The Biden administration plans to boost financial-crimes enforcement by $64 million this year for an annual total of $191 million. This 50% spending increase is aimed squarely at the rise in recent years of “illicit actors” — including mobsters, terrorists, and corrupt politicians— who exploit “loopholes in financial-reporting requirements.”
Though many of these shady players patronize digital currency exchanges like Coinbase, Cash App, and Binance, or use convoluted corporate ownership structures to confuse regulators and tax collectors, the planned budget increase also heightens the need for “know your client” and “anti-money laundering” due diligence for lenders, bank-based or not.
For retailers, manufacturers, suppliers, and service providers, this requirement may seem an obstacle to providing in-house financing for purchases, but it doesn’t have to be, thanks to enhancements in technology.
“In recent years, lending has come to the fore as a means of ‘laundering’ — or disguising criminally obtained money as legitimate profit,” says Dmitry Voronenko, CEO and co-founder of lending-tech pace-setter TurnKey Lender. “As a result, loan applications have come into regulatory focus to ensure loans are meant for legitimate purposes, and not to mask ill-gotten gains as repayments.”
US enters an era of even stricter AML requirements for lenders
In May 2018, new — also more stringent and time-consuming — customer due-diligence requirements put out by the Financial Crimes Enforcement Network, part of the US Treasury Department, went into effect.
These heightened requirements around AML have already had an impact on traditional due diligence. In the first full year of then-new rules around customer due diligence, the time it took to onboard financial-service clients increased by 22%, according to Thomson Reuters.
A subsequent report by Thomson Reuters says two-thirds of financial-service organizations report that:
- KYC information sometimes can’t be validated (53%)
- They encounter difficulties in keeping information up to date (51%)
- They’re frustrated with the increased length and complexity of onboarding processes
Fortunately, says Voronenko, “the tasks of verifying each customer’s identity, understanding the source of each customer’s funds, and appraising the money-laundering risks associated with each loan applicant” can be automated, making fast and accurate KYC due diligence “a powerful tool in marketing an in-house lending program for small- and mid-size businesses. It comes down to adopting the right approach and using the right technology.”
Surveying the KYC/AML landscape, and how lending tech can help
There are three principal considerations for mitigating the risk of inadvertently doing business with bad actors in the course of providing financing for a purchase:
- Best-in-class KYC software
- Staff training by regulatory specialists
- Ongoing monitoring against suspicious activity
It’s also helpful to recognize that every jurisdiction is different — but increasingly similar in terms of taking financial crime seriously. While the US is the most aggressive regulator, Europe, Asia Pacific, and the Middle East aren’t far behind, with other regions coming under increasing pressure to do their part. In 2020, regulators fined companies $10.4 billion for non-compliance with AML and KYC protocols, a 27% increase over 2019, says Fenergo, a company that makes client-onboarding software.
With lenders under increasing scrutiny, it falls on them, at a minimum, to:
- Verify the customer’s identity
- Verify that the customer’s funds are “legitimate and sufficient”
- Understand the money-laundering risks posed by the customer
In aid of these due diligence measures, lenders are required to:
- Make certain that customer identification procedures are in place
- Equip staff members with a clear and comprehensive customer acceptance policy
- Monitor transactions on an ongoing basis
- Follow risk-management procedures
All of these tasks can be accomplished more easily and faster with technology.
Three pillars of automated, ongoing KYC compliance
Artificial intelligence — a blend of machine learning, natural-language processing, neural networks, and “fuzzy” logic — helps software systems “think” and, over time, to “learn” so that outcome predictions become more accurate.
An advanced automated lending platform will also review and manage flexible “blacklists” of bad actors, deploy jurisdiction-specific compliance expertise based on most recent updates, conduct cross-checks, and monitors financial and social-media behaviors. Streamlining these processes results in faster onboarding and approval.
While automating and enhancing KYC procedures means clients don’t require manual analysis and approval, client-facing staff should be aware of known fraud “tells,” basic AML laws, and in-house procedures and policies. And this training must be ongoing to keep up with regulatory changes, new technologies, and innovative criminal techniques.
The job of analyzing new or existing customers should be governed by a step-by-step algorithm designed to handle all scenarios, from essentially risk-free to highly dubious.
Compliance capabilities to keep you out of trouble
Again, customer analysis isn’t a “one and done” step in the context of onboarding. For security, and to be compliant in many jurisdictions, this due diligence must be periodic if not continuous. To this end, there must be an ongoing process of oversight and data archiving — especially around financial transactions and accounts — of existing borrowers.
“Our capabilities around KYC and AML cover all these bases and more,” says TurnKey lender’s Voronenko. “We understand that non-bank lenders, whether they’re retailers, medical-service providers, capital-equipment makers, or anything else where sales may be facilitated by in-house financing, simply want to stay out of trouble.”
For this reason, he adds, “our compliance functionality — which works straight out of the box — is central to our advanced lending-software platform. It has to be: compliance is a point of friction to in-house lending that’s in our immediate interests to smooth over as much as possible.”