How to manage AML and KYC as a digital lender in 2023

Blog Post Digital Lending

If you’re just planning to enter the digital lending market, regulatory compliance may seem like an insurmountable hurdle. But it’s not. In this in-depth 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 those regulations one needs to know a little more.

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 thourgh an API integration.

That said, let’s dig right in.

Still an industry in its infancy, FinTech is growing at an extraordinary pace. 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 technological ease of launching your own lending platform isn’t always equally easy to run in full compliance.  

Yet as economies go digital and laws adapt, the regulators catch up and develop simple processes and procedures for business to follow. And considering the added benefits of offering credit products digitally, it’s worth the effort. For example, starting a retail financing operation in the US now has little to no regulation. And to show, how the technology reacted, TurnKey Lender has rolled out a dedicated edition that supports sales tax, customer agreements, custom notifications, and a brand-new vendor management module.

7 Steps to Create a Lender's Compliance Blueprint

Back in 2016, Thompson Reuters carried out a survey which showed that because of the recent change in AML laws, customer onboarding time increased on average by 22% in 2016. And then it grew by another 18% in 2017. Large financial institutions, as well as alternative lenders, found 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 on par with security when it comes to 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. BNP Paribas’ $8.9 billion fine and HSBC’s $1.92 billion fine are just some of the biggest examples of punishments for KYC/AML non-compliance. And many jurisdictions don’t stop there, imposing criminal penalties including imprisonment.  

According to Fenergo’s research, over the last 10 years, companies all over the world have been fined $26 billion for AML, sanctions and KYC non-compliance. Predictably, the US Department of Justice is the most punitive regulator in the world but Europe, 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 in 2023

For many entrepreneurs, AML became the boogieman that prevents them from entering the lending niche. In reality, thanks to technology, compliance these days is no rocket science. And 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. Business just needs to stay educated about what’s going on 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. And this directly applies to lending, since, just as any other financial instrument, it may be used 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 subjects 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.

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:

KYC for Lenders in 2023

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:

  • Customer’s identity;
  • Source of the customer’s funds (legitimate and sufficient);
  • Money laundering risks associated with that customer.

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 in 2023:

  • 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 upon millions on regulatory compliance connected to KYC. 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.

Jurisdictions differ

Even though KYC and AML laws in different jurisdiction 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 28 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’s tool suite automates all the work related to loan processing, servicing and risk evaluation. At the same time, the machine learning within the system will be learning the specifics of your clientele to approve more of the right clients and loans faster in the future. All that’s left to you with TurnKey Lender’s software is to bring in the leads and the AI-driven award-winning platform will do the rest.

KYC and AML action items for lenders

Lending automation

In this digital age, the first thing 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 life cycle. 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.

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 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 advanced lending software with regulation compliance functionality available out of the box, keep an eye on regulatory updates, and keep your staff trained.
Should you have any questions about TurnKey Lender and how to use it for optimal AML/KYC compliance,  contact us here. And if you haven’t signed up for a free TurnKey Lender trial, check it out here. We’ll be happy to show you around and help with any questions you may have.

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. 

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