Transaction Monitoring

Regulatory Roundup: Navigating Evolving AML/KYC Requirements for Transaction Monitoring

Financial institutions are vulnerable to fraud, money laundering, and other illegal activities. Banks often implement strict Anti-Money Laundering (AML) measures to prevent these crimes. The concerned financial institution loses its reputation when a fraud case comes to light. Banks have no choice but to take measures to prevent illegal customer activities. Remember, certain regulations are in place for AML and KYC (Know Your Customer). Regulatory bodies ask financial institutions to take necessary steps to combat fraud and money laundering. Banks often pay heavy fines for violating these regulations. Continue reading to understand the changing KYC/AML regulations in Transaction Monitoring in 2024.

Understanding AML/KYC Requirements in Transaction Monitoring

Before delving deeper, it is essential to understand the basics of transaction monitoring. It is an indispensable process in the banking and finance industry, including digital platforms. Transaction monitoring refers to tracking customer activity to prevent fraud, money laundering, and other crimes. It helps identify illegal transactions in real time and take appropriate actions. Transaction monitoring systems use predetermined rules to generate alerts on suspicious transactions. These systems monitor customer location, payment frequency, and other activities to generate alerts. These systems also generate risk scores for each transaction based on different parameters. When the risk score is high, there are chances of money laundering, fraud, or any other malicious activity.

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Transaction monitoring is imposed on financial institutions through AML and KYC regulations. These regulatory frameworks are designed to protect financial institutions and customers from fraud or money laundering. For instance, AML requires banks to indulge in Customer Due Diligence (CDD), transaction monitoring, and reporting. On the other hand, KYC allows financial institutions to collect updated information from their customers. These personal details are used to authenticate transactions and determine risks. AML and KYC regulations ensure transparency and safety in the finance industry. AML/KYC regulations might differ as per jurisdiction. Also, regulatory bodies keep changing these regulations to address the current needs. 

Changing AML/KYC Requirements for Transaction Monitoring

AML/KYC regulations are dynamic, and banks should be well-versed with them. The latest changes have come in the form of Beneficial Ownership Information (BOI) reporting. It has been implemented from the 1st of January 2024 in the USA. It requires financial institutions to provide beneficiary information to the FinCEN. A beneficiary is an individual who enjoys control over the reporting company or owns 25% or more ownership stakes. Companies existing before the 1st of January 2024 have a year to provide beneficiary details in their initial reports. However, companies created after the 1st of January 2024 must file their initial BOI reports within 90 days of receiving the notice of creation. 

The introduction of MiCA (Markets in Crypto-Assets) in the past year was also a significant development in the finance industry. It became effective in June 2023 in the European Union (EU). It is a licensing regime within the EU for digital assets, including cryptocurrency. Transaction monitoring has always had challenges with cryptocurrency due to its decentralized nature. Crypto firms are required to apply for a license within the new MiCA regulations. It also compels stablecoin issuers to keep appropriate reserves. These regulations will make the crypto industry more transparent, which has been ungoverned for long. It also requires crypto issuers to release the holdings of their customers to tax authorities. It will prevent malicious actors from stashing illegal funds in secret digital wallets.

Countries around the world have been vocal about AML practices in the past. For instance, the EU grabbed headlines when it enacted the 6th Money Laundering Directive (6AMLD) towards the end of 2020. Similar to MiCA, 6AMLD also helps harmonize the AML regulations across the EU. They help remove loopholes within the domestic financial systems and make a unified solution for all member states. The current anti-money laundering framework has become stronger with the help of 6AMLD, MiCA, and other reforms. Many other regulations related to AML/KYC in transaction monitoring are expected to be released worldwide. Financial institutions must update themselves based on these changing regulations. 

It might be challenging for many financial institutions to keep up with the changing AML and KYC regulations. Luckily, they can partner with third parties offering AML and KYC services. Financial institutions can transfer their in-house transaction monitoring processes to these third parties. Reliable service providers will automatically update the processes based on the new AML/KYC processes. Not to forget, it will help financial institutions save a fortune on in-house operational costs. A reputed third party can even innovate existing AML and KYC processes for improved accuracy.

In a Nutshell

The changing AML/KYC requirements for transaction monitoring are challenging for financial institutions. They are required to change their existing reporting and due diligence processes to meet the new requirements. Banks and digital platforms can partner with third parties to collect customer details and monitor transactions. It will help them reduce the operational costs for transaction monitoring. Check out the latest AML/KYC rules now!