Before we talk any further about this topic, let’s understand what AML and KYC are.
AML is the abbreviated form of Anti Money Laundering, and KYC stands for ‘Know Your Customer’. Typically, AML comprises of a specific set of rules, procedures, and regulations that administer and help cut down the chances of money laundering – the process of illegally obtaining money involving legitimate businesses and foreign banks. Various measures are being developed by people and organizations across the globe to prevent money laundering and terrorist financing.
On the other hand, KYC involves the process of extracting the information about customers such as your identity, address and other details. This is done so as to prevent the exploitation of banking services for wrong purposes like terrorism financing, money laundering, etc. KYC is, in fact, an integral part of AML and Combating Financing Terrorism (CFT).
Who uses KYC and AML?
AML and KYC are used as a standard by almost all financial institutions like banks. If any financial organization fail to meet the AML and KYC standards, they will be charged hefty fines.
Why do banks require KYC and AML?
Regardless of the type, all banks and financial institution has to necessarily maintain both AML and KYC to steer clear from frauds. Often, the entire process of KYC and AML happen to be too hectic for both the bank and the customer. The process begins with the customer having to bring the different identity proof documents to the bank. After which, the bank will review the documents and accept or reject it. The process is time-consuming and can take up to around 10-20 days. It also increases the operational cost as well.
KYC is intensive, non-competitive, and highly duplicative especially when it comes to multi-national corporations that possess multiple banking relations in various countries. Thus, banks find it a nightmare reviewing the documents of the customers and verifying the backgrounds because the document usually involves a lot of personal information.
Nevertheless, knowing all the information about a customer can help the financial institution’s risk management team analyse and prevent any criminal activities like terrorist financing, money laundering, and more.
‘Identities’ and banks
We know for sure that identity happens to be a burden for many banks as well as financial institutions. However, digitizing identity can help lessen the difficulty although it can prove to be quite expensive. Researchers suggest that over $1 billion are spent every year by banks and financial institutions on the identity management system which doesn’t solve the problem completely.
This happens because disparate systems and technologies won’t be able to communicate with each other at most times. Convergence and disruption are of high importance to banks and financial institutions in the present world, and in such a scenario, this can prove to be a serious threat. Thus, banks will have to think about cost-efficiently managing, and analysing ‘identities’ twice before taking any action to better understand the clients’ requirements.
Blockchain can help
Banks and financial institutions can walk out of this situation with the help of blockchain – a distributed ledger where data is duplicated for users in real-time. Financial institutions can use blockchain as their foundational architecture to build applications that will help provide their users with a platform where data can be digitally stored.
As the data is duplicated across the network rather than centrally storing it on a device, blockchain allows information to remain safe. Often, banks ask users for their blockchain to identify data, and once it is shared, you will be allowed to log in using a one-time password (OTP). You will also be granted a private key to your data as well.
Though the identity data can be sourced and managed by other parties, it still remains entirely transparent and you will solely have the authority to distribute it to others. As it is self-sovereign, it is further protected from hackers and fraudsters.
How will it benefit financial institutions?
Typically, every bank and financial institution has to identify and build a low-risk profile for their customers. Being backed by a KYC model, blockchain will help minimise the costs which, in turn, helps with presenting KYC utility and self-perpetuating market leadership. As middlemen are often not a part of the process, banks can enjoy complete control over their customer data.
Features of blockchain for KYC
Blockchain can transform the way banks and other financial institutions function. It can simplify KYC and minimize operational costs. Additionally, it can also help complete more complex transactions and workstreams on a chain. In the future, we can surely expect to see more innovation in the Identity and KYC arena.