What Are KYC and AML Requirements for Financial Services and Why Do They Matter?

KYC, AML and Identity Verification

Understanding who financial services clients are and the risks they pose is fundamental to achieving regulatory compliance. Balancing that with fast, convenient onboarding can help organizations build trust and fuel growth.

Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations govern financial services nearly everywhere in the world. Those regulations require companies gather and verify identity information, run sanction checks and perform due diligence to achieve compliance and mitigate risk.

Financial Services Compliance Requirements

Financial services are highly regulated in all their forms. Some compliance requirements apply to the entire industry, while others focus on specific sectors, such as wealth management and online trading. 

Financial services regulations vary by country and, in many instances, by state or province. Adding to the complexity, the requirements often change with updates or new guidance.

Financial crime compliance requirements are designed to counter crimes such as:

• Money laundering
• Cybercrime
• Bribery
• Corruption
• Securities and commodities fraud
• Bank fraud
• Mortgage fraud
• Insurance fraud
• Embezzlement
• Insider trading
• Market manipulation
• Credit fraud

Despite shifting compliance requirements around the world, there are some consistencies.

Program Governance

Compliance needs robust corporate governance, ongoing operational controls, sufficient staff and regular training to carry out its mandate. 

Data Privacy and Security

There are numerous data laws governing financial information. Privacy laws mandate requirements for personal data. Financial privacy laws determine how personal financial data is handled and shared. Digital records laws dictate standards for securely storing and managing financial records. 

Data lifecycle management processes can help organizations manage storing, using, sharing, archiving and destroying financial information.

Risk-Based Approach

A risk-based approach is a strategy of systematically analyzing the business, customers, partners, regulators, and the security and risk environment. A solid compliance program is characterized by understanding potential risk and taking corresponding actions.

AML and KYC

Running identity checks and watchlist screening helps prevent bad actors from getting an account. Those measures also help inform the due diligence process and establish risk profiles.

Organizations can also apply AML and KYC at key steps in the customer journey, such as in response to unusual account activity, exceeded transaction thresholds, major withdrawals, changes in personal information and account changes.

Payment Security

Compliance depends on ensuring funds flow securely in and out of accounts. Secure account access controls must be in place to protect against fraud, money laundering, account takeovers and other malicious activities.

Account Monitoring

It’s not enough to perform due diligence at account opening. Transaction values and types can change, altering the account’s risk profile. Transaction monitoring also can help reduce fraud, mitigate risk and improve operational control. 

Reporting

Maintaining complete, transparent records and reporting to regulators are fundamental compliance measures. Communicating with regulators, understanding their requirements and keeping them informed are hallmarks of a good compliance program.

Audits 

Performing continual reviews and audits to ensure systems and processes are robust helps avoid compliance failures.

Asset and Wealth Management Compliance

Asset and wealth management represents a significant portion of the global economy, with an estimated $103 trillion in assets under management as of 2020.

Wealth management firms offer a range of services including investing, estate planning and tax accounting. Due to the range of services, firms often need multiple licenses and must meet different reporting requirements. 

Many wealth management firms build their compliance programs around industry best practices. That approach helps standardize global operations and shows clients the firm takes security seriously.

AML Requirements

Many investment advisers might not face direct AML requirements, but their activities often require using entities that fall under compliance guidelines. 

For example, executing trades and holding securities requires broker-dealer platforms, which must ensure any investment adviser they do business with isn’t dealing with accounts connected to money laundering or other illegal activities. There are also Office of Foreign Assets Control and Securities Exchange Commission (SEC) guidelines around safeguarding client assets and protecting the integrity of the U.S. financial system.

“In light of the increased pressure by the SEC,” according to global business advisory firm FTI Consulting, “investment advisers may be better served viewing customer relationships through an AML lens, even if not currently required, since the fallout of failing to do so may already be at their doorstep.”

Learn more information about wealth management identity verification and KYC.

Enhanced Due Diligence

Enhanced due diligence (EDD) procedures can come into play when wealth management firms are onboarding clients. Some EDD practical steps, suggested by the Financial Action Task Force, include:

• Obtaining identifying information from a robust sources, and using it to assess customer risk
• Carrying out additional searches, such as through verifiable adverse media, to build the customer risk assessment
• Commissioning an intelligence report on the customer or a business’s beneficial owner to better understand if there’s a risk of criminal activity
• Verifying the source of funds involved in the business relationship 
• Seeking additional information from the customer about the purpose of the business relationship

Transforming Wealth Management

Once a traditional in-person business, the wealth management industry is adopting new technologies to better serve clients digitally. Mobile apps, robo-advisers and other wealth technology innovations are creating new ways to manage finances.

The first step in the digital customer journey is onboarding. Clients understand and respect robust security procedures. But they also don’t want to be burdened with slow and cumbersome processes.

Agile, intelligent digital onboarding technologies can help firms customize and optimize the experience to achieve compliance without compromising the customer experience.

Stock Trading and Broker-Dealer Compliance

Innovations such as fractional share trading, alternative systems and 24/7 access have created a global market for online trading. 

Securities compliance for broker-dealers includes general regulations and securities-specific requirements such as those covering sales and trading practices. Compliance is mandatory.

For online trading companies, success starts at onboarding. Broker-dealers with smooth AML, KYC and identity verification processes can streamline onboarding and build their client base.

“We needed a seamless onboarding process, one that not only addresses the regulatory requirement, but that also makes the process between sign-up and trading rapid and simple. We were also looking for a partner that has a global footprint, that is able to scale with us as we grow — there was only one option, and that was Trulioo.”
Dan Silver, Chief Operating Officer of Stake

Five Steps to Financial Services Compliance

Keeping up with the ever-changing complexities of financial services regulatory compliance is difficult. Add in rapidly evolving technologies, innovative service opportunities and expanding global markets, and the demands on compliance can be daunting.

But there are ways to streamline onboarding, automate identity verification and gain valuable customer insights. An agile, global identity verification platform can help financial services organizations build customer trust, achieve compliance and expand their global reach.

• Automated Onboarding

As financial service customers increasingly turn to digital interactions, automated onboarding can keep pace. Manual checks might be necessary in some cases, but many AML and KYC checks can be done automatically.

For KYC, digital identity verification can take input from people and match the data against known identity data sources. Identity Document Verification can compare photos of ID documents to government templates and ensure authenticity. It can also compare the photo on the ID to a live selfie.

For AML, Watchlist Screening checks identity information against thousands of AML watchlists worldwide to help prevent known criminals and corrupt officials from getting accounts.

For onboarding businesses, organizations can verify a company’s information and identify any connected entities and ultimate beneficial owners (UBOs). Assessing a business customer’s risk requires knowing the ownership structure and who benefits from its operations. That includes running AML and KYC checks on the UBOs.

• Adaptable Risk Assessments

Risk-assessment tools let companies tailor the information they gather to meet their needs. The tools enable automated identity verification workflows to adjust quickly to different scenarios based on customer or location risk. That approach protects the business but also ensures smooth onboarding in low-risk situations.

Customer risk levels often break down into four buckets:

• Low — Customers who can be easily verified
• Medium — Customers who could pose a higher risk and may require further due diligence and monitoring
• High — Customers requiring enhanced due diligence and close monitoring
• Prohibited — Customer profiles that strongly indicate suspicious behavior and risky transactions

• One Integration

Identity verification and compliance systems are often a patchwork of tools, data silos and isolated processes. Adjusting those systems can require new rounds of negotiations, additional integrations and more development time.

When financial services organizations leverage all those services from a single integration with one platform, the silos disappear, the tools work in tandem and the streamlined services can enhance and accelerate customer onboarding. When those services work together, organizations can unlock data analytics and customer insights that can mitigate risk and improve customer experiences.

• Perpetual KYC

Ongoing transaction and account monitoring helps financial services companies quickly flag changes in a customer profile to aid compliance and fraud prevention.

Understanding account status in real time can be a powerful organizational tool, providing insight into emerging risks and triggering reviews to prevent deeper problems. Automated checks that raise flags for further analysis reduce the burden on staff members while enhancing risk mitigation. 

An ongoing understanding of accounts can also lead to meeting customer expectations for additional services. In that context, KYC can help organizations strengthen client relationships.

• Streamlined Audits

Compliance programs typically must undergo audits of the information they collect. Automated onboarding and compliance workflows make that easier by providing clear digital audit trails.

Those automated processes provide additional strategic value over manual record keeping. Every customer who enters information into the system adds to its data analysis capabilities.

Intelligent internal audit processes can account for deeper data sets and analysis that can decrease risk and improve performance. It’s an additional line of defense that helps protect the compliance process by double-checking accounts after onboarding. 

The digital audit trail is a cornerstone of creating a resilient, agile and scalable compliance program. 

Balancing Compliance With Streamlined Onboarding

With the right tools, processes and expertise, financial services compliance operations can be much more than a necessary cost. They can enable fast, convenient onboarding and reduce customer abandonment. 

Automated, global and comprehensive identity verification can lift compliance programs above simply meeting regulations. It can provide insights into customer patterns, use cases and other data points that can improve risk mitigation and fuel growth.

When financial services organizations achieve compliance, enhance security and meet customers’ onboarding expectations, they’ve taken the first step toward long-lasting customer relationships.