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In an era where technology evolves at a rapid pace, criminals are quick to adapt, developing increasingly sophisticated methods to exploit vulnerabilities within financial systems and testing the boundaries of traditional KYC practices. How can compliance experts create robust defences and identify emerging risks in an ever-evolving battle against financial crimes?
Know Your Customer (KYC) is considered a principal building block of a financial institution’s AML program. The requirement to identify all customers, proxies, representatives, beneficiaries, and beneficial owners of companies is embedded in various national and international regulations, from the EU’s AML Directives to the FATF’s 40 recommendations.
Despite the numerous laws, financial institutions have trouble setting up effective KYC programs. In June 2023, a report from the European Banking Authority found that money laundering and terrorist financing risks in financial institutions are not managed effectively. It was noted amongst AML/CFT weaknesses that financial institutions tend to fail to implement ongoing customer screening or have weak onboarding procedures for remote clients.
Let’s explore what financial institutions can do to strengthen their KYC processes and have an effective line of protection against criminal infiltration.
What are the main elements of an effective KYC program?
The obligations of customer due diligence can be found in 4 key steps introduced in the general provisions of most AML regulations:
1
Identification and verification of the customer with sufficient certainty.
2
Assessment of the characteristics of the customer and the purpose and intended nature of the business relationship with an adequate level of AML risk assigned.
3
Continuous vigilance over the business relationship and operations of the customer, achieved through controls of transactions and customer profile.
4
Continuous training of employees to enhance and update their knowledge of KYC and all subcategories related to it.
The first line of defense in KYC programs
The first line of defense (1LOD) in KYC programs is integral to ensuring the program's effectiveness and regulatory compliance. Frontline staff, such as customer service representatives, relationship managers, and branch personnel, serve as the initial gatekeepers in the customer relationship process.
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Do you need help to improve your KYC processes? Contact us at info@pideeco.be!
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KYCSun 31 January 2021
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