Read this guide about anti money laundering KYC: what it is and how they complement each other. You will learn how Know Your Customer can prevent money laundering.
What is KYC anti-money laundering?
In order to know what this term refers to as a whole, it is necessary as a first step to know what anti-money laundering is.
The AML anti-money laundering is a financial crime that manages to legalize money that was obtained illegally.
On the other hand, KYC, the acronym for Know Your Customer, implies knowing the identity of the users, their activities and their financial risks.
Then, the union of these two terms covers the evaluation and reduction of risks that are linked to financial crimes of clients and partners.
How do KYC and AML complement each other?
Knowing what kind of partners, suppliers or clients we have is a growing need.
In 2018 came into force the regulations that manage to control money laundering.
This is reported by the European Commission, in its press release:
“Today, the Fourth Anti-Money Laundering Directive enters into force.
It strengthens the existing rules and will make the fight against money laundering and terrorism financing more effective”.
For this reason, the KYC and AML have a single objective: to get to know a client or partner closely, understanding the root of their economic activities and assessing the risks of possible money laundering.
Therefore, companies need to incorporate the KYC anti-money laundering procedure, to collect information on the financial reputation of an individual, company or partner.
What is KYC
The KYC has become a mandatory procedure that financial institutions must comply with.
The objective is to end tax criminal activities, money laundering and the financing of terrorism.
As we have previously mentioned, the KYC corresponds to the name of Know Your Customer, and is responsible for detecting any anomaly in financial movements.
Just as there is money laundering, another illegal action that could trigger fraud are the offers of “boiler rooms”.
What are the 3 components of KYC?
KYC‘s job is to differentiate between favorable and unfavorable clients or companies.
In order to do this in a verifiable and reliable way, we consider three components:
- Customer identification: searching and verifying the available information is the first and most important step, as it ensures whether it is on lists such as OFAC or interpol.
As well as people who have a high level of PEP (politically exposed person) committed to corruption scandals etc.
- Customer Due Diligence (CDD): which translates to all collected data being from reliable sources;
- Enhanced Due Diligence: when the company, customer or partner is deemed to require high risk.
Which requires constant reputation monitoring.
Directive (EU) 2018/843 of the European Parliament and of the Council of May 30, 2018 states in its text that this directive:
“Constitutes the main legal instrument in the prevention of the use of the Union financial system for the purposes of money laundering and terrorist financing”.
KYC documents
We provide you with the generalized KYC documentation, whether it is for a private individual, sole proprietor or company.
If you are a private individual the documents you would need to provide are:
- Voter ID Card, passport, driving license, NREGA Job Card or others;
- Letter issued by National Population Register containing details of name, address;
- Permanent Account Number (PAN) or Form 60 (as applicable).
If you are a sole proprietor, besides the previous documents, you will need to prove your economic activity.
- Two Entity proofs and One Address proof of the Entity;
- PAN card of the Proprietor.
If you are a company, you will need to provide the following documents:
- Entity proof and Address proof of the Entity;
- Memorandum of Association ( MOA ) or e-form INC 33**;
- Articles of Association (AOA ) or e-form INC 34**;
- Certificate of Incorporation;
- Board Resolution (BR) -duly signed;
- PAN Card in the name of the company;
- Any documents as mentioned above (except BR) containing address will be acceptable as address proof also.
In any case, depending on the type of society or company, you may be required to provide more specific documentation.
Anti money laundering law
Over the years, money laundering has been a serious problem for both financial institutions and the government.
On its website, Europol states that:
“The United Nations Office on Drugs and Crime (UNODC) estimates that between 2 and 5% of global GDP is laundered each year. That’s between 715 billion and 1.87 trillion euros each year”.
How can KYC prevent money laundering?
The KYC procedure obliges a company or institution to verify the identity of the client or partner before providing any type of service or creating any association.
Which makes it an essential procedure, and controls the financial life of something or someone in particular.
ReputationUP Coach has a risk analysis, which is a revolutionary patented software, that measures and prevents risks against this and any other kind of crime.
KYC and AML are two concepts that refer to the understanding and application of these tools to detect any type of financial anomalies.
Who investigates money laundering?
In the USA there is a government agency called FinCEN (Financial Crimes Enforcement Network).
FinCEN is in charge of safeguarding the financial system from illicit use, combating money laundering and its related crimes including terrorism.
On their website, they declare that:
“Every single success was achieved by the sheer dedication to mission and professionalism of the FinCEN work force. FinCEN will continue to make AML Act implementation a top priority”.
How do banks detect money laundering?
As we’ve said throughout this article, information is the key for organizations to stay on top of new and old clients.
There are a series of verifications that can help to keep control on the information of the financial life of each user.
Identity verification, i.e. KYC, obliges banks to verify personal data; this way, they can detect any unusual movement.
Another tactic is the anti-money laundering retention period, in which deposits are left in an account for five business days.
A perfect way to save time to assess financial risks.
There are different cyber security tracking transactions, that way banks control the number of customers they have.
Which helps make it a much faster investigative process.
This type of software combines different sources of information: user history, risk assessment and transaction details.
They report any type of movement, whether in cash or digital, and in the case that the system suspects some abnormal activity, it alerts the bank immediately.
ReputationUP Coach has different technological methods that will help you investigate the financial activity of your suspected client or partner.
What are the three stages of money laundering?
The high amounts of money as a consequence of money laundering can be disguised as homes, hotels, warehouses, etc.
All this is done with the aim of going unnoticed by the authorities and not being held accountable.
These are the three stages of money laundering.
- Placement: is the phase in which they introduce illicit money into the legal economy, achieving this through businesses, companies, etc.
The way to evade justice is to deposit non-suspicious amounts of money, in different banks and on different days.
- Concealment: is the second phase, and its objective is to prevent tracking, for this reason they carry out transactions in different financial entities and countries.
The creation of fake companies is a way of disguising the origin of the money.
- Integration: it hinders investigations by the authorities, so that legal money cannot be differentiated from illegal money, since they will be invested in different assets.
What is the first step of money laundering?
As we have mentioned before, the first step is the “placement”, we will explain in more detail below.
This is the starting point, it is about the income of cash or physical goods that come from illicit activities.
They are usually sources of goods and large volumes of money.
When receiving large amounts of cash, they have to know how to introduce it in such a way that they give no reason for investigation by the authorities.
For this reason they almost always invest it in real estate or are part of the legal financial system in one way or another.
At what stage is money laundering difficult to detect?
It should be clarified that from the first stage, detecting money laundering is a complicated job.
But there is one in particular that makes all kinds of research difficult: integration.
To distinguish between legal and illegal money, it is hard work for the authorities.
This stage manages to achieve an appearance of legitimate and legal wealth, by re-entering the economy with commercial transactions.
So, they achieve the placement of the laundered funds, and they continue to turn the economy around and create a legal perception.
For this reason, they choose to invest in real estate, luxury items, etc.
What is EDD in KYC?
EDD means Enhanced Due Diligence and it is an advanced process of KYC.
After all the information that we have given you throughout this article, you know that the purpose of the KYC is to collect information from all users.
In this case, EDD is a more rigorous compilation, which means that the type of information is much more detailed.
The financial institution calculates an EDD risk rating in KYC when it finds inconsistencies in transactions or very large sums of unjustified money.
So they can immediately sue under the name of “reasonable security.”
This EDD technique also takes into account any information on the internet that compromises any type of relationship with money laundering or corruption.
What are some examples of money laundering?
Through the years, different cases of money laundering have been protagonists in the world.
We reveal two cases that caused a great impact in the financial world.
- Liberty Reserve, the famous alternative online payment network.
One of the most notorious cases in the United States, Arthur Budovsky the founder, was arrested in 2013 at the Barajas airport (Madrid, Spain).
Behind this man was a huge money laundering system for about 250 million dollars.
The United States Department of Justice on its website states that:
“Arthur Budovsky, 42, pleaded guilty to one count of conspiring to commit money laundering before U.S. District Judge Denise L. Cote of the Southern District of New York.”.
- Droguerías la rebaja, a multinational of nationally recognized pharmacies.
Through this company, the Rodriguez Orejuela brothers, recognized for being part of the “Cali cartel”, managed to launder significant amounts of money.
After the extradition of these brothers, the company was bought by the Coopservir co-op, managing to clean up its finances.
Today, it is defined as being a solid company with a presence in a large part of their national territory.
Conclusions
The anti-money laundering KYC encompasses the evaluation and mitigation of risks that are linked to financial crimes of clients and partners.
From this guide, on KYC anti-money laundering, the following conclusions can be drawn:
- It is a mandatory procedure that financial entities must comply with;
- Objective is to end tax criminal activities, money laundering and financing of terrorism;
- The 3 components of KYC are: Customer Identification, Customer Due Diligence (CDD) and Enhanced Due Diligence;
- KYC procedure obliges a company or institution to verify the identity of the client;
- The three stages of money laundering are: placement, concealment and integration;
- The EDD in KYC is a more rigorous type of compilation.
ReputationUP Coach has the best technological tools, which allow you to investigate your partner or client against any case of money laundering.