A report of the united nations office on drugs and crime found in research that the average amount of money laundered is 2% to 5% of global GDP annually. The banks are one of the most common victims of money laundering due to the business model of this sector which makes it suitable for such crimes. The global regulatory authorities have identified the risk in this sector and Anti Money Laundering (AML) regimes are becoming more rigid than ever. The banks have no other option but to practice, AML compliance or they have to face huge penalties.
Why Banks are the Most Common Victims of Money Laundering?
Money laundering is the illegal movement of black money to wash it. Several transactions and investments are made to manipulate the trail of black money, ultimately integrating it into legitimate money.
Banks are the most common victims of financial crime and are always under the radar of regulatory authorities. Banks are the sovereign money transfer entities and have a developed global framework, so it makes it easy for criminals to reach their supporters in different corners of the world.
Why Do Banks Need AML Compliance?
1. Regulatory Requirement
Global AML regimes require the banks to run thorough KYC and AML screening of their customers. AML compliance requires the banks to collect and screen the information of their customers before extending their services to them. AML screening is conducted by verifying the information of a customer against the global sanctions lists, watchlists and PEP lists. The verification of the country of the customer is also advised. Once the verified information is collected the banks assign a risk rating to the customer based on thee results.
Lastly, the bank performs AML screening on the customer based on his risk rating. AML screening measures include periodic AML screening of the customer, keeping track of customer’s transactions, his occupation, and income, etc.
Also, the banks are required to maintain a record of this whole process and to report any unusual activity of their customers.
2. Fraud Prevention
Numerous types of frauds are executed in the banking sector to exploit the services provided by banks. Most common types of frauds with banks are listed below:
- Fake or stolen identity fraud: The criminal uses a fake or stolen identity to circulate his black money through the financial system anonymously.
- Account takeover fraud: Criminals gain illegal access to the bank accounts of legitimate customers to transfer funds to anonymous people or to withdraw the funds available in the stolen account. Often the criminals take over accounts for money laundering and terrorist financing.
Other than that, phishing scam, money laundering, terrorist financing are the frauds that are committed within the banking sector and affects the banks negatively.
Banks are always keen on improving their fraud prevention methods. The fraud exposure of banks is global. So, the banks invest in online AML screening software to get a global risk cover. AML screening software provides swift AML verification results within a minute and the customer is screened against global watch lists, sanction lists, and PEP lists. It helps banks in achieving global risk cover and good AML compliance standards.
A credit rating is a very dear thing for banks. Credit ratings are assigned to the banks based on their compliance, security practices, reserves, etc. In case a bank is found non-compliant with AML regulations, the bank might lose its credit rating along with heavy fines.
For example, Swedbank’s credit rating dropped when the bank was found to be involved in a money-laundering scandal. The rating agencies have their eyes set on the activities of the banks and their security practices, periodic analysis is also conducted, so banks need to be vigilant in their AML compliance practices to maintain their credit rating.
To wrap up, banking is an old industry and has the confidence of millions in it. The recent outbreak of financial crimes reported in banks around the globe is affecting the confidence of the masses. This defames of the banking sector and the rise of FinTech might bring the industry down. AML compliance is more than a regulatory requirement for banks, it improves the market value, customer value, growth and profits of a bank by eliminating fraud from the bank’s eco-system.
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