AML Compliance Checklist: Pillars, Red Flags, Processes, and more

The new FinCEN rules require businesses to take a more risk-based approach to their AML and CFT processes. These requirements lead to the creation of a more robust and secure environment for your business and its clientele. However, these processes can be tedious and lead to increasing the complexity of your business’s AML and CFT activities.

Since businesses need to conduct ongoing and continuous AML and CFT checks, they should establish a checklist of all the tasks that need to be accomplished to streamline the process. So, an AML checklist is exactly what we will be giving you. You can follow this to the T to save time, or you can modify it to suit your business. So let us get started.

The Five Pillars of AML

The five pillars of AML are processes that must be adopted by businesses to maintain a standard that is easy to replicate. These pillars help your business stay compliant with the AML laws put in place by the regulators. Let us take a look at the five pillars of AML:

• Designate a Compliance Officer: Every business, including yours, needs to employ a compliance officer to ensure your business complies with the incumbent AML regulations. This officer is meant to oversee and direct your business’s AML practices and manage the compliance team. Ideally, you want to hire someone with experience in the industry that your business operates in.

• Create Written Internal Processes: This step includes documenting the measures your business takes to stay compliant with AML rules. This creates a standard operating procedure that is custom to your business which sets a standard that your compliance team follows. A written procedure document helps your business’s compliance team avoid deviance as well as train new additions to the team.

• Educate Your Employees: Your business needs to keep its employees updated with the latest standards of AML regulation. This is why, AML requires the training of employees with the newest technologies and systems to maintain compliance. This training should not only be limited to the compliance team of your business but other employees as well. This ensures that compliance is not a post-facto correction, but an ongoing process in your business.

• Conduct Third-Party Reviews: Apart from internal standards and their execution, a robust AML system should also consist of assessment from an external reviewer. This helps the business receive an unbiased opinion on the state of their AML practices. An external review also helps the business gain a new perspective on its AML practices, which can help further reinforce them.

• Adopt Risk-Based Procedures for Customer Due Diligence: According to the new AML and CFT rules by FinCEN, financial institutions must conduct risk-based customer identification, monitoring, and reporting processes. Businesses also need to conduct the appropriate level of due diligence on customers based on their risk profiles.

AML Red Flags

Now that you know the five pillars of AML, how about finding out the red flags your business’s compliance team should be on the lookout for? These red flags are not direct proof of criminal or illegal activity, but should still be monitored to avoid potential legal liabilities.

• Large Cash Transactions: Cash transactions are difficult to track and are often used to finance illegal activities.

• High Frequency of Transactions: These are often associated with “structuring” of “smurfing” in money laundering, where a person makes multiple transactions that are just below the reporting threshold to avoid detection.

• Irregular Transaction Patterns: Every customer has specific tendencies and patterns that they establish with a business over their association. One of the reasons why a customer’s behavioral pattern might change is due to a possible association with illegal activities. Therefore, these changes warrant inspection and possible reporting.

• Transactions with High-Risk Entities, Jurisdictions, and Businesses: Irrespective of their value, frequency, or pattern, transactions with high-risk parties require monitoring and vigilance. These parties include businesses like gambling, countries with relaxed money-laundering laws or poor history with money laundering, and customers and businesses with suspicious track records. Transactions with Politically Exposed Persons (PEPs) also require unconditional monitoring.

AML Regulations

In this blog and others, we have often mentioned financial regulations and regulators, which begs the question, “What and who are these?” Well, let’s find out.

In the US, the Department of Treasury handles all matters finance, and the Financial Crimes Enforcement Network (FinCEN) is a bureau under the Department of Treasury that looks into matters of financial crimes.

When it comes to laws, the Bank Secrecy Act (BSA) and the Corporate Transparency Act (CTA) are the primary disclosure-based laws that businesses need to comply with. Apart from these, there are also the new AML and CFT rules that FinCEN enforces on businesses to protect the interests of its customers.

Processes to Improve AML Compliance

Having seen the typical red flags your business needs to watch out for, and the laws that could apply to your business, let us explore a few ways to counter these and other edge cases.

• Conduct a Risk Assessment: Your business conducts many customer identification processes when onboarding new clientele. However, this identification is often limited to the customers’ basic identifiers, such as their name, address, age, sex, and more. To improve the AML compliance of your business, you should also improve the depth of your customer identification.

This deeper analysis involves identifying the risk associated with each customer and taking appropriate monitoring and reporting measures. Integrating Signzy’s PEP Screening API and Criminal Screening API can help your business identify any risks associated based on a customer’s background.

• Implement Streamlined KYC Practices: Every business needs to take sufficient Know Your Customer measures during client onboarding and continue to do so throughout their association. While this helps businesses from a “legal liability” perspective, the tedium and repetitiveness can cause friction between the business and its customers.

Since KYC can’t just be done away with, businesses need to implement streamlined KYC measures that ensure compliance without compromising the customer’s user experience. Signy’s KYC Verification API has a suite of features that can be integrated into your business to ensure that this balance is struck with every client.

• Create a Robust Verification Process: The advancement of technology is something of a double-edged sword for your business. On one hand, it helps your business expand and on the other, it also helps bad actors who use newer technologies to commit fraud and other crimes. One such case of misuse of technology can be seen with AI-generated selfies and identity documents being used to create false identities and dupe businesses.

The use of AI leads to these fake selfies and documents being created en masse, and with a high degree of accuracy. Using Signzy’s Liveness Check API and document verification APIs like DL Verification API, OCR API, and more can help significantly reduce the margin of error in the customer verification process.

• Go Beyond Personal Verification: Your clientele isn’t just individual human beings. During its normal course of operation, your business might interact with other organizations as well. AML measures are not just limited to limiting individuals from committing monetary crimes, its scope also extends to entities like businesses.

This is why your business’s client onboarding and verification processes should also be inclusive of other entity structures. After all, shell companies and businesses formed in geographies with lax regulations are often used to launder illegal money. Signzy’s EIN Verification API and UBO Check API can help expand the scope of your business’s identification and verification measures.

Conclusion

Anti-money laundering measures are both a necessity and a bit of a hassle. Businesses that can strike the balance between compliance and customer satisfaction are the ones that end up going the distance. Integrating technology into your business’s AML processes is a step in the right direction.