The relevance of KYC/CDD in the overall compliance of AML/CFT requirements and anti-financial crime framework is to ensure that only legitimate customers are onboarded and criminals are avoided.
Organizations, including the Financial Institutions (FIs) are exposed to money laundering, and terrorist financing risks, because of offering services to a wide range of customers, who may be from diversified back grounds and jurisdictions. FIs are attracted by the money launderers because they find it easier to hide, use or transfer their black money.
To mitigate the risks of financial crimes, including money laundering, terrorist financing, fraudulent activities, and sanction compliances, the organizations are required to apply the appropriate know your customer and customer due diligence (KYC/CDD) measures, before onboarding the customers.
Relevance of KYC/CDD for Compliance and Anti-Financial Crime
Financial crime includes the conversion of ownership of assets or property by the person for personal benefit or advantage. Financial crime is the act of using the financial system of the country to perform criminal acts involving funds or money. Financial crime results in reputational and financial losses for the organization. The occurrence of financial crime leads to investigations by regulators and other related organizations. Financial crime may be performed by the people forming the group including the employees of the organization.
While there seems to be broad agreement on the meaning of such concepts as money laundering, corruption, and tax evasion, the terms financial abuse, and financial crime are far less precise, and in fact, are sometimes used interchangeably. Financial crime has the broadest meaning, encompassing not only illegal activities that may harm the financial system of the country but also include other activities that exploit the regulatory frameworks related to tax and AML/CFT.
Financial crime occurrence in financial institutions is sometimes referred to as financial sector crime. Financial crime may be referred to as any non-violent crime that results in a reputational and financial loss, including financial fraud. Financial crime related activities also include a range of other illegal activities, such as tax evasions or tax fraud, insider trading, market abuse, etc.
Money laundering refers to activities involving the processing of criminal proceeds to disguise their association with criminals and their activities. The term financial crime also includes the ‘fraud’ which usually includes activities such as theft, corruption, embezzlement, money laundering, bribery, insider trading, and extortion.
KYC/CDD Processes
Appropriate KYC/CDD processes are required to be designed and implemented at all levels, within the organization, to prevent the risk of occurrence of financial crime either by the customers or by any third-party.
Board of Directors and senior management are primarily required to take clear responsibility for managing the ML/TF risks, as part of overall risk management activities. There should be evidence that senior management is actively engaged in the organization’s approach to addressing the ML/TF risks. The compliance program of the organization includes the policies and processes to deal with financial crime risks and incidents. The compliance program includes the AML and KYC policies, which are developed to include the risks management activities, and processes to deal with financial crime.
Senior management is required to obtain sufficient information to identify and understand the financial crime risks, to which the organization is exposed. It enables senior management to define and implement the appropriate AML/KYC measures, and adhere to the organization’s risk appetite.
Below are some areas related to the management of financial crime, which must be managed through the appropriate and robust compliance program, including the CDD and KYC processes and measures:
An overview of the emerging and new types of financial crime risks to which the organization is exposed.
Legal and regulatory developments related to financial crime and the impact these may have on the firm’s approach to managing the money laundering and terrorist financing risks.
Periodic review of the effectiveness of the organization’s financial crime controls.
An overview of activities of the employees of the organization such as staff expenses, gifts, hospitality, and charitable donations.
Other relevant information about individual business relationships, for example, the number and nature of new business relationships, in particular those that are high-risk business relationships.
CDD and KYC Measures
The CDD and KYC measures protect an organization from being used for financial crime activities, which may be performed by the existing customers or employees of the organization.
KYC/CDD process ensures that sanctions related compliances, issued by the regulatory authorities, are complied with by the organization. When onboarding the customers, the sanction lists are checked, to ensure that the prospective customer is not appearing in the sanction list. Different types of sanction lists may need to be referred for KYC/CDD purposes, including financial sanctions, trade related sanctions, etc. It depends on the relevant regulatory requirements, and regulations.
CDD and KYC enable the organization to avoid the risks of onboarding such customers who are criminals such as money launderers or related to some criminals in any other manner. Onboarding the criminals causes the entity to face the risk of financial crimes leading to reputational and financial losses. CDD and KYC processes, including the identification of financial crime risks, are mandatory processes that are followed at the time when the customers contact the organization either physically or through online portals.
Final Thoughts
KYC contributes to the CDD process by assisting the institution in identifying unusual or suspicious activity during the customer relationship, protecting the financial institution from fraud and other financial crimes, and ensuring compliance with relevant laws and regulations.
