Banks and other financial firms are under pressure to mitigate the risk of incidents such as money laundering or financing of terrorists. Due diligence and screening are considered one of the most essential aspects of developing a sound AML compliance strategy. This process also protects the institution in a way that its activities and operations conform to international policies and laws. Appropriate due diligence and screening measures assist financial institutions in identifying the unlawful flow of money and stepping measures toward their reduction.
According to the Financial Action Task Force (FATF) report of 2023, worldwide money laundering deals are 2% to 5 % of the world’s gross domestic product. It means $800 billion to $2 trillion per year. This figure shows why there is a need for a comprehensive AML compliance program that serves the interests of the institution and the global financial system.
Steps for Proper Due Diligence
Some fundamental procedures and activities to be considered in customer due diligence before establishing relationships with customers are briefly explained below:
Customer Identification Program (CIP)
When working on due diligence, find who your customers will be. This includes the full name, the address of the patient, and the identity number of the said patient. According to the Global AML Survey 2024, more than 90% of FI follow CIP under their AML compliance to check the identity of customers against reliable information.
Risk Assessment
There is a major difference in the risks that the various customers present. A sound AML program section classifies its customers by the risks that they pose. A survey conducted by the International Monetary Fund (IMF) in 2024 reveals that banks that adopt risk-based assessments cut their exposure to higher-risk clients by 65 percent. PEPs are considered high-risk entities to facilitate. They need to undergo a more rigorous identification through background checks and assessing their financial antecedents.
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Ongoing Monitoring
Screening is one of many kinds of due diligence that has to be performed. There is a need for regular customer transaction tracking. According to the PwC’s survey conducted in 2023, a large percentage of financial institutions, about 75%, noted that they detect suspicious activities while monitoring compliance with the AML program.
Update Customer Information
Customer information must be updated regularly to apprise all the relevant parties of the updated risk associated with each customer. The 2023 AML Compliance Report by Thomson Reuters revealed that the AML compliance checklist between the periodic review and update of the customers’ data is used by 68% of the financial institutions.
Conduct Effective Screening
Screening is the process that follows the customer and their transactions’ checking against other databases to ascertain their illegitimacy. The LexisNexis Risk Solutions report in 2023 stated that companies that adopted an effective screening program recorded a 55% decrease in compliance violations about financial crimes. The AML CTF compliance program should also contain several thorough screening measures.
Sanctions and Watchlists
The first and most basic process is to screen customers against sanctions and watchlists. These lists contain persons and organizations who need restrictions on the enforcement of related activities concerning financial transactions. In the case of the latter, the technical knowledge regarding the global lists should be available to the AML program to bring compliance with the AML regulations.
Politically Exposed Persons (PEPs)
PEPs hold these public executive or managerial positions at a higher risk of engaging in corruption and financial crime. The AML compliance program must have a clear way of identifying and screening for PEPs.
Adverse Media Screening
Adverse media screening means checking for any negative news regarding a certain customer. This can give an early signal of other risks that may be present in the organization.
To prevent such issues, media monitoring should be implemented to detect any form of compliance with AML.
Transaction Screening
This emphasizes the fact that every transaction should be checked for anomalies. Anomalies that are out of the ordinary or not in line with the customer’s profile should be reported as suspicious. This is among the key requirements of the AML compliance program regulation.
Stay Compliant with AML Regulations
Being compliant with AML legislation is a common occurrence. A study conducted in 2024 exposed that 60% of financial institutions suffered from penalties resulting from outdated AML programs. The AML compliance program has to be reviewed and updated regularly to meet the current AML CTF compliance standards and other existing requirements. An internal and external audit must be carried out from time to time to ascertain the effectiveness and sustainability of the AML program. Continued training of the employees so that they become aware of the best practices and current laws in place. For organizations that have a fresh set of risks related to financial crime, it would be necessary for the AML compliance program to remain reactive.
