Money laundering is a serious offense that can incur a fine of up to $500,000 or twice the value of the laundered amount. It also brings a hefty prison sentence that can be as high as 20 years in cases of domestic or international money laundering.
The amount of money that is laundered every year is estimated to be roughly 2 to 5% of global GDP. This is equivalent to $800 billion – $2 trillion, a mind-blowing figure.
The worst part about all this is that 90% of global money laundering goes unnoticed, and in the US, it is responsible for 38% of illegal activity.
It is for this reason that financial institutions and businesses desperately keep seeking ways to protect themselves. This is where KYC comes in.
What is KYC?
While criminals have gotten pretty good at finding ways to launder money, banks, and financial institutions have also got a few tricks up their sleeves. The most powerful of these countermeasures is KYC which stands for “Know Your Customer.”
KYC is a process where any financial institution or institution that is at risk of money laundering collects certain identity-related information from their clients. This information typically involves the person’s name, address, date of birth, and identity documents, such as a passport or driver’s license.
The collection of information is often performed by banks when someone tries to create an account, but any institution, even non-financial ones that are at risk of money laundering, such as the jewelry or real estate industries, can also insist on KYC verification.
While KYC can be done manually, there are professional service providers who specialize in this niche. You can go through this list of the 10 best KYC vendors (with pros and cons) to understand how such service providers can help your business.
How Does KYC Actually Lower the Risk of Money Laundering?
It is important to remember that KYC is not a foolproof method. It makes the process of money laundering significantly harder for criminals, but determined people are likely to find a way to continue breaking the law.
KYC is an extremely effective method because it involves a number of processes that most people aren’t aware of. This is because they are usually carried out under the radar.
AU10TIX notes that customer due diligence (CDD) requirements are a fundamental pillar of KYC and play a key role in verifying the information collected from customers. However, the role of CDD continues beyond simply collecting data.
Once customer information is verified, a risk assessment is often made based on the type of business or operation the customer runs or is involved in. Their location and other factors that can provide valuable cues are then used to detect patterns commonly noticed in money laundering operations.
Thus, one can say that CCD involves assessing money laundering risk based on a customer’s transaction history and risk profile. It is a continuous process that also monitors customer transactions to ensure that their financial behavior is in sync with their assessed risk profile.
KYC processes have gotten really good at identifying suspicious activity, such as when money is moved in and out of countries that are known to be hot spots for financial crimes. It also helps in flagging large transactions or inconsistent patterns in transactions that could be signs of money laundering.
Despite how effective KYC appears to be, businesses have wisely realized that simply relying on one method alone is not going to protect them fully.
This is why KYC is often used in conjunction with a number of other countermeasures, such as online identity verification systems and complex anti-money laundering solutions.
These often include customized transaction monitoring services, which give institutions, banks, and businesses monitoring options that are more in line with the unique contexts in their industries.
These Anti Money Laundering (AML) companies also make it easy to comply with laws that require financial institutions to send SARs and STRs (Suspicious Activity Reports / Suspicious Transaction Reports) to agencies like the Financial Action Task Force (FATF).
The FATF is an intergovernmental organization that is responsible for dealing with money laundering and terrorism funding. Financial institutions and individuals that fail to send SARs and STRs or send them late can face legal consequences, which can include fines, imprisonment, and even revocation of licenses.
Conclusion
Businesses and financial institutions play a cat-and-mouse game, trying to ensure that the methods of money laundering detection are kept updated as quickly as criminals can find ways to evade them.
KYC may feel like an unnecessary burden to customers due to the inconvenience that it poses. However, it is a necessary process that is inevitable due to the scale at which money laundering takes place in the world today.
By incorporating KYC, transaction monitoring systems, blockchain technology, and biometric authentication, businesses can significantly reduce the risk of money laundering. However, constant vigilance is essential for ensuring safety.
