Open Banking
Risk
January 5, 2024
5 min

How Can Open Banking Support Anti-Money Laundering (AML) Initiatives?

Timothy Shin

Open Banking Expert

In the financial world, Anti-Money Laundering (AML) refers to a series of laws and regulations upheld by the government to prevent the passing of illegitimate funds as legitimate income. Essentially, AML is a way for authorities to detect and deter transactions that involve money obtained through illegal means like drug trafficking, terrorism, fraud, or other unlawful activities. 

It’s essential that merchants, operators, and fintechs adhere to AML regulations to prevent any issues or penalties down the road. Open Banking supports AML initiatives by streamlining compliance procedures and digitalizing the traditional methods of Know Your Customer (KYC) verifications that are a part of the AML process.

Why Is AML Compliance Essential? 

Despite being a long process, AML compliance is essential to adhere to. Outside of the moral component of combatting illegal activity and creating an honest financial system, there are also concrete reasons why businesses should seek to adhere to these regulatory requirements: 

  • Non-compliance with AML regulations can severely damage the reputation of a business or individual. This can lead to a loss of trust among customers, partners, and stakeholders, impacting the long-term viability of the business.
  • Not following AML regulations can lead to civil and criminal penalties. Fines and monetary penalties can be imposed on individuals or entities violating AML regulations. These fines can range from moderate to substantial amounts, often based on the gravity of the offense. 
  • Continuous non-compliance can result in increased regulatory scrutiny, leading to more frequent audits, investigations, and monitoring, disrupting business operations and adding additional costs.

How Does AML Work? 

To understand how AML works, it’s important to understand KYC first. KYC and AML are erroneously used interchangeably. While they’re both under the same umbrella of preventing money laundering, AML describes the regulatory framework and laws that must be followed. In contrast, KYC is the set of verification procedures institutions use to ensure AML compliance. 

In simple terms, KYC is a component of following AML regulations. While every institution may have different requirements unique to their operating standards, KYC generally includes these three steps: 

  • Establishing consumer identity through multiple forms of documentation (driver's licenses, birth certificates, passports, utility bills, social security numbers, etc.)
  • Evaluation of the consumer identity documents and further inspection of consumer transactions and other financial activities to determine legitimacy.
  • Final assessment of consumer accounts and approval. 

Traditional AML Processes Are Too Slow and Labor-Intensive 

Understanding how AML works may not immediately reveal its flaws, but the major issue with adhering to AML compliance is how costly and time-consuming it can be. For example, traditional AML requirements are heavily paper-based. In other words, the consumer must provide various documentation for manual processing by the institution. Bank statements, identity documents, company registrations, bills, and a lot more can go into the AML process. 

Not only is this a friction-laden process for consumers, but it’s not any more pleasant internally when it comes to reviewing the documents and data. Even with digital tools, the need for manual review makes processing all of this unstructured data labor-intensive and costly. To make things worse, it’s especially difficult to re-gather more information if anything is incorrect or improperly evaluated, thus creating further friction. 

How Open Banking Supports AML 

Open Banking connectivity supports AML by digitalizing and aggregating comprehensive financial data to streamline the KYC and AML processes. With all digital processes, there’s no need for the consumer to gather all the necessary documentation and information. Everything is automated and gets submitted in real-time, from validating their identity to providing transactional data. 

Open Banking also eliminates manual input, which removes the risk of human error and significantly reduces the time and costs associated with reviewing data. Institutions can now receive consumer data in a structured and easy-to-digest format that will allow them to make concrete and accurate decisions about each consumer’s respective risk levels. 

Before Open Banking, companies only got to see a small snapshot of their client’s transaction history and overall profile, limited to the documents they submitted. With Open Banking connectivity, there’s no need to make decisions based on a few identifying documents and bank statements. Open Banking connectivity enables consumers to be transparent with their financial data so that institutions can see a holistic and current view of consumer health, history, and transactional activity. 

It’s also important to recognize that AML compliance doesn’t just stop when a consumer gets verified. Continuous AML monitoring is essential as a part of proactive customer due diligence. A “set-it-and-forget-it” mentality doesn’t exactly apply to regulatory compliance. This is why Open Banking directly supports AML initiatives by automating these critical processes so businesses and institutions can keep up with regulatory requirements. 

Bolster AML Compliance with Trustly 

You don’t need to spend hours on end manually validating consumer information, and the days of asking consumers to provide dozens of documents are a thing of the past. Trustly’s Open Banking APIs allow businesses and institutions to automate their AML compliance process and enhance their KYC procedures. Our proprietary risk engine can analyze risk factors and build comprehensive consumer risk profiles. Want to learn more? Request a free demo today

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