ANTI-MONEY LAUNDERING AND FINANCING OF TERRORISM IN THE AGE OF DIGITIZATION
1. Introduction
Faced with the tightening of national and international regulations to combat money laundering and the financing of terrorism and in view of the sophistication of fraud, financial institutions have had to strengthen checks on customer files and have thus made the customer journey more cumbersome.
The confinement and distancing obligations imposed by COVID have for their part had a strong impact on the customer knowledge journey, a key element of the AML-FT process initiated by financial institutions.
These establishments, banks more specifically, are forced to transform their way of working and the way in which they collect information and data from potential customers as soon as they enter a business relationship.
The digitization of “Know Your Customer” KYC journeys thus appears to be an important efficiency lever likely not only to alleviate the impact but also to improve the digital customer experience. However, questions arise in this regard. They are mostly related to technical barriers, the reliability of tools and legislative opinion regarding the risk that such initiatives may entail…
In this article, we will address the issue of e-KYC, to improve the quality of service on the one hand and to strengthen the LCB -FT system, after a brief reminder of certain basic notions as well as than the legislative and regulatory framework
2. Definitions and principles
Money laundering:
According to VERNIER Éric (2018), money laundering is defined as a process used to hide the origin of funds from criminal activities such as drug trafficking, arms trafficking, corruption, etc. Its ultimate goal is to make illegally acquired capital appear to have a legitimate source and to insert it into the economic sphere.
Laundering is, in our view, the fact that a physical or legal person acts in a way to help conceal or cover up the integration into the financial system of dirty money and black money.
Black money is that earned through tax evasion and tax evasion
Dirty money, on the other hand, comes from illegal and criminal activities. It is the money that comes mainly from drug trafficking and organized crime
This complex mechanism is considered harmful to the economies of countries and could have harmful consequences insofar as financial crime can easily spill over into the financing of terrorism.
The fight against this scourge has been decreed by the international community since its first appearances, it spans nearly half a century
It was only in 1989 and faced with the threats of seeing the international financial system directly or indirectly involved in the mechanism of money laundering and terrorist financing at the risk of affecting its integrity, that the international community established measures, legislation and control bodies binding on the countries that adhere to them.
The Financial Action Task Force (FATF)
The year 1989 saw the creation by the G7 of the FATF, an intergovernmental organization which monitors the integrity of the international financial system through the fight against money laundering, the financing of terrorism and the proliferation of weapons of mass destruction. The FATF will have a decisive role in the development of international standards on AML-CFT, in mobilizing the international community against money laundering and terrorist financing crimes
The FATF is made up of 37 countries and territories, as well as 2 regional organizations (European Commission and Gulf Cooperation Council). Other countries join through nine FATF-style regional bodies that play a vital role in ensuring that their member states implement FATF recommendations.
Published in 1990, the FATF recommendations (40) have been revised in 1996, 2001, 2003 and most recently in 2012 to ensure that they remain current and relevant. They are intended to be applied by all countries in the world.
The decision-making body of the FATF, the Plenary, meets three times a year.
3- LCB-FT and KYC
LCB-FT and KYC are two closely related concepts that must be understood as part of the process of verifying customer identity and screening customer behavior. Thus, the relationship between KYC and LCB-FT processes is fundamental to prevent money laundering in contractual relationships and transactions
KYC is actually a behavioral study, which will draw a profile for each customer based on their behavior history. Once the KYC has been established, it will be possible to determine whether the transactions carried out by the client are suspected of being linked to the offense of money laundering and/or terrorist financing.
Following the attacks of September 11, 2001, the Basel Committee recalled the need for an active and systematic policy based on the 3K rule: Know Your Customers, Know Your Suppliers, Know Your Employees.
-Know Your Customers (KYC) consists of studying customer behavior in order to detect their risk profiles. This applies when opening an account and then continuously with the updating of information.
-Know Your Suppliers (KYS) consists in applying the same procedure for the choice of subcontractors, co-contractors, banking correspondents and other bank partners. It is in fact a question of requiring them to respect and adhere to quality standards identical to those applied by the bank.
-Know Your Employees (KYE) involves knowing the employees and developing rules for staff rotation and separation of functions with a view to strengthening the bank’s LCB-FT system.
4. Mandatory LCB-FT risk management
Financial establishments (banks and insurance companies) are the business sectors most exposed to the risks of money laundering and terrorist financing
Indeed, financial institutions run the risk of heavy penalties if they do not comply with their obligation of vigilance, information, and warning. As examples:
- In 2018, the cumulative number of sanctions imposed by the French Prudential Supervision and Resolution Authority (AFCPR) amounted to 70 million euros.
- In 2021 the Paris Court of Appeal imposes a fine of 1.8 billion euros on a Swiss bank suspected of having encouraged wealthy French customers to defraud the tax authorities.
However, the management of this risk is not without effect on the relationship of the financial institution with its customers and on the sustainability of its processes.
Indeed, the control system when entering a relationship has made customer journeys more cumbersome and made the customer experience more complex, making customers less and less satisfied.
At the same time, the implementation of new internal procedures has impacted the banks’ operational teams (sales, back office, compliance). Administrative tasks have become longer, more tedious and the risk of human error has increased
On the other hand, the lasting knowledge of the customer, from the “Emboarding” relationship and during the life of the relationship, requires the processing of a large amount of data requiring rigorous and time-consuming work, which can never be reliable. 100% when manual.
On another level, the COVID crisis has shown that it is impossible to set up a know-your-customer (KYC) journey in an atmosphere of confinement and distance, hence a control of the LCB-FT risk more and more. hard.
5. Digitization of the KYC journey
When we talk about KYC for banks, we must therefore imply the processes of:
- Getting in touch
- Remediation
. Periodic review
Nowadays, Artificial Intelligence and Machine Learning provide banks with valuable solutions that are not without risk, to overcome the above-mentioned constraints
In the example of entering in a relationship with a financial institution, the different stages of the process are digitized as follows:
- The customer fills out a form directly online or on a tablet in the agency by filling in their personal information
- He provides the supporting documents necessary for the constitution of his file (identity, income, address, company documents) on a dedicated interface
- An automatic and real-time control is carried out on the supporting documents. This control verifies the veracity, consistency, and completeness of the file.
- Once the file has been verified and accepted by the bank, the customer signs the contract via an electronic signature solution
- His file is securely archived, and his account is open
This simplified description of the digitization of the KYC process is not always easy to implement. Technical, security and regulatory obstacles are multiple and sometimes blocking.
- Technically: to digitize the 3 KYC processes effectively, it is necessary to embed many digital functions. These are the following 7 digital function blocks:
|
electronic signature |
Smart automation (BOT) |
|
strong authentication |
Workflow |
|
The RAD-LAD * |
GED System |
|
Parts management |
|
* LAD (automatic document reading) brings together three technologies essential to its operation: RAD (automatic document recognition), OCR (optical character recognition) and IRC (intelligent character recognition)
These are concepts that are an integral part of document digitization and electronic document management (EDM). The objective of these applications, tools and technologies is to make EDM more efficient and adapted to users.
The challenge of implementing the 7 digital blocks differs from one banking institution to another and depends on the maturity of the digitalization process in the bank.
- On the regulatory and security level: the digitization of KYC, concerning the entry into a remote relationship, presents with regard to the 5th AML-FT Directive (EU Directive n ° 2018/843 of May 30, 2018) risks of fraud particularly important in terms of identity fraud induced by the use of electronic identification
Indeed, experience has shown that identity fraud is a significant phenomenon, for consumer loans:
- 6% of documents in circulation would be fraudulent in France
- 5 – 20 billion euros: amount of damage caused to companies each year by identity fraud
To overcome these obstacles and encourage the use of digitization, this same 5th AML-FT Directive recognizes the legality of entering into a remote relationship under well-specified conditions and restrictions, particularly in terms of electronic identification.
This has enabled many European financial institutions to access the digitalization of the know-your-customer journey (KYC) and to benefit from its advantages.
6. Conclusion
Subject to compliance with the prerequisites for securing the digital identification scheme provided for by the European standard, the deployment of digital KYC services offers several advantages:
- Compliance with LCB-FT measures and limitation of the risk of fraud
- Time savings concerning the collection and control of supporting documents (for the bank and the customer)
- Reduction of costs, in particular human costs (back office)
- The simplification of the process of entering a relationship (natural persons especially), generating a better customer experience
In the case of Tunisia, which has recently successfully exited the classification imposed by the FATF as a country with major strategic deficiencies in its AML/CFT system, the concerns are mainly centered on the compliance and strengthening of the AML/CFT system. FT of the financial sector. The digitization of KYC processes has not yet matured in the banking community, which focuses instead on training, the mechanization of monitoring, alert and disclosure processes.
In this respect and apart from the ambitions of digitizing the KYC process which do not seem to be the priority, Tunisian banks and the competent authorities are called upon rather to catch up by further strengthening the conventional AML / CFT system by following the following recommendations:
Strengthen the inter-bank communication system and that of the banks with the various other stakeholders (BCT, Ministry of the Interior, etc.)
- Eradicate anonymity.
- Confirm the validation of account openings in D+(n) by the compliance department; (D: day of opening of the account by the network, n is to be shortened as much as possible)
- Strengthen staff training on money laundering.
- Integrate the element of ethics in the selection of new recruits.
- Strengthen the interconnection between the banks and the public bodies concerned to better know the potential customer during the D+(n) validation period.
- Set up a BLOCKCHAIN platform controlled by the State to make the circulation of information relating to customers easy and prompt when entering into a relationship.
- To get information on:
- The reasons why the person wants to open an account with a new bank.
- The origin of funds.
- How many accounts the potential customer has with other banks.
- The address.
- The real function of the customers with tangible proofs.
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