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KYC - More Than Just Satisfying Regulators

When most banking professionals think of compliance they think of roadblocks to doing what they want to do. They think of check the box activities that they do simply to prevent regulators and internal audit from slapping their hand. They think about it in a very “me” way. What they often forget about are the true reasons compliance exists and the real life consequences that can come from failures. When it comes to Anti-Money Laundering (AML) and sanctions compliance, the real life reasons for the regulations are incredibly important. I’m not talking about fines and bad press for banks, I’m talking about the criminals who are enabled and the victims who are harmed when banks don’t do what they are supposed to. Removing the debate of whether or not financial institutions should be policing their customers, one cannot deny that stopping criminals and terrorists is pretty important. For example, the Economist recently released this great video explaining how banks can help stop human trafficking, (

A key aspect of AML compliance programs is Know Your Customer (KYC). The 4th and 5th EU Money Laundering Directives and the new FinCEN CDD Rule have made it a priority and have also contributed to how complex, time consuming, and repetitive the process has become at some institutions. What is often not discussed these days is why KYC is important. For those out there fighting the good fight, here is a reminder of why what you do is important. For those who see KYC compliance as roadblock, here is a reminder of the purpose of these checks and balances.


How does KYC stop criminals?

Prevention of access to banking services

One of the main purposes of conducting KYC is to prevent bad actors from gaining access to the financial system. By requiring a customer to provide documentation and details about themselves, it allows compliance teams to truly identify who they are doing business with and discourages bad actors from attempting to open accounts for fear of identification. At the same time, compliance teams are able to accurately identify sanctioned parties and ensure they don’t provide them services. By collecting various pieces of information about a customer and their related parties, the compliance team is also able to develop a risk rating of the customer – an understanding of how much risk the bank is taking on by providing this customer with products and services. This allows them to place additional requirements and monitoring on those customers who require increased scrutiny.


Identification of criminal activity

The other largest reason is to collect information to help investigators identify when a customer has done something potentially criminal with their accounts and report that to authorities. A solid set of due diligence information allows a bank to build a profile of expected activity for a customer. When the customer’s transactions deviate from those expectations, an alert can be triggered and investigators begin to look into those transactions and that customer. During those investigations, accurate and detailed information about a customer allows investigators to find patterns and connections amongst different parties, transactions, accounts, etc. Details such as phone numbers, email addresses, IP addresses, and physical addresses can be used to identify additional information about the customer, associated accounts, associated parties, and connections to other customers. It is through these patterns and connections that skilled investigators can identify complex criminal behavior and report it to law enforcement for additional investigation.


The Takeaway

KYC can be a burdensome and repetitive process. It can consume a lot of time, money, and resources to be done properly. But it is important. Not just to ensure compliance with financial regulations, not just to satisfy regulators, but because it also helps deter and catch criminals. Not just white collar criminals, but human traffickers, drug traffickers, arms dealers, and terrorists. Try not to forget that the next time that your AML compliance team is making a case for more resources or updated technology support. KYC compliance doesn’t have to be a roadblock, it should be a partner to helping ensure that criminals don’t take advantage of your institution.  



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