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PCBB Banc Investment Daily April 07, 2017
Banc Investment Daily
April 07, 2017

Money Laundering, KYC & CDD

If you thought scientists were stodgy types who don't know how to have fun, you were wrong. We laughed when we heard a group of Belgian scientists that discovered a planetary system recently named it after their favorite beer. This group of dedicated researchers were probably toiling away late at night, and when they made the discovery they named it TRAPPIST-1 after beers that have been brewed for centuries by monks in monasteries. We wonder if they celebrated so heartily after finding the planetary system that the janitors found them passed out on the floor the next morning. Who knows, but it is a fun story.
Speaking of fun (sic), all banks these days have been having "fun" with the Bank Secrecy Act (BSA) and regulation around Anti-Money Laundering (AML) as of late.
All banks know about the dangers of money laundering, but with a highly connected financial economy (and the de-risking by big banks), community banks may be more at risk these days than before. Criminals have become smarter, as they break into accounts and quickly move money. They may even try to seem legitimate by varying the amounts of money wired and sending small amounts as they try to fall under the radar of BSA. They may even try to create a legitimate looking profile as a new customer so make sure to be aware of the signs and have a solid Know-Your-Customer (KYC) process.
There are definitely things to look out for if you receive money from another bank or notice unusual transfer activity. Of course, the first sign is having wire transfers to countries that you know are "secrecy havens" where there is little to no regulatory oversight. Other obvious signs include seeing a high volume transfer with a low account balance or experiencing repetitive low value wire amounts (especially noticing the same amount going in as going out). International transfers that include multiple monetary tools such as bank checks, traveler's checks and personal checks could also be an indication of trouble. Wire transfers that seem unrelated or inconsistent with your customer's business are also red flags, as are funds transferred to and from the same person.
Being perceptive of the red flags is one thing but being proactively aware of any potentially high risk customers is another. The good news is that as a community banker, this will most likely be a more straightforward task than for the big banks with their voluminous databases. Given ongoing regulatory updates, it is easy to get bogged down in scrutinizing data, instead of prioritizing and managing the highest risk areas. So, make sure your teams are properly focused.
For its part, FinCEN issued final rules in July of last year for Customer Due Diligence (CDD). The goal was to help banks clearly identify all their customers. These rules, covering identification, verification and purpose for each customer (as well as continuous monitoring), should be integrated into your AML program. If you review client profile data along with transaction activity on a regular basis, you can address anomalies and redirect data to a different risk level as may be appropriate. Over time, these regular assessments should make the process more streamlined and efficient.
Having strong KYC and CDD processes and being cognizant of the signs of money laundering will help keep your bank out of unintentional illegal activity. Being vigilant about internal enforcement of AML, staying on top of trends and issues, regularly reviewing and risk ranking customer data and ensuring employees know what to do when suspicions arise is critical.