Over the last decade, there have been several fundamental changes in Europe's KYC and AML regulations.
What Exactly is a KYC Check?
KYC, or Know Your Customer, is the process of detecting and updating a client's or individual's identification. Banks, for example, do similar checks when a new account is opened. It is a necessary procedure used to identify consumers as part of a due diligence process, and clients will be required to provide evidence of identification and other necessary papers.
Who is Responsible for Performing KYC Checks?
Any company in a regulated industry, such as a bank, is legally required to monitor customers and clients as part of its KYC procedures. The ultimate goal of screening is in the name - know your customer – it is critical to determine whether individuals are involved in activities like money laundering, fraud, or corruption.
Typical examples of these firms are:
- Banks and other financial entities.
- Managers of assets.
- Experts in the law.
- Estate agents, amongst others.
In recent years, high-profile examples of suspected money laundering have focused the general public's attention and policymakers on the infiltration of illegal cash and fraud into European communities. As financial institutions and authorities better understand these illicit techniques, current AML regulations are constantly modified to avoid such approaches better.
Not only is the growth of consumer expectations putting additional pressure on organizations to offer seamless, wholly digital and mobile services, but the unusual scenario dictated by the coronavirus outbreak in 2020 is also hastening the rate of digital transformation in KYC compliance.
European Commission's Action Plan
To deal with the challenges of this rapidly changing ecosystem, the European Union has begun to implement a number of more rigorous financial regulations in recent years and is now looking to foreseeably strengthen its enforcement powers across the bloc, as emphasized by the European Commission's Action Plan published in May 2020.
Understanding the new rules' logic requires understanding the macroeconomic and geopolitical environment preceding their implementation. The decade beginning in 2007 saw the globe – and particularly the European area – caught up in what became recognized as the Global Financial Crisis and the Great Recession that followed. As nations entered a crisis with actual economic effects, a substantial portion of the general people struggled to comprehend the mechanisms that had gotten their national financial systems into such a mess in the first place. People began to sense the need for more openness on how their personal data was being held and utilized by firms parallel to the rising skepticism in businesses.
At the same time, news articles like the Panama and Paradise Papers raised public awareness about the widespread prevalence of money laundering activities in our communities. Finally, catastrophic terrorist incidents have heightened the need to implement comprehensive anti-terrorism financing measures across jurisdictions.
As a result, a variety of rules were enacted to address one or more of the broad concerns that the financial industry had been dealing with over the preceding ten years. Specifically:
- The Fourth, Fifth, and Sixth Anti-Money Laundering Directives (AMLD4, 5 & 6) aim to combat the widespread presence of money laundering in our society by instituting more stringent inspections, improved international collaboration, and stronger criminal penalties.
- The Payments Services Directive (PSD2) was implemented to encourage customer-centric innovation in banking, emphasizing avoiding payment fraud and the abuse of digital financial tools.
- The revised Markets in Financial Instruments Directive (MiFID II) was motivated mainly by the need for more openness in financial investment activities.
- The General Data Protection Regulation (GDPR) was the EU's answer to the public's demand for more governance over personal information.
Historically, risk and compliance professionals have served as gatekeepers, putting systems in place to safeguard the organization from destructive human behavior, large regulatory penalties, and reputational implications. This function has grown even more critical in this new, more challenging regulatory environment.
The rising danger of economic and reputational consequences, in particular, has pushed the compliance function closer to the center of the corporate structure. As a result, compliance is no longer seen as an afterthought or a "check the box" activity but rather as a proactive and deliberate endeavor.
With various rules coming into effect in fast succession, compliance professionals have found themselves in need of a more complex and adaptable approach to their job, one that allows for swift adjustments to adapt to new demands as they are implemented.
The Importance of KYC Tool Implementation
Because of the sweeping nature of the new rules, compliance teams must collaborate with a wide range of divisions inside their organization. Close coordination with the IT department, in particular, is required to ensure that current business rules are represented in processes and that all team members follow them. The coronavirus crisis in 2020 has heightened the necessity for coordination between these two areas even more. To maintain financial institutions' business sustainability, compliance must transition from a large office- and paper-based role to a digital and remote one. Therefore, implementing AML software is quite essential when it comes to compliance with the newly emerging regulations. If you want to learn about Sanction Scanner's AML software, you can contact us and request a demo.