Regulate KYC Laws within Financial Institutions for Effective Loss Prevention
The implementation of stringent KYC (Know Your Customer) laws within financial institutions is essential for effective loss prevention. The rising importance of these regulations is evident in the global anti-money laundering (AML) software market, which saw substantial growth from 2016 to 2017 and is projected to reach around $1.77 billion by 2023. This growth highlights the critical role of effective KYC measures in combating financial crimes and reducing monetary losses. It is majorly utilized in protecting the economic health and security of institutions globally.
What is the Know Your Customer Rule? Understand the Basics
Know your customer rule is the defined protocol for a financial advisor to scrutinize the background history of the fund’s transactions in banks. Know your client (KYC) assists in finding illegal individuals during the onboarding process when opening a bank account or during the registration process. The whole process of finding the right customers to become a part of financial institutions and making partnerships with potential entities needs the complete scrutinization of their background history to check if they were involved in any type of illegality, such as money laundering and terror funding. To combat such fraudulent activities within banking departments or related businesses, they must follow the AML laws proposed by government institutions.
Defined KYC Regulations for Enhancing the Operations of Financial Institutions
KYC regulations are the defined protocols in every country, which may vary according to their operational frameworks within the financial institutions. There are three components of the KYC program which ensure the integrity of the system. The effective components of the KYC program, which primarily tells about the regulations, are given below:
Customer Identification Program
The customer identification program is the first component of the KYC protocol, in which onboarded or consumers waiting to acquire services need to validate their essential credentials. Majorly government-issued credentials are required during the scrutinization process. It includes an ID card, social security number, proof of address, and passport details. CIP utilizes machine learning algorithms with the assistance of artificial intelligence to check any signs of anomalies, counterfeits, and forgery incidents.
Customer Due Diligence
Customer due diligence is another phase of the KYC procedure, which includes the calculation of customer risk score. This risk score is calculated by analyzing the major factors that involve their relation with the potential businesses, the previous partnerships, the nature of the businesses, and the complete analysis of their financial accounts to detect any type of illegal transaction that can lead to money laundering and terror funding. Customers who are identified as the ones involved in any type of irregular transactions would be further scrutinized through enhanced due diligence. Meanwhile, the other authentic customers would get access to the services or become part of the financial institutions.
Ongoing Monitoring
The ongoing monitoring process is ensured for all the individuals who are part of the financial institutions, either the working staff or the ones who are getting their required services. The ongoing monitoring process is part of KYC rules that mitigate the chances of money laundering that can conducted by their current customers.;
FINRA 2090 & 2111: Proposed KYC Legislation within Financial Regulatory Body
FINRA 2090 and 2111 are two different but diverse regulatory bodies that come under online KYC laws. The objective of FINRA 2090 is to ensure that investment analysts comprehend each profile so that the chances of getting involved in any monetary loss fraud are minimized. It also includes maintaining accurate records for a complete understanding of their clients to give appropriate services and comply with the regulatory bodies.
FINRA rule 2111 means that brokers must make sure their investment advice fits a client’s financial needs and goals. They need to look at the client’s current financial situation, including other investments they have, before suggesting any buying, selling, or exchanging of securities.
The Coherence Between AML/KYC Laws
AML and KYC laws have coherence in their regulations as they both are considered in the financial institutions for combating monetary frauds such as money laundering and terror funding. These apparent scams are denser, but they can be easily mitigated if there is proper regulation. So, through the appropriate implementation of AML and KYC laws, financial institutions and even small businesses can enhance their efficiency.
Final Verdict
KYC laws consist of rules that ensure certain deliveries among the stakeholders and the customers. The proper integration of regulations provides the confidence to ensure the integrity of the system. Fraudulent activities such as data breaches, money laundering, and terror funding can only be mitigated when there is a proper strategic approach that contributes to solving the major problems regarding the decreased integral factors.
