3 Elements of a Customer Identification Program for AML Compliance

Howard Schulman

A customer identification program (CIP) involves verifying information provided by a customer. Businesses do this by using independent and legal identification documents. CIP is an important process for any business before establishing a business relationship. Businesses conduct CIP in compliance with anti-money laundering regulations.

A related concept is AML, which refers to the laws that prevent criminals from legitimizing illegally obtained funds. The total amount of money laundered globally in a year ranges between $1.6 trillion and $4 trillion. With cases of money laundering ever rising, there has been a call for more effective and efficient AML procedures.

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Elements of a Good Customer Identification Program

With technology advancement, CIP has become more effective in preventing crime. This means that criminals have also diversified their methods to ensure illegal money is not traceable back to them. This has led AML regulatory bodies to come up with ways to control this menace. CIP is a vital aspect of an effective KYC program. Before developing CIP, financial institutions should understand the Bank Secrecy Act.

A good CIP has the following elements:

  1. Clear Written Protocols

The BSA requires every financial institution to have a well-written, detailed, and unambiguous CIP. It should outline the procedures and practices comprehensively. All parties involved in a CIP should be aware of the necessity of conducting it. Moreover, the conditions that potential customers should fulfill before admission into the business should be clear. Financial institutions, on the other side, should know the red flags to be on the lookout for. This is to prevent starting a business relationship with a criminal.

A customer’s risk profile may also change over time. It is thus important that the CIP is clear on the steps that the institution should take in the event of a risk. The program should also be clear on how to verify information that may arise on the course of the relationship. Such information includes the source of funds, the recipient, and the purpose of the transaction. A good customer identification program is specific on how to create a risk profile. This makes it easy to determine the level of risk a potential relationship is likely to pose to the institution.

Every institution should have secure software for storing customer information. This is to prevent identity and information theft by third parties. In 2019, there were about 3.2 million cases of identity theft in the United States. Proper CIP should also be easy to retrieve customer information. This calls for financial institutions to adopt modern storage trends for bulky information. Cloud storage, for instance, has led to an increase in the security of information in firms.

2. Effective Verification System

Money launderers’ methods keep evolving by the day. This has called for robust verification systems, both in-person and remote. Remote verification systems demand application of biometrics such as facial recognition. Institutions ought to look to adopt software that makes this process easy. A verification system should be difficult to manipulate. This discourages identity theft and prevents unauthorized third party access.

Additionally, KYC requires that institutions get all the relevant information from potential customers. The firm’s personnel should have the right training on how to review various sources of information. They should then come up with a risk profile based on this information.
Sources of customer information that institutions may review include:

  • Public records: These include immigration information, real estate records, and criminal history. It is important to know past and current legal issues if any.
  • Asset tracking: It involves verifying real property and business ownership. This helps in determining whether they are the real owners of the entities they claim to own.
  • Sanctioned databases: The Office for Foreign Assets Control regulates this. OFAC lists all businesses involved in fraudulent activities on their website. As a result, it is easy for financial institutions to know that a customer is a criminal.
  • On-site inspections: They enable the firms to verify information first hand. Should the firm suspect that the details provided are inaccurate, it prompts an on-site inspection.

3. Independent Audit Process

All anti-money laundering regulatory bodies demand a rigorous periodical audit. It is a recommendation that skilled independent auditors undertake this process. It helps to determine that financial institutions have a proper CIP program in place. The audit process also evaluates the entire CIP process for areas that need improvement. Further, it determines whether a firm is implementing AML guidelines to the letter. The role of an independent audit is to strengthen a firm’s AML program.

What Are Steps of the Money Laundering Process?

Anti-money laundering authorities have enacted strict regulations. This has prompted money launderers to source for more advanced methods. There is not one single way money launderers launder their funds, but there are some commonalities employees should watch out for.

The process of money laundering typically involves:

  1. Placement

This entails putting proceeds of criminal activity in a financial system since holding onto the money may directly link to criminal activity. This stage is where the criminal is most vulnerable. Therefore, financial institutions should always screen cash transactions involving huge amounts. AML regulations call for institutions to report cash transactions above a certain limit. This stage is the most important for a money launderer as it delinks the illegal proceeds from their source.

2. Layering

In this step, criminals separate the proceeds of crime from the origin. Money launderers use complex procedures to cover the money trail. This step involves transferring the money fast and to different recipients.

3. Integration

This is the final step. It entails getting the money back to the criminal so that they can use it. At this stage, the criminal has established a sequence that would be difficult to suspect. Yet, fraudsters may modify this step to avoid being discovered.

The Need for an Effective Customer Identification Program

The success of financial institutions is dependent on the strength of their CIP. This is why anti-money laundering bodies demand strict adherence to their rules. Financial institutions need to understand that an effective CIP helps to avoid risks that constantly evolve. As a result, having an up to date CIP is paramount. Head over to lightico.com to learn more about elements of a good customer identification program and how it goes hand-in-hand with our eSignature platform.

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