What are AML and KYC Requirements for Banking and Why Do They Matter?

Understanding Banking AML and KYC Requirements

Compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations is a critical component of banking operations.

A financial institution’s efficiency achieving AML and KYC compliance influences its ability to quickly onboard customers. The average onboarding process for a new corporate client can take up to 100 days, and more than 40% of that time is spent on KYC due diligence and account opening. 

Inefficient AML and KYC processes can lead to frustrated customers, lost business and sanctions or fines for noncompliance. When customer onboarding and ongoing monitoring are smooth, financial institutions can build consumer trust and expand.

Customer onboarding is crucial because it sets the tone for the business relationship. A slow, cumbersome process can sour the relationship and even lead to customer abandonment.

A clear understanding of what to collect and why can lead to smooth processes that take into account the customer’s point of view.

Why Does the Banking Industry Need KYC and AML Compliance?

AML processes are fundamental requirements in banking. Almost every country has strict AML regulations, with noncompliance leading to fines, sanctions and the risk of reputational damage.

Robust AML procedures often include:

• Clear, up-to-date written policies 
• A designated compliance officer with the power to influence the company’s actions
• Proper training so employees understand the company’s policies and procedures
• Periodic reviews to keep the program tested and current
• KYC is a critical function in banking and a requirement in complying with AML laws. It involves verifying a customer’s identity, financial activities and risk level.

KYC requirements during account opening vary based on local regulations, but they often include collecting and verifying identity information such as:

• Name
• Birthdate 
• Address
• Identification number

Identity verification can include validating documents or using other methods, such as comparing a potential customer’s information with data from consumer reporting agencies or other sources.

Once an identity is verified, financial institutions can perform additional due diligence to understand the nature of a potential customer’s financial activities. The due diligence steps financial institutions take depend on their risk-based approach to verification, which is influenced by factors such as:

• The types of accounts offered by the bank
• The bank’s methods of opening accounts
• The types of identifying information available
• The bank’s size, location and customer base, including the types of products and services used by customers in different locations

Watchlist screening also plays a crucial role in onboarding by checking if a potential customer is on a sanctions list or politically exposed. Those checks help financial institutions determine the risk of performing financial activities with people or businesses.

What Is KYB and Why Does It Matter in Banking?

Just as banks perform KYC on people, they need to perform Know Your Business (KYB) procedures for corporate customers. KYB entails knowing a business’s identity, its financial activities and the risk it poses.

KYB requires regulated entities verify a company’s:

• Business registration number
• Legal name
• Address
• Operational status
• Key management personnel
• Incorporation date

Depending on the risk assessment, further enhanced due diligence (EDD) might be necessary. EDD involves collecting additional information for higher-risk customers to gain a deeper understanding of their financial activity. 

Some countries require regulated entities have proper risk assessment and control procedures. Others outline the circumstances when EDD is necessary. 

Factors to consider for EDD include:

• Business location
• Nature of the business
• Purpose of the business transactions
• Expected pattern of activity in terms of transaction types, amount and frequency
• Expected payment origination and method 
• Articles of incorporation, partnership agreements and business certificates
• Understanding the business customer’s customers
• Identification of ultimate beneficial owners (UBOs) of an account or business customer
• Details of other personal and business relationships the customer maintains
• Approximate annual sales
• AML policies and procedures the customer has in place
• Third-party documentation
• Local market reputation through review of media sources

What Are UBOs and How Can Financial Institutions Identify Them?

The UBO owns or controls a business or legal entity. Understanding who UBOs are and the risks they pose is a critical part of EDD and can help financial institutions achieve regulatory compliance and enhanced security.

The definition of a UBO varies by country. The U.S. Financial Crimes Enforcement Network definition of a UBO, for example, includes:

“Any individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25 percent of the ownership interests of a reporting company.”

UBO information is often difficult to find. Nominee shareholders can hide true ownership. Shell companies or trusts can obscure information. The ownership percentage can be difficult to pinpoint and might require following complex paper trails.

There might not even be paper trails. Despite regulatory recommendations to the contrary, some parts of the world don’t have documentation requirements for beneficial ownership, meaning there is no shareholder information to investigate. 

Building an efficient UBO verification program often requires four key steps.

1) Receive company vitals

Collect and verify company records such as identification number, name, address, key management personnel. 

2) Analyze the ownership structure and percentages

Determine who has an ownership stake, either through direct ownership or another party.

3) Identify beneficial owners

Calculate the total ownership stake, or management control, of any associated person and determine if it crosses the threshold for UBO reporting.

4) Conduct AML and KYC checks

Perform AML and KYC verification, including watchlist screening, on everyone identified as a UBO.

There are technologies that can help financial institutions acquire, process and analyze KYB information. Leveraging a digital, automated platform can help financial institutions accelerate verification, ensure accuracy and quickly onboard business customers.

Deploying Robust and Scalable Bank AML and KYC Solutions

The global banking system processes more than a billion transactions every day, including through transfers, domestic and international payments, loans, and account opening. Each transaction represents an opportunity for financial crime, whether it’s money laundering, identity theft, fraud or terrorism financing.

Financial crime attack vectors continue to evolve, requiring changes to compliance requirements. New risks and regulations require analysis, strategies, processes, training, implementation, monitoring and adjustments.

Banking customers understand and appreciate the need for security. But slow, cumbersome onboarding can lead to frustration, potential abandonment and lost revenue.

Building and maintaining online trust in such a complex and diverse environment poses extreme challenges. A person and business verification can help financial institutions overcome those challenges by:

• Automating manual processes, such as data acquisition and data entry
• Using artificial intelligence to enhance data verification
• Combining data sets from multiple sources to develop a holistic understanding of customers and their associated risk

Automatically gathering data, fine-tuning risk-based processes to match specific situations and delivering accurate responses in a standardized format can help financial institutions save time and make informed decisions.

Compliance with AML, KYC and KYB regulations is not optional for financial institutions. But leveraging an agile, automated, global verification platform can help ensure organizations quickly achieve compliance while building customer trust and expanding their worldwide reach.