Security Measures to Implement for Preventing Money Laundering in Banks
Money laundering is a phenomenon that has been prevalent in the financial sector for decades.
It refers to a process through which criminals hide the source of their money from authorities by introducing it into the financial system through shell companies and other methods.
Money laundering aims to introduce tainted money into legitimate enterprises so it can be used without raising suspicion. It poses an enormous threat to national security and affects banks’ reputations and profitability. Moreover, they are also a hindrance to growth, as they directly impact the economy.
According to the United Nations, the amount of money laundered is between 2% to 5% of the global GDP, or between $800 billion to $2 trillion. Banks must implement various measures to prevent money laundering within their organizations.
Here are some things they can do:
Practice AML Compliance
Anti-Money Laundering (AML) compliance is a set of rules and regulations to prevent financial crimes, such as money laundering or terrorist financing. Money laundering is increasing. According to the report “Basel AML Index 2021,” the global money laundering score increased from 5.22 to 5.3 in 2021. Hence, there is a need to improve AML compliance to prevent a further rise and ensure a drop in the numbers.
There are several ways you can practice AML compliance, but one that is often overlooked is customer due diligence (CDD). CDD refers to identifying if your customers are who they say they are before doing business with them.
It also means determining what products and services they need from you so that you know if there is any risk involved in doing business with them. You may even want to ask for identification cards or other documents that prove their identity before establishing a relationship with them.
The suspicious activity report (SAR) looks at whether there has been any illegal activity within an account over the past six months, while the suspicious transaction report (STR) only examines individual transactions instead of larger accounts.
Strengthen the Know Your Customer (KYC) Process
Know Your Customer (KYC) is a process to verify the identity of customers and their source of funds. It helps to identify customers who may pose a higher risk to financial institutions and prevents money laundering.
KYC is a crucial part of AML and a widely popular way of preventing money laundering. Hence, global spending on AML/KYC rose 26% in 2021 as governments focused on implementing these measures to fight financial crime.
There are many ways that banks can strengthen their KYC process. For example, it is much easier for banks to prevent money laundering in the future by collecting information about new customers as soon as possible or by requiring additional information when suspicious transactions occur.
If you think your bank’s KYC process needs strengthening, ask yourself these questions:
- Are there any policies regarding when and how you should collect customer information? How often should this happen?
- What methods do you use to determine whether or not a customer might be suspicious?
There can be chances when the customer needs help understanding this need. In such scenarios, you should help your customers understand what is KYC verification and why it is vital for their benefit. When both you and your customers understand KYC verification, you can find many ways to strengthen it and prevent money laundering.
Establish Internal Controls
Establishing internal controls is the most crucial step in preventing money laundering in banks. Internal controls are policies, procedures, processes, and systems that help to prevent fraud or mitigate risk within an organization. They also help you to meet compliance requirements such as those established by regulations like the Bank Secrecy Act (BSA), USA PATRIOT Act, and others.
Not only do your internal controls exist to protect your bank from risk, but they also protect customers’ privacy and ensure that they’re treated fairly. Suppose a customer believes he was mistreated by a bank employee who had access to his personal information or funds, for example. In that case, it could lead him to take his business elsewhere or even file a suit against you for negligence or discrimination if he thinks someone else at the bank mishandled his account.
Internal control audits are another important step in preventing money laundering. They allow you to keep tabs on how well things are running daily inside your institution and ensure they continue functioning smoothly as time goes on.
Leverage Customer Due Diligence
Customer Due Diligence (CDD) is key to preventing money laundering. It’s a process that involves gathering and verifying information about the customer, which helps the bank to identify any suspicious activity.
For example, suppose you’re opening a new account for your business and will accept cash deposits from customers. In that case, the bank needs to know who these people are to ensure those funds are legitimate. That’s where CDD comes in. It helps them keep an eye out for anything fishy.
This also applies when someone wants to open up an account abroad. The bank needs to know where they’re sending their money and why they want it there to prevent terrorist financing or other criminal activity happening under their nose without them knowing about it.
CDD is vital because most money laundering cases are caught through monitoring customer accounts. A recent Deloitte study confirms the same. According to Deloitte’s Anti-Money Laundering Preparedness Survey Report 2022, 72% of survey respondents said unusual customer account activities trigger money laundering.
Transaction monitoring is one of the best security measures to prevent money laundering. It involves a bank’s staff conducting routine checks on all customer-initiated transactions and comparing them against their risk models. It can be done manually or automatically, depending on the size and nature of your business. The goal is to identify suspicious activity and take necessary steps toward mitigating it.
Transaction monitoring plays a vital role in preventing money laundering because it helps you detect suspicious activities immediately so that they don’t turn into something more serious later.
Overall, banks should implement more effective measures to prevent money laundering. This will help them avoid any penalties and fines they may face if they don’t comply with AML laws. However, it should be a collective effort by the banks, the government, and consumers.