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Effectively Prevent Fraud and Money Laundering Using The Know Your Customer Principle

15. July 2020 / in Knowledge

Forged identities used to make applications for emergency support during the coronavirus crisis have made it painfully clear: a stolen name, an alleged trader, a few false statements – even small things can cause losses amounting to several million. It often starts with the failure to check the identity of the account holder – a mistake with far-reaching consequences.

Money laundering reporting officers and compliance staff know all too well that many fraud cases are not bold enough to generate much media attention, but rather are subtle and inconspicuous. However, the devil is in the details.

The actual challenge is actually not all that complicated and is legally regulated by the due diligence requirements of the Money Laundering Act (GwG). Know Your Customer (KYC) provides clear guidelines in this respect. Used correctly, it gives banks a framework to eliminate much of the risk during onboarding, prevent fraud and combat money laundering.

In this blog post, you will learn how the KYC principle helps you onboard new customers, act in compliance with the law and reduce the risk of money laundering and fraud.

Read here how Open Banking facilitates the balancing act between risk management and customer experience.

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What Is Behind the Know Your Customer (KYC) Principle

The financial sector is and will continue to be a hub for fraud, money laundering and terrorist financing. For this reason, all banks and financial institutions are required by law to implement the Know Your Customer principle.

The basis for the KYC principle, also known as the AML (Anti-Money Laundering), is the Money Laundering Act, which requires adequate identification and legitimacy checks of all customers and account holders. When identifying natural persons in accordance with the Money Laundering Act, you must document and verify the following information (§11 Section 4 of MLA ):

  1. Name (surname and all first names)
  2. Place and date of birth
  3. Nationality
  4. Address (no P.O. boxes)

KYC Process Ensures Onboarding of New Customers in Compliance with the Money Laundering Act

Among other things, the implementation of the KYC process guarantees that new customers can be clearly identified and verified. This lays the foundation for a secure, low-risk customer relationship right from the onboarding stage. Forms of fraud such as opening a bank account under a forged or stolen identity, e.g. a false name, are ruled out in this first step.

Infographic Foundation for a secure customer relationship

KYC is based on the fundamental idea that the first step in effective fraud prevention is knowing the customer and the risk involved.

Furthermore, in line with the Know Your Customer principle, you can check whether the customers’ funds originate from a legal source. Last but not least, you lay a paper trail based on the information you collect, enabling the customer relationship to be traced from the very beginning. Subsequently, intelligent customer data analysis and the documentation of risk assessments complete the customer profile.

Do you need to verify the source of your customers’ funds? Find out how to do this quickly, easily and in a legally compliant manner.

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Conduct the Right Due Diligence to Minimise Risks in Accordance with the Law

The stakes are high: money laundering reporting officers are liable for offences related to money laundering and terrorist financing, e.g. by late submission of suspicious activity reports. As a result, if they do not comply with the KYC principle, they are in danger not only of causing damage to the institution (or company); they also run the risk of acting unlawfully. However, due diligence requirements are rewarding for those money laundering reporting officers who follow them in order to be on the safe side. Whether general or enhanced due diligence requirements apply depends on the level of risk of money laundering or terrorist financing.

In general, banks and financial institutions are subject to the general due diligence requirements (Section 10 of the German Money Laundering Act). In particular, they are obliged to identify the contractual partner and any person acting on their behalf. The identification must be carried out when “establishing a business relationship”, i.e. before conclusion of the contract.

If there are indications of a potentially higher risk, the money laundering reporting officers must comply with the enhanced due diligence requirements (Section 15 of Money Laundering Act), such as obtaining further information. This category includes, for example, politically exposed persons (PEPs) or particularly complex transactions involving a higher risk of money laundering or terrorist financing. 

Correctly Applied, The Know Your Customer Principle Prevents Fraud Before it Arises

The Money Laundering Act requires banks, among other things, to verify identities in a compliant manner. The potential that a secure, effective Know Your Customer process holds is enormous, especially if it is quick and seamless for all those involved.

By clearly identifying your customers, you minimise financial and reputation risks before they arise. When onboarding customers, you should pay particular attention to implementing an accurate, effective method of getting to know your customers as well as possible.

Infographic Effective KYC

What are the opportunities offered by new technologies and Open Banking to make the best use of KYC and prevent risks and money laundering before they arise? Find out more in our free white paper!

KYC is an important step towards proactively combating fraud and money laundering. In order to protect yourself against these and other risks, Open Banking enables you to implement a seamless anti-money laundering strategy, which is made all the more stable and secure thanks to automation and digitalisation. Read this blog post to find out how Open Banking makes risk management safer, faster and smarter.

Schlagworte: Knowledge

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