How to manage AML and KYC as a digital lender in 2024

Entering the digital lending market, regulatory compliance may seem like an insurmountable hurdle. But it’s not. In this guide we’ll break down what you need to know to safely become a digital lender and unlock the improved retention, profits, and client returns.

The key terms you will hear in connection to compliance are KYC (Know Your Customer) and AML (Anti-Money Laundering). 

The short explanation would be that AML is the overall governance framework aimed at preventing money laundering and other crimes. While KYC is a set of processes and tools within the jurisdiction’s AML framework. But to work with these regulations, there’s more to know.

It’s the government’s role to make sure that there’s as little fraud and unlawful activity in the society as possible. Which is why launching your own lending platform is a lot easier than doing it in full compliance.

Specific regulations and compliance laws differ by country but the good news is that modern lending management systems come pre-configured for easy export and formatting of reporting data and allow for automatic direct data communication through an API integration.

As economies go digital and laws adapt, the regulators catch up and develop processes and procedures for business to follow. And considering the added benefits of offering credit products digitally, it’s worth the effort. Especially if you’re working in emerging verticals like in-house financing where regulators are still catching up and technology providers like TurnKey Lender are keeping you ahead. Like in-house pay-later operations or green energy financing.

Generally, compliant lending processes require more detailed analysis at onboarding and constant control of existing clients. Financial institutions find themselves balancing between two extremes. On one side there are KYC and AML rules which they have no choice but to comply with. And on the other side, they have customers for whom speed is paramount when it comes to accessing financial products.

There’s no arguing that preventing fraud, terrorism and money laundering is extremely important for any civil society. And for the lack of better controlling mechanisms, lenders do need to collect the data about users, analyze it and only after that serve the clients. Especially since the rules are rather strictly enforced already and the trend will continue. For example, Danske Bank’s was fined €1.82 billion for  poor AML and KYC controls, Westpac’s AU$1.3 billion for over 23 million AML/CFT breaches, and Deutsche Bank’s $186 million for inadequate AML systems.

Predictably, the US Department of Justice is the most punitive regulator in the world but the EU, UK, Asia Pacific, and even Middle Eastern regulators don’t lag so far behind.  

That said, anyone entering the digital lending niche should have a very firm grasp on what KYC and AML are and what business needs to do in order to stay compliant and in the safe zone.

AML for lenders

For many entrepreneurs, AML became the boogieman that prevented them from entering the lending niche. In reality, thanks to technology, compliance these days is not rocket science.

In fact, even if it wasn’t for the regulating bodies, when you’re selling financial products, you want to know who a customer is, where their money comes from, and if it’s legal to do business with them. The good news is that even though AML laws around the world get stricter, the FinTech capabilities grow equally fast helping businesses comply with the laws easier. So there’s no reason to be irrationally afraid of AML and KYC rules. Businesses just need to stay educated about what’s going on in their jurisdictions and use the right software to power their compliance.

AML often goes hand-in-hand with CTF (counter-terrorist financing) and both are sets of procedures aimed at stopping any types of illegal financial operations. Punishments for not complying with both can be severe. 

This directly applies to lending, since it often becomes a tool for money laundering. Therefore many jurisdictions and controlling bodies may pay special attention to lenders to make sure there’s nothing fishy going on.

Experts say that until recently, borrowing wasn’t considered among the most effective ways to launder money. But as other doors close, criminals may start to use it more often, therefore, making lenders subject to more frequent regulatory checks. In light of these developments, many lenders started to apply the risk-base approach to their AML compliance. Meaning that business gets more inventive with the methods, sources and monitoring approaches they use to analyze existing and new clients. This is also where a lender puts together customized CDD (Customer Due Diligence) and EDD (Enhanced Due Diligence) frameworks which are applied respectively to regular and to high-risk clients.

Several key components form the bedrock of an effective AML program:

• regulatory compliance that keeps lenders in step with dynamic regulations
• continuous monitoring to detect anomalies in real-time
• ongoing staff training on the latest AML practices
• robust onboarding processes with AML checks built in from the start.

But universally the best way to mitigate risks is to have a good enough screening process to avoid working with dangerous clients altogether. To achieve that a company needs to have the following things:

• Top of the line software that helps with AML/KYC compliance;
• Staff training by your jurisdiction’s regulation specialists;
• Ongoing monitoring of the existing accounts for signs of suspicious activities.

KYC for Lenders

It all started way back in the 70s when regulating bodies started to zero in on identity theft, identity fraud, money laundering, and terrorist financing. At the time they forced banks and financial institutions to put in place a policy framework to know their customers before opening an account. A lot has changed in terms of adjustments to the technological advances and overall specification of the rules. But the basics remained.

KYC stands for “Know Your Customer”. Put real simple it means that as a lender before accepting a borrower you need to verify their identity, address and make sure they aren’t involved in anything illegal through the accessible databases. To do that all the potential clients need to submit documents which will serve as relevant proof. As a lender you need to know the following minimum about each and every client:

• verify the customer’s identity
• confirm that their funds are legitimate and sufficient
• assess the money laundering risk they represent. 

To make that happen, customer identification procedures need to be in place, staff need a clear and comprehensive acceptance policy to work from, transactions need to be monitored on an ongoing basis, and risk management procedures need to be followed consistently. All of this moves significantly faster with the right technology behind it.

The collection of this data, no matter how unnecessary it may seem to the customers, has to become the routine part of the due diligence process of any lending operation. Which brings me to the most important elements of KYC for lenders:

• Clear and exhaustive customer acceptance policy;
• Customer identification procedures in place;
• Ongoing transactions’ monitoring;
• Risk management.

This may sound complex. Especially if we take into account that big corporations are forced to spend millions on regulatory compliance as it has become a separate multi-billion-dollar industry. But that doesn’t necessarily have to be the case from small to midsize lenders. Given the right approach and the right technological choice for automating compliance and onboarding tasks, easier and faster due diligence can become a powerful tool in marketing a lending business.

Lending regulations by jurisdiction 

Even though KYC and AML laws in different jurisdictions often have a lot in common, they still differ by countries. And to comply with each individual local law you will need to consult with the local lawyers. This point is very important when you choose the software that will power your operation. The platform you choose needs to have integrations with the right credit bureaus, payment processing companies, and data source providers.

TurnKey Lender’s solutions are already successfully implemented in more than 50 jurisdictions and make it a lot easier for lenders to comply with regulations. The software has most of the integrations out of the box and helps you safely collect, process and save the data you need.

TurnKey Lender automates all the work related to loan processing, servicing and risk evaluation. At the same time, machine learning within the system will be learning the specifics of your clientele to approve more of the right clients and loans faster. All that’s left to you is to bring in the leads and the award-winning AI-driven platform will do the rest.

Lenders gain four key advantages:

• built-in regulatory updates so your lending program always complies with new rules as they’re published
• easy deployment from a secure cloud-based platform with intuitive process flows and 24/7 support
• automated processes for faster approvals, less human error, and cost savings
• traditional scoring enhanced with alternative data and proprietary machine learning algorithms that continually optimize the formula.

KYC and AML action items for lenders

The first thing a lender needs for easier compliance is the right lending platform software. TurnKey Lender’s automated lending system allows preventing fraud related activities and mitigating credit risks throughout all business lifecycles. 

To detect potential fraudsters, the solution provides for flexible blacklists management. The platform leverages regulatory compliance expertise to ensure that all platform processes remain compliant as new rules are published by regulatory agencies. It syncs with credit bureaus and other relevant institutions and databases, cross-references and learns about your clients and their behaviors thanks to machine learning. This allows customers to be safely onboarded, processed and approved for a loan faster. Much faster.

An effective way to start a compliance gap analysis is to map out the places where prospects and customers connect with your company and make sure core best-practices are implemented:

• customer identification and verification
• asset ownership checks
• sanctions and watchlist screening
• risk classification of customers
• source of funds verification
• ongoing transaction monitoring
• suspicious activity reporting.

Staff training

There’s no need to have all the clients analyzed and approved manually anymore, but your staff, especially the people working with the clients, need to know the tell-tale signs of fraud, basics of AML laws, companies policies and procedures. And keep in mind that training isn’t something you’ve done once and it holds forever. Sessions need to become regular to keep your people sharp.

Implementation of CDD and EDD frameworks

There should be a clear step-by-step algorithm to follow when your company needs to analyze new or existing customers. Both simple and risky cases. This way both you and your employees won’t freeze but quickly run a client through the framework to understand what you’re dealing with.

Ongoing monitoring and storage

It’s not enough to check your customer once, during the onboarding. There needs to be an ongoing oversight of financial transactions and accounts. With help of TurnKey Lender, you have access to an exhaustive data set about each borrower and always know what is going on.

Final thoughts

AML and KYC compliance isn’t as scary as it’s thought about. All you need to do to stay out of trouble is to use lending software with pre-configured regulatory compliance functionality, keep an eye on regulatory updates, and keep your staff trained.

Reach out and schedule a free personalized demo to see how TurnKey Lender will automate your lending process and provide sufficient flexibility for simple regulatory compliance.