How to optimise your KYC processes

Although methods of tackling financial crime are continually being improved, the ever-changing nature of the technology industry means criminals are seemingly gaining the edge. Fraud reporting has increased year on year. Businesses being fined for non-compliance with anti-money laundering (AML) regulations have expanded, and more than $937 million in fines were issued in the first half of 2021 alone. Currently, vast amounts of time, resources and capital are being dedicated every day to combating and limiting the damage of fraud and money laundering. However, it is clear the effort is not having nearly the effect on criminals that the financial industry would desire.

Across the world, a war is being fought across multiple fronts, the battle to prevent fraud, money laundering, and the exploitation of financial services. A 2020 study claimed that AML policy intervention has less than 0.1% impact on criminal finances. To claim victory, financial institutions must be able to optimise their KYC and prohibit bad actors from gaining access to financial products.

The growth in the digital economy and the increase in crime

The nature of criminality is to continuously innovate new ways to exploit and take advantage of law-abiding

fraud. individuals and institutions. With the rapid expansion of the digital economy, crime has risen, especially financial crime.

The momentum of growth seen in the development of the digital economy has been at a breakneck speed, so prevention has come as a real challenge. Since the introduction of fintech and Neobanks and their boom over a short period of time, there have been even more methods of laundering money and committing

The digital economy is running in tandem with a borderless financial economy, making it even more challenging to prevent crime. Organised criminal enterprises ruthlessly engage in cross border illegal activity and exploit the helplessness of authorities. These factors mean financial services and regulators are one or several steps behind the criminals.

For the criminals engaging in this activity, often the most challenging task they face is legitimising their money by getting it into the legal financial system. Money laundering is big business, and frequently it’s a criminal’s most significant vulnerability.

The onus for preventing money laundering lies with banks and financial institutions, which means enforcing stringent KYC procedures. Regulatory inspection has led to an improvement in this area. More and more information is being shared between law enforcement agencies, regulators, and institutions, which are now working together to solve problems and find solutions. If these processes are as effectively implemented as they should be, the industry can prevent criminals from gaining access to financial institutions before they begin laundering money.

Leaning on KYC

There are many advantages to automating KYC processes, such as making those processes much more efficient. For example, AML checks against politically exposed persons (PEPs) and those on sanctions lists are most optimally performed by automated risk engines. The engines can undertake the heavy amount of work needed to continually monitor and carry out daily checks more efficiently than a human can.

KYC is critical for recognising patterns of repeat behaviour that criminals often engage in. Automation is excellent at seeing repeat activity, so machines are ideal for spotting these similar types of fraud. The rise of perpetual KYC is yet another string to the bow of automation, identifying changing risk factors in real-time and freeing up more time for analysts to carry out other risk management and compliance operations.

However, new types of fraud and criminal activity are constantly evolving and identifying these can involve more nuance - less suited to automation. Professionals, using cognitive functions, are still crucial in understanding the difference between customers and criminals. AI models cannot yet predict behaviour. Therefore, some human involvement is essential to ensuring the best risk-based decisions are made, and new modes of criminal activity are seen. Perpetual KYC automation - monitoring the customer landscape for risk automatically - allows human analysts to spend less time on remedial tasks and divert attention elsewhere, which is optimal when striking a balance. The human touch in conjunction with effective technology is a powerful combination in the fight against fraud.

Hitting the right balance

Automated technology is brilliant at creating efficient KYC processes, but it is not nuanced enough to be ideal when operating independently. It is still imperative for financial institutions to truly understand their customers; otherwise, automation can introduce more risk.

The best way to optimise KYC processes is to strike a balance between technology deployment and cognitive thinking. Ensure human beings are available to identify new types of crime and the nuance in behaviour to make the best risk-based decisions as part of a holistic approach to KYC and fraud prevention.

Alex Richter, Head of PassFort

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https://www.occrp.org/en/daily/15047-fines-for-anti-moneylaundering-breaches-drop-globally https://www.tandfonline.com/doi/full/10.1080/25741292.2 020.1725366