How to strengthen Anti-Money Laundering (AML) Compliance and Due Diligence in the BFSI Sector
Non-compliance with Anti-Money Laundering (AML) regulations is unacceptable in the BFSI landscape, leading to hefty monetary penalties and reputational damage. Issues like poor customer due diligence compromised compliance protocols, sloppy data security, and corruption are major culprits.
With fines for non-compliance hitting record highs, financial institutions are becoming more vigilant about strengthening AML compliance than ever. This is quite apparent in Reserve Bank of India’s 2022-23 Annual Report which shows enforcement actions against 205 entities, resulting in 211 penalties amounting to ₹40 crores. Cooperative banks took the biggest hit, followed by NBFCs, private and public sector banks.
These numbers have given us better visibility to the one fact.
We need stricter AML measures and robust screening solutions to prevent money laundering and terrorist financing, protecting institutions and the entire financial system.
A Quick Look at the Regulatory Landscape
In India, the Prevention of Money Laundering Act (PMLA) is the cornerstone for combating money laundering. It establishes legal mechanisms for identifying, confiscating, and preventing illicit financial flows. Reserve Bank of India’s KYC Master Directions mandate comprehensive KYC processes to verify and monitor customer identities and ensure fraud prevention and financial integrity.
The FEMA, 1999, regulates foreign exchange transactions to prevent money laundering through strict controls and reporting mechanisms on cross-border activities. SEBI has set forth AML guidelines that require firms to implement robust AML policies and procedures for the securities market.
Trends Shaping the Compliance Landscape
To adhere to these ever-evolving regulations and stay compliant, there has been an increased focus on real-time monitoring and reporting to identify suspicious activities swiftly.
The shift from standard due diligence to enhanced due diligence and risk-based approaches, particularly for high-risk customers and transactions, indicates that companies want specific areas to receive more thorough scrutiny and risk mitigation.
These changes reflect the proactive measures companies are taking to adapt to the evolving nature of the regulatory landscape to remain compliant and mitigate risks effectively.
Facing the Giants: Major Challenges in AML Compliance
- False Positives/Negatives: False positives/negatives are significant concerns in AML compliance. They often stem from outdated databases as they have limited/inaccurate information and manual checks, which are prone to errors, leading to back-and-forth investigations wasting time and effort. These false flags create frustration and distract compliance teams from focusing on real threats – making the financial institutions vulnerable to money laundering activities.
- Detection Difficulties: What truly has necessitated advanced analytical tools and expertise is contemporary money laundering schemes. Many financial institutions need help in implementing real-time monitoring systems, which hampers their ability to identify and respond to suspicious activities quickly.
- Business Risks: Regulatory bodies impose hefty fines for non-compliance, which can significantly impact an institution’s financial stability. Severe lapses in AML compliance can lead to the revocation of banking licenses, threatening the institution’s ability to operate. Publicised enforcement actions can lead to customer churn and loss of trust, severely damaging an institution’s reputation.
- High Operational Costs: Extensive resources are required for AML processes, resulting in high operational costs and affecting overall profitability. If the processes are manual, it will lead to high turnaround times (TAT), delaying customer onboarding and transactions.
AI, Blockchain, and Beyond: The Tech Revolution in AML
- Utilising Blockchain Technology: Blockchain provides enhanced transparency and traceability of transactions, making it easier to track and prevent illicit activities.
- AI and Machine Learning: AI/ML-powered due diligence solutions can be leveraged to learn from past data and improve detection algorithms, reducing the incidence of false positives and negatives.
Utilising cutting-edge technologies can help automate AML processes, enhancing accuracy and efficiency while freeing up resources for other critical tasks. Using predictive analytics can help in identifying patterns of money laundering, allowing for proactive measures to prevent financial crimes.
- Verification APIs: Utilising verification APIs can streamline KYC processes, reduce manual workload, improve TAT, and enable real-time monitoring, allowing institutions to address compliance risks comprehensively. At AuthBridge, we offer 150+ verification APIs to ensure comprehensive due diligence for our clients, especially our BFSI clientele.
We recently did it for our B2B secure payment service provider who was looking for a KYC and negative due diligence solution for partner entities.
We used an API-based service for instant verification, focusing on PEP and sanction checks and enabled swift identification of partners and cross-referenced with international sanction lists. This ensured streamlined partner verification and risk mitigation.
Best Practices for Building a Strong AML Framework
- Continuous Screening: Regularly monitoring existing customers and transactions to detect changes in risk profiles and ensure ongoing compliance is crucial. Companies must establish ongoing due diligence procedures to maintain up-to-date customer information and identify potential risks promptly.
- Comprehensive Onboarding: Conducting thorough checks and risk assessments before initiating new relationships is crucial. Using multi-source data to verify customer identities and accurately assess risk is one effective approach. At AuthBridge, we leverage an extensive database of over 15 million records, encompassing criminal checks, politically exposed persons, defaulting companies, global sanction lists, regulatory defaulters, and financial and credit defaulters—all sourced from 100% verified channels.
- Periodic Database Updates: Outdated databases can lead to missed red flags, inefficient screening, and regulatory violations which can lead to hefty penalties. Therefore, ensuring AML databases are regularly updated is crucial to maintain accuracy.
Strengthening AML compliance and due diligence is not just a regulatory requirement but a strategic imperative for BFSI institutions. By adopting advanced technologies and proactive strategies, institutions can safeguard their operations, protect their reputations, and contribute to the stability of the global financial system.
Original article available HERE
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