ID Verification: What is the AML Process in Banking?
By Leor Melamedov
Banks are mandated by government law to tackle money laundering, especially if they are based in countries that are signatories to the Financial Action Task Force, such as the U.S. Fortunately, Anti-Money Laundering (AML) technologies can make the process of ID verification and other AML measures far easier and more accurate than manual processes.
What is AML, and How Does it Relate to ID Verification?
AML stands for Anti-Money Laundering. It refers to a broad set of security measures banks take to reduce their exposure to bad actors using their banks to disguise illegitimate funds as legitimate income.
Anti-money laundering laws started applying to banks once the Financial Action Task Force (FATF) was formed. It is an intergovernmental organization that was formed in 1989 to combat money laundering and is made up of 37 countries that are bound by its laws. At first, the organization was responsible for finding instances of money laundering, analyzing the most popular methods of concealing illicitly gained funds, assessing what is currently being done to fight financial fraud, and setting targets for fighting it more effectively going forward.
Once the initial analysis period of the FATF was completed, it submitted 40 recommendations to help its members navigate the process of combating financial corruption and fraud.
After September 11, 2001, countries around the world became more concerned about terrorism funding and related financial crime. As a result of these concerns, the FATF changed their primary goal and altered their recommendations to empower member countries to take action against international terrorist financing. This began the process of revising the FATF’s guide and new regulations were created. New detailed information about weapons of mass destruction, wire transfers, and other activities that could be linked to terrorism was added.
This was also the time the concept of a politically exposed person (PEP) was created, which is an individual in a position of high political power. PEPs are automatically considered higher risk entities for banks, as are Designated Non-Financial Businesses and Processions (DNFBPs). This is because they are more likely to be connected to politically-motivated financial crimes.
According to the FATF, member countries must work to outlaw money laundering and take action to fight against these crimes. If money is discovered to be connected to financial crime, it is to be confiscated, which is to be enforced by the authorities.
In addition, the FATF asks that financial institutions in participating countries comply with KYC and verify their customers’ identities. They must keep records of all customers that are considered at high risk of engaging in corruption, must constantly monitor them, and if needed, report on them to authorities. All member countries must maintain a financial unit that processes such reports and manages investigations into them when needed. They must also cooperate with the rest of the international community when it comes to reporting and assisting with fighting money laundering across borders, including bringing prosecution to those guilty.
Why is the AML process important to the banking industry?
The AML process, including ID verification, is critical for banks’ financial and reputational standing, especially if they are part of the member countries that compose the FATF. While all banks are obligated to abide by these regulations, they are sometimes a source of frustration for financial institutions. Many claim that following regulations is expensive, time-consuming, and burdensome. Some are going as far to say that the AML measures they are forced to follow are ineffective and not worth the money being poured into them.
Despite such complaints, there are many good reasons for banks to continue to abide closely by the regulations. First, the penalties for lax AML are harsh, amounting sometimes to millions of dollars for large banks that fail to take proper AML measures. Second, there is a reputational cost to failing to comply with regulations; over time, a financial institution’s image can be eroded if it becomes associated with corrupt individuals or businesses.
There is no getting around AML — auditors and regulators require it, and banks’ compliance officers will in turn demand it. Due to new and more stringent regulations over the years, many banks are turning to digital, AI-based solutions to tackle compliance with greater efficiency.
This should come as a relief for banks that are frustrated with the time and financial burden AML procedures traditionally pose. Rather than scouring outdated databases and doing manual work, fintech companies and other solution providers can use big data to get more precise insights about customers without investing more time and effort. This also provides relief for customers who can get approved to open an account with the bank faster.
So while AML started being enforced long before the age of AI and big data, today’s financial institutions have more tools at their disposal to confront the ever-growing threat of money laundering, fraud, and international terrorism.
How can I fulfill AML compliance requirements with Lightico?
Lightico’s digital ID verification capability allows banks to significantly reduce ID-related fraud through an AI-based system that compares customers’ selfies with uploaded IDs. It also reduces the cost of staying compliant and increases agent efficiency. It takes less than 10 seconds to authenticate ID using Lightico, which is more than 20 times faster than other products on the market.
Learn more about how Lightico can help you stay compliant without sacrificing efficiency at Lightico.com.
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