UK’s FSA offers ideas on KYC, AML technology

11/01/2003
United Kingdom regulators are seeking to balance money laundering legislation and voluntary compliance, while Britain’s financial institutions are eyeing automated account monitoring to control compliance costs.

United Kingdom regulators are seeking to balance money laundering legislation and voluntary compliance, while Britain’s financial institutions are eyeing automated account monitoring to control compliance costs.

To address these issues, the UK’s Financial Services Authority (FSA) published a discussion paper on how businesses can make well-informed decisions about managing money laundering risks.

The report, “Reducing Money Laundering Risk,” focuses on Know Your Customer and account monitoring. It offers guidance gleaned from key British and international statements of best practices, including the Paris-based Financial Action Task Force’s 40 Recommendations.

For a sound KYC program, the FSA suggests going beyond collecting customer identification information. While recognizing that the amount and type of information will vary, it says customers should be asked:

  • The reason for establishing the account relationship
  • The anticipated level and nature of the anticipated activity
  • The relationship between account signatories and beneficial owners
  • The source of funds
  • In individual accounts, the customer’s occupation
  • In a private banking account particularly, the source of wealth or income.
  • Net worth.

The report recommends examining KYC information against other data the institution has collected in order to assess costs and other implications of a KYC program.

Monitoring is also key. The report examines automated monitoring systems, good monitoring processes and the need to tailor them for various types of businesses. It suggests four due diligence measures that can determine when an established customer’s activity might be suspicious.

• Is the size of the transaction consistent with the customer’s normal activities? • Is the transaction “rational” in the context of the customer’s business or activities? • Has the customer’s pattern of transactions changed? • In an international transaction, does the customer have any obvious reason for doing business in the subject country?

When managing “higher risk” accounts and relationships, the FSA suggests additional monitoring such as determining if procedures or information systems provide timely information and reviewing the customers’ source of wealth annually when possible.

What the UK FSA says about software monitoring of accounts

As the use of computer software rises in order to comply with increasing AML regulation, AML officers are wondering if high-tech solutions should be adopted. The FSA suggests that software can be costly, depending on factors such as:

• capacity required • volume of transactions • complexity and size of the business • if the system is developed in-house • sophistication required • compatibility with existing, legacy systems • ease of installation • hardware, software or Internet needs

Once the system is running, there are many maintenance expenses such as support, upgrades, licensing and staff training.

What kind of results can be expected? The FSA says that depends on the system capability, the complexity of the business and whether customers have “risk indicators” that the software is designed to detect. Software is most effective when customers:

• behave inconsistently • Issue unusual instructions • are from high-risk areas of the world • become inexplicably active • hold funds in offshore banks.

When assessing an external or internal automated system, the FSA says senior management should understand the data monitored, as well as how and why alerts are generated and evaluated.

(The full report can be found on Moneylaundering.com Premium.)