Customer Due Diligence for Deterring Financial Crimes

Published in

Shufti Pro

4 min readNov 13, 2020

Global regulators have made it obligatory for financial institutions to actively fight against terrorism. For governmental agencies, protecting the interests of the international financial system is a priority that can not be overlooked at all costs. There is only one way through which global regulators can ensure the integrity of the financial system is; by eliminating financial crimes such as money laundering, breaking off sources available to terrorists, and deterring any other activity which leads to the former.

FATF’s efforts and mandatory KYC procedures is a necessary step towards combating crimes of money laundering and terrorism financing.

Financial institutions are increasingly becoming concerned about the drastic consequences of money laundering and terrorist financing on its infrastructure and global economies. This includes the risk of reputational damages, which poses threats to the system’s stability leading to harmful impacts on foreign investments.

Online financial criminals usually leverage loopholes, weaknesses, and vulnerabilities in the system. Due to the ineffective institutional structures, criminal entities are untethered to move their funds acquired through illegal sources, or used for illegal reasons.

Regulatory authorities are contributing greatly to preventing money-related crimes and, therefore, taking important steps to bring stability. Simultaneously, implementing legislation, policies, and standards critical for this war against money laundering. Thus, KYC/AML programs were developed to address customer verification and identification shortcomings.

What is Money Laundering?

It includes the movement of large sums of money generated through illegal criminal activities such as human trafficking, drug trafficking, illegal betting, corruption, smuggling, tax evasion, and others. In order to safeguard the criminal identity and benefit freely from the proceeds, such illicit sources of funds are masked or concealed.

FATF — Financial action task force was established to fight against money laundering and terrorism financing. FATF consists of 33 member states, the primary objective of FATF is to develop international rules and regulations for anti-money laundering. FATF was established in Paris in 1989 by the G-7 summit in close partnerships with the United Nations, IMF, and World Bank including FATF-style regional bodies.

What is Terrorist Financing?

Terrorist financing includes the collection of finances with the intention to fund and support terrorist organizations or activities. These funds may originate from both legal and illegal sources.

The primary objective of entities involved in terrorist financing is not just to disguise the sources of funds, but both the sources and the financed terrorist activity in question.

The Relation between Money Laundering and Terrorist Financing

Money laundering and terrorist financing, both fall under the category of financial crimes. In both crimes, bad actors leverage the financial sector to their gain. In other words, money laundering and terrorism financing are closely related since the methods of laundering money and financing terrorism are very similar and identical.

Therefore an effective Anti-money laundering and terrorist financing techniques can address the issues. Robust KYC for customer identification in financial institutions prevents, detects, and reports any illegal activity. On-going AML identifies unique transaction patterns and customer financial history to detect suspicious financial activities.

Why KYC — Know your Customer standards are necessary?

Money laundering and terrorist financing use financial institutions to transfer illegal money. There are various ways and gateways used for money laundering, but this by far is the most common one. This technique of transferring illegal money through financial institutions makes banks vulnerable to constant abuse and system exploitation.

The reason why adequate and robust KYC due diligence for new and ongoing KYC for existing customers is the need of the hour. Know your customer procedures in financial institutions are critical for greater customer transparency and for fighting against the crimes of money laundering. Enhanced due diligence is performed when customers are making huge transactions and whenever financial institution suspects money laundering activities.

Moreover, ongoing AML checks are performed to keep a close check on the PEPs — Politically Exposed Persons who have a history of suspicious activities. Such high-risk individuals are checked against global sanctions, black-lists, and PEPs lists.

Online ID verification is a fool-proof solution to meet KYC and AML compliance

KYC includes various methods of verifying customer identities, the most commonly used method is document verification. In online document verification, the customer’s official ID document is checked against defined parameters to ensure that they aren’t forged, photoshopped, or manipulated.

Digital ID verification solutions also use facial recognition technology to prevent facial spoofing attacks, which as a result helps with identifying identity theft.

Using Artificial technology in ID verification solution benefits businesses since it strengthens the accuracy of the system for sound KYC/AML compliance.