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KYC compliance is compulsory. It’s also a unique opportunity.

Kyc compliant unique opportunity

The regulatory landscape for the financial services industry has shifted dramatically over the past five decades. And as new technologies continue to upend banking and other financial systems, approaches to KYC (know your customer) and KYB (know your business) will continue to evolve.

If you’re a business leader, you need a strong infrastructure. You also know you have to create processes for fraud prevention, including how to navigate and comply with KYC and KYB laws. Unfortunately, like so many regulatory procedures, executing KYC/KYB can be time-consuming and frustrating.

When implemented strategically, however, a comprehensive risk management solution can become a competitive advantage that enhances your customers’ experience and saves you time and resources. In this post, we’ll highlight why KYC and KYB are important and offer some recommendations on how you can make compliance a productive part of your business strategy.

The importance of KYC, KYB and other anti-fraud measures

Let’s review why preventing fraud and managing risk are critical in the first place:

  • Compliance with regulations for KYC as well as AML (anti-money laundering) is compulsory, and noncompliance can damage a business’s operations and reputation.

  • Identity fraud tactics are becoming more and more sophisticated, so it’s crucial to protect your business as well as your customers’ PII (personally identifiable information) in the face of evolving threats.

And here’s what can happen if your compliance efforts fall short:

The possibility of costly fines

    Regulations to prevent and combat identity fraud can’t be ignored. Put simply, they’re the law. If you don’t take steps to ensure compliance, you’ll be slapped with hefty fines and may be subject to other penalties. And if you think startups are somehow exempt, that’s definitely not the case. Traditional banks and fintech companies alike must abide by the requirements—or pay the price.

    Consider the case of Capital One, which failed to report suspicious financial transactions related to organized crime, fraud and other criminal activity. In 2021, after being investigated for knowingly violating AML compliance rules, the bank was fined $390 million. Or take the case of Robinhood. Following a 2020 probe related to charges of money laundering and cybersecurity breaches, the company’s crypto arm was found to have violated several KYC requirements. Robinhood must now pay a $30 million settlement to the New York State Department of Financial Services.

    These are not isolated cases. According to the World Economic Forum, from 2009 to 2019, banks around the world were hit with a collective fine of $26 billion for failing to comply with AML/KYC.

    The persistence of worldwide threats

    If the prospect of a fine doesn’t bother you, what about accidentally contributing to global terrorism or human trafficking?

      In the wake of the attacks on September 11, 2001, the United States enacted the Patriot Act, administered by the Office of Foreign Assets Control, better known as OFAC. Designed to deter and fight domestic and international terrorism, the law requires that financial institutions take proactive measures to prevent the illegal financing of terrorism, human trafficking and other criminal activity–lest the institutions become unwitting accomplices.

      According to the United Nations Office on Drugs and Crime, the total amount of money laundered worldwide in a single year is up to five percent of the global GDP. In US dollars, that translates into roughly $2 trillion. Imagine the number of financial institutions that have been unknowingly involved. With better KYC/AML protocols in place, they could have avoided becoming vulnerable. They could have even prevented criminals from moving so much money, and in so doing, made it easier for all financial institutions to operate. Left unchecked, money-laundering schemes corrupt financial institutions, undermine their integrity and slow down economic growth.

      Severe hits to your bottom line

      Are you willing to sacrifice profits because you didn’t prioritize fraud prevention in your business strategy?

      According to a recent report from LexisNexis Risk Solutions, every dollar of fraud costs financial institutions, on average, $3.64. (This takes into consideration costs related to the actual fraud loss.) The cost is even steeper for digital banks—an average of $3.87 for every dollar of fraud. Not surprisingly, the popularity of mobile banking has intensified fraud risks and the potential for significant financial losses. Although fraud risks continue to be a real and present danger for the financial services industry, acts of fraud aren’t inevitable.

      How to optimize your KYC processes and fight back

      The good news is, the examples we just highlighted aren’t inevitable. Meeting KYC requirements can be surprisingly straightforward if you're open to innovation. In fact, by strategically implementing KYC/KYB, you’ll gain significant benefits.

      • Partnering with an expert to automate your KYC processes can enhance the user experience for your customers and create opportunities for your business, including greater speed to market.

      • Strengthening your operational efficiency will save you valuable time and resources. The key is to connect all your data sources so you can accurately verify a higher number of customers.

      Here are four recommendations to get you started:

      1. View KYC as a proactive strategy, not a reactive afterthought or burdensome obligation. Establishing a CIP (customer identification program) is one important initiative. CIP fulfills the federal requirements for financial institutions to confirm the identity of all potential customers. Achieving an effective CIP program, in turn, allows your institution to meet KYC requirements.

      2. Equip your team with the insights and tools to stay ahead of fraud risks and other threats. Reviewing a customer’s data shouldn’t stop at onboarding. Using an automated, holistic approach to managing KYC and AML, such as an IDP (identity decisioning platform), your team can continuously review and monitor a customer’s ongoing transactions. They can also create an identity and risk profile for each customer. Each profile then becomes a valuable tool to detect any uncharacteristic behaviors and actions that may signal potential fraud risks.

      3. Leverage the expertise that comes with an IDP. By partnering with an IDP, you’ll benefit from specialized knowledge about KYC/KYB compliance. You’ll connect with experts who can help you implement risk management and improve your day-to-day efficiency. They can walk you through the basics of setting up a system and help you stay abreast of any changes in regulations.

      4. Approach KYC automation as an opportunity to protect your core product and reallocate your resources toward future innovations. An IDP can be modified to suit the changing needs of your financial institution or fintech business. Your fraud and risk teams can work within the platform and do what they need to do faster and with fewer resources. And your engineers can focus on what matters most: your core product and product roadmap.

      How Alloy can help

      Are you ready to implement strategic processes for KYC/KYB and KYT (know your transaction)? From onboarding to transaction monitoring, Alloy offers a full set of solutions to help your business achieve regulatory compliance–and much more.

      Learn more

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