• Barley Laing, the UK Managing Director at Melissa


• 04.12.2023 12:00 pm
#AML #KYC #ID #verification

No financial institution wants to support criminal activity or risk substantial fines from regulators that also damage their reputation. Yet many are doing so because they are not doing enough to prevent money laundering.

Identifying and stopping money laundering, particularly as digitalisation creates new opportunities for it to take place, is proving a challenge for financial institutions who are on the front line in trying to prevent it.

Money laundering is proving such a significant issue that the United Nations Office on Drugs and Crime (UNODC) estimates that it accounts for between two to five per cent of the world’s GDP.

While there are a wealth of global and regional laws and regulations around anti-money laundering (AML) that require those in financial services to identify prospective customers and activities by existing customers that could be linked to money laundering, this isn’t proving enough to reduce it.

Eight red flags to identify money launderers and processes to prevent such activity from occurring:

1.Reluctance of prospective customers to provide personal information: Verifying the identity of an individual before they open an account is one of the most important steps financial institutions must take. This requires the prospective customer to share certain personal information and, where appropriate, provide documentary proof of their identity, such as their address. Most people have no issue with sharing such information about themselves. However, if a prospective customer does seek to evade the provision of or provide false information it should set off an alert. People should never be onboarded without completing the required know your customer (KYC) verification process.

2. Geographic location of prospective and existing customers: Although money laundering is not limited to any particular geographic region, the risk is higher in some countries that are more exposed to corruption and organised crime due to weak regulations and poor governmental insight. According to the Basel AML 2022 report, countries including The Democratic Republic of Congo, Haiti, Myanmar, Mozambique and Madagascar have high money laundering risks. Hence, it’s worth prioritising due diligence for those with an address from any of these countries.

3. Lack of clean and up to date data on customers: If your data is not clean and up to date then you can’t be certain that you don’t have any money launderers as customers. Therefore, before utilising ID verification tools a good first step to help prevent money laundering and fraud is to have processes in place that deliver ongoing data hygiene. When it comes to the data cleansing process one of the most useful tools is an address autocomplete or lookup service which gathers accurate address data in real-time at the onboarding stage. These tools also provide address validation - supporting ID verification. Since ID checks will pick up basic issues with data, such as an incorrectly formatted address, it’s better value and best practice to ensure you have accurate user contact data in the first place.

4. Implement effective know your business (KYB) checks: Money laundering and fraud are frequently committed by shell companies or organisational structures that just don’t exist in reality. It can be very hard to source who the owners of these are. And where there is such complexity these can be fronts for financial crime, even terror financing. To fully comprehend the risks posed by new and existing business customers and suppliers it’s important to carry out KYB checks – something most regulators around the world require financial institutions to undertake. For an effective and cost-effective approach to KYB screening it’s advisable to cross-check a company name, address, business registration number and operational status against recognised sources of business data, such as from a business registry or regulator, like Companies House.

5. Embrace SaaS electronic identity verification (eIDV): One of the best ways to prevent money laundering and fraud is by using a software-as-a-service (SaaS) electronic identity verification (eIDV) tool. Such a platform can, in real-time, cross-check the names, addresses, email addresses and the phone numbers provided by prospective customers. For best results it’s best to source a SaaS eIDV platform with access to billions of consumer records from reputable sources from around the world, such as from government, utility and credit agencies. Using such a tool is significantly quicker, more accurate and cost-effective way to undertake ID verification when compared to manual checks. Some even offer wider KYC checks such as KYB, sanctions screening, etc.

6. Have up-to-date sanctions lists: While it’s a regulatory requirement to screen for those who have been sanctioned, it’s surprising how many financial institutions aren’t set up to effectively do this. It’s important to obtain an up-to-date sanctions list that can undertake automated sanctions screening in real-time, around the world.

7. Undertake PEP and RCA checks: It’s vital to recognise that having an up-to-date list of those who have been sanctioned is not enough. Those in financial services need to screen against politically exposed persons (PEPs) and relatives and close associates (RCAs) of PEPs from around the world, because there’s a tendency for these groups to be involved in or drawn into crime. In the UK, financial organisations are legally obliged to undertake enhanced checks of both domestic and foreign PEPs.

8. Adverse media screening: As part of best practice customer due diligence (CDD) and anti-money laundering (AML) processes, adverse media checks are very important. Sourcing adverse media screening technology with a global reach enables financial institutions to keep abreast of the latest news and alerts, in real-time, on any arrests or court cases, for example, against their customers who may be PEPs and RCAs, and others who could have a potential negative regulatory, financial, or reputational consequences to their organisation.

In summary

Paying attention to money laundering red flags and undertaking steps to deliver AML compliance by obtaining clean customer data and using a platform like eIDV, which can offer a full ID verification service, including KYB checks and sanctions data, for example, are vital in 2024. Taking such an approach will help to prevent money laundering and fraud, significantly lessen the likelihood of being fined by regulators and the reputational damage this can cause.