC, or "Know Your Customer," is a crucial aspect of their different AML procedures. As a result, if KYC processes are not incorporated into AML policies, they cannot be implemented effectively.
Importance Of the KYC Process
The KYC procedure is concerned mainly with the following:
Verify the customer's identity:
Determine if the customer is a person, a partnership, a sole proprietorship firm, a corporation, a limited liability partnership, or any other type of business entity, and examine any legal documents that identify the individual or the specific business entity.
Determine the following information:
Verify the customer's official or registered address, the location where the individual's personal or commercial operations are conducted (residence, office, factory, etc.)
Looking at the big picture, the KYC processes in an AML system can assist in determining:
- The nature of the client's industry
- The reason for the account's creation
- The source and final destination of cash transferred between accounts
- Expected account activity, both in terms of number and kind of transactions
- The account's genuine beneficial owners, as well as those who have been nominated
- The client's audience (es)
- The validity of identification documents
- The individual's residence or the location of the company concerning the bank/financial institution
What Happens When Organizations Doesn't Comply with AML/KYC Regulations?
The legislation directs how regulated companies do business, and compliance teams are continuously confronted with new restrictions aimed at preventing money laundering and terrorist funding. AML (Anti-Money Laundering) and KYC (Know Your Customer) are two sets of legislation that are enforced in the great majority of nations. It's essential to have a comprehensive understanding of the account holder, especially when it comes to identifying persons who are subject to sanctions, Politically Exposed Persons (PEPs), or those who might represent a significant risk to the bank's clients and stakeholders.
Penalties for Non-Compliance
Money fines are the most widely known punishments for noncompliance. In 2012, prominent financial firms such as HSBC ($1.92 billion) and Standard Chartered ($327 million) received a lot of public attention, as did BNP Paribas ($8.9 billion) in 2014. Over the years, several other institutions have also been punished for smaller amounts. In addition to the institution's dangers, people inside those institutions have accountability. According to a recent investigation, 60 percent of all respondents anticipate compliance officers' personal responsibility to rise in 2016, with 16 percent anticipating a significant rise. Noncompliance can result in criminal consequences such as jail. Failure to report suspicious transactions is a crime in the United Kingdom that carries a potential penalty of five years in jail as well as penalties. In Canada, the same is true. Money laundering offenses in the United States have far harsher sentences, ranging from 5 to 20 years in jail, depending on the hardness of the offense.