KYC/AML Compliance Checklist for Fintechs: A Guide to Knowing Your Customer and Anti Money Laundering

KYC/AML Compliance Checklist for Fintechs: A Guide to Knowing Your Customer and Anti Money Laundering

As a consequence of the increased financial crime linked with internet banking, fintechs must double-check their anti-money laundering (AML) and know your customer (KYC) procedures. 

Financial technology companies understand the importance of compliance. But what is actually required to meet KYC/AML standards? 

This blog will give fintech startups a brief overview of the three components that comprise KYC and AML and provide a handy checklist.

Let’s get started!

What is Know Your Customer (KYC)?

Know Your Customer (KYC) is a series of identity verification processes that protect financial institutions against money laundering, terrorist financing, and other criminal activities by ensuring they know who they are dealing with.

Many countries have KYC laws to make it more difficult for criminals to use money illegally, such as by laundering or tax evasion. In the U.S., KYC falls under the Bank Secrecy Act (BSA). Businesses or governments that do not follow KYC legislation risk running into serious issues.

Steps for a KYC check include:

  • Collect the customer’s name, address, and date of birth.
  • Verify that the information is correct and obtain a copy of an identification document (e.g., driver’s license or passport).
  • Confirm that the photograph on the ID matches the customer.
  • Check for any sanctions or watchlist matches

What is Anti Money Laundering (AML)?

AML regulation is the process of applying countermeasures to protect a financial institution from the risk of being used to facilitate illicit activities, such as money laundering and terrorist financing. Financial institutions are required by law to implement an AML program that meets specific requirements.

To create a compliance program, one needs to develop AML screening policies and procedures. Compliance programs like these ensure that companies can operate without the risk of legal consequences.

KYC Rules and AML Overview for Fintechs

Fintech firms face challenging regulatory hurdles and should take the necessary steps to comply with KYC and AML regulations. Organizations that wish to protect their reputation and trust and avoid financial damage must take the steps required to comply with KYC and AML regulations.

These laws are made to protect both consumers and financial institutions. They help prevent identity theft, fraud, money laundering schemes, or other criminal activities.

Compliance Challenges for Fintechs

To understand the compliance challenges of fintech firms, it is essential first to understand their business models. Fintech companies have been labeled as innovators in the financial industry.

Generally speaking, fintech companies are more reliant on technology and automation. They also offer a more comprehensive range of services, from payments to loans and asset management. And because they’re digital-first, they often have a different customer base than banks. These unique aspects can cause challenges regarding compliance with KYC and AML regulations.

Fintech firms must validate a user’s identity before they can do business with them. Fintechs can achieve this through a sturdy KYC process and AML procedures.

The KYC/AML Compliance Checklist

Your KYC policy includes three elements:

Customer Identification Program (CIP) 

The first and most crucial step in following KYC guidelines is identifying the client and their financial history. This is a vital component of any KYC procedure since the law mandates it. It’s a provision of the Patriot Act, which requires all people who have bank accounts to submit a CIP so that their records can be noted and reviewed.

All banks and financial firms are required to use a CIP on their customers. This helps fintechs identify their customers and aids them in monitoring the financial activities of their clients throughout the KYC verification process.

While it is permissible for a CIP to be carried out by the FATF or The Financial Action Task Force, the decision is ultimately up to the banks and financial institutions. To verify a CIP’s success, the bank must analyze these facts in terms of validity, verification, and relevance. While performing an AML inquiry, such criteria should be met.

Continuous Customer Monitoring (CCM) 

KYC checks continue throughout the life cycle of a customer. It’s not enough to view a customer briefly; therefore, banks maintain an active system that regularly screens their clients. 

A fintech company must conduct regular transaction monitoring based on customer risk and suspicious activity, keeping track of their commercial relationships. KYC typically includes due diligence, risk management, and transaction analysis elements.

The fintech may use this ongoing monitoring to keep track of each customer’s financial transactions and notify the necessary regulators of abnormalities. There are also times when KYC must be re-verified. This is true when a customer’s financial or business-related traits change, such as changing occupation or business and adding account holders.

When creating your monitoring system, consider these factors:

  • Recurrent transactions that take place outside of your region or country
  • Escalated number of transactions 
  • Transaction from an unknown party

Continuous customer monitoring is a time-consuming component of KYC compliance, but it is crucial since even a minor increase in financial activity can indicate financial fraud if not detected. This continuous monitoring is all digital, giving each client complete protection. As a result, any financial fraud can be effectively combated by maintaining a KYC compliance program.

Customer Due Diligence (CDD)

The most time-intensive aspect of a Know Your Customer procedure is assessing the trustworthiness of your customer through CDD. Fintech companies must be aware of their customers to know what risks are associated with them.

There are three levels of customer due diligence, depending on the customer:

Standard Due Diligence (SDD): Low-risk consumers, who pose a minimal risk to your company, will be required to undergo an SDD. Initial information is necessary for clients that frequently reveal early risks, but a complete CDD isn’t needed if the chances of financial fraud or tax evasion are low.

Customer Due Diligence (CDD): Customers who have a low-to-moderate risk of causing problems for your company are required to supply certain information that you will use in the course of a financial activity examination to assess any additional potential risks connected with customers. 

Enhanced Due Diligence (EDD): Customers who have a high probability of causing problems for your company are required to provide more information that you may utilize in the course of a finance investigation. This is any additional information that a bank may consider necessary for their KYC procedure. 

Customers with higher-risk profiles are usually asked to provide more detailed insight into their financial activities as part of this process.

Fintechs can take the following measures to streamline their CDD operations:

  • Fintechs may ask about a customer’s company and the number of transactions they execute to help analyze their financial activities.
  • Fintechs may categorize and characterize their customers’ risk profiles while confirming or verifying a client.
  • Fintechs can request any documentation necessary to keep the CDD process current.
  • Fintechs can develop a system that will regularly monitor customers to take the appropriate actions to maintain compliance.

The KYC procedure is quite thorough, and you may adjust the checklist for one’s specific financial activities.

The know your customer and anti-money laundering requirements for fintechs have been simplified significantly with the introduction of Sila.

Getting Your App Up and Running With Sila

Sila provides an embedded KYC and AML compliance program through a versatile API that allows fintechs to know their customers with only a few lines of code. Sila’s AML compliance solutions can be used by financial institutions, cryptocurrency companies, peer-to-peer lenders, and payment service providers.

As a fintech, you can use the Sila API for most of the following regulatory requirements:

  • Identify high-risk customers and transactions
  • Implement custom rules for enhanced due diligence
  • Integrate know your customer (KYC) and anti-money laundering (AML) capabilities into your application with just a few lines of code
  • Complete a SARs, or suspicious activity report, filing

Ready to know more about Sila’s know your customer (KYC) and anti-money laundering (AML) compliance solutions? Talk to our sales team, or start your app in the sandbox today!