With the mass adoption of financial apps, money can cross borders at a tap. While this has granted unprecedented convenience to consumers and businesses alike, it presents new risks for financial institutions, which must contend with fraud across international jurisdictions. 

Anti-Money Laundering (AML) norms and systems are designed to mitigate the risk of criminals disguising illegal gains as legitimate income. Money laundering isn’t new, however, bad actors continue to evolve their tactics. Sophisticated schemes leverage regulatory gaps between jurisdictions, synthetic identities, and the sheer volume of data financial institutions must contend with.

Major global banks have been fined into the billions for failing AML compliance. Such failures, beyond financial consequences, erode public trust. Amid these challenges, technological solutions allow large institutions to combat money laundering at scale.

This guide will explain all the fundamentals of AML checks and compliance, then touch on how identity-based solutions offer a powerful defense against fraudulent activity. 

The core objectives and challenges of AML compliance

AML compliance is about safeguarding the financial system from criminal abuse. This includes:

1. • Deterring money laundering: Preventing schemes by which criminals conceal the origins of illegally obtained money, typically by passing it through complex transfers and transactions.

• • Identifying illicit activities: Detecting and reporting activities that may be linked to financing terrorism, drug trafficking, human trafficking, and other serious crimes.

• • Protecting the financial system: Preventing financial institutions and markets from being used as conduits for illegal activities. 

Even with clear goals, implementing an effective AML program presents several resource-intensive challenges. Namely dealing with:

Data fragmentation

Data often resides in silos scattered across different systems and countries. This fragmentation leads to inconsistent customer profiles, making it hard to perform accurate risk assessments and identity verifications.

For example, a multinational bank may have customer information spread across branches in different countries, each with its own data management system. Without a unified view, it’s hard to identify suspicious patterns that span multiple jurisdictions.

Regulatory variation

AML regulations can vary widely from one country to another. For instance, the European Union’s AML directives have different requirements than the U.S. Bank Secrecy Act. These differences extend to reporting obligations, customer due diligence procedures, and record-keeping requirements.

For global organizations, keeping up with regulatory changes in every jurisdiction is a daunting task that demands significant resources.

Operational complexity

Organizations must strike a delicate balance between conducting thorough compliance checks and providing a simple customer experience. Lengthy verification processes lead to customer frustration, potentially resulting in dropoffs as customers seek faster services elsewhere.

Moreover, the need for real-time transaction monitoring adds to the complexity. Financial institutions must process vast amounts of data quickly to identify and respond to suspicious activities promptly.

High costs and resource allocation

Costs include technology infrastructure, hiring specialized personnel, and ongoing training to keep staff updated on the latest regulations and threats.

Smaller institutions may struggle with the financial burden, while larger organizations face challenges in scaling their programs effectively. Allocating resources efficiently without compromising compliance is a constant challenge.

False positives and manual reviews

Automated systems, while essential, can generate false positives, where legitimate transactions are flagged as suspicious. This issue creates an extra workload for compliance teams, who must manually review and resolve these cases.

A large bank might receive thousands of alerts daily, some of which are actual suspicious activity, demanding attention, while others are false alarms. Sifting through these consumes time and resources, diverting attention from genuinely suspicious activities.

Overview of AML Checks: processes and strategies

AML checks comprise a series of processes that financial institutions and other regulated entities implement to prevent illegal activities.

These best practices—Know Your Customer (KYC), Customer Due Diligence (CDD), and Enhanced Due Diligence (EDD)—are interrelated, but have some important distinctions.

Know Your Customer (KYC)

KYC is the traditional first step in AML compliance. It focuses on verifying the identity of customers at the outset of the business relationship. The goal is to ensure customers are who they claim to be, preventing known bad actors from being onboarded.

Regulatory bodies worldwide specify the minimum information required and provide guidelines on acceptable verification methods. Key parts of KYC include:

1. • Identity information collection: Gathering personally identifiable information including full name, date of birth, address, and government-issued identification numbers.

• • Document verification: Examining government-issued IDs, passports, and other official documents to confirm authenticity.

• • Verification against external sources: Cross-referencing customer information with external databases, such as credit bureaus or government record offices to validate identity.

Customer Due Diligence (CDD)

CDD is a broader process that builds upon KYC by assessing the potential risks associated with each customer. It involves a deeper analysis of a customer’s activities, financial dealings, and risk factors.

KYC falls under the umbrella of CDD, with a focus on identifying and verifying the customer’s identity. CDD, more broadly, adds the dimension of ongoing monitoring and risk assessment throughout the customer relationship.

Components of CDD

1. 1. Risk Assessment

• • Evaluate customer risk level based on factors like occupation, geography, transaction types.

• • Accurately risk-scoring customers (low, medium, high) to determine the appropriate level of scrutiny.

2. 2. Customer profiling

• • Categorizing the customer’s normal transactional behavior to identify deviations.

• • Gathering information on the sources of their funds and the nature of their relationship.

3. 3. Ongoing monitoring

• • Observering transactions continuously against their risk profile. Updating customer information as needed.

Enhanced Due Diligence (EDD)

EDD is an intensified form of due diligence required for customers who pose a higher risk for money laundering. This includes:

• • High-risk jurisdictions: Customers from countries that are sanctioned or have poor AML controls.

• • Politically exposed persons: Individuals with prominent public positions that may be susceptible to laundering or corruption.

• • Complex ownership structures: Entities with opaque ownership that could conceal ultimate beneficial owner

• • Unusual transaction patterns: Activities that deviate significantly from normal behavior without clear justification

EDD measures

Comprehensive background checks

• • Validating the customer’s source of wealth and funds

• • Investigating the customer’s business activities and reputation

Heightened monitoring

• • Increasing the frequency and detail of transaction reviews

• • Setting stricter thresholds for triggering alerts

Senior management approval

• • Requiring higher-level authorization to establish or continue relationships with high-risk customers.

Looking ahead in AML Compliance

As technologies advance, new tools and methods are emerging to enhance AML compliance further. Among these innovations, Electronic Identity Verification (eIDV) and digital wallets are gaining attention. 

While still emerging, they offer promising solutions to streamline compliance processes and address challenges in verifying identities and detecting fraudulent activities within an integrated identity ecosystem.

Electronic Identity Verification (eIDV)

Electronic Identity Verification, or eIDV, is becoming an important consideration in the fight against money laundering. This technology allows organizations to verify digital identities in real-time by cross-referencing multiple data sources, including government records, financial information, and biometric data.

One of the potential benefits of eIDV lies in its ability to enhance accuracy in the verification process. By automating checks and reducing reliance on manual data entry, eIDV can minimize the risk of human error. Even small mistakes can open doors for identity fraud, which money launderers often exploit. For identity professionals, embracing eIDV could lead to a higher level of confidence in the authenticity of customer identities, which is fundamental to effective AML compliance.

In addition to accuracy, eIDV holds promise for improving efficiency. Traditional identity verification methods can be time-consuming, requiring customers to submit physical documents and wait for manual reviews. With eIDV, the onboarding process has the potential to be accelerated, providing quicker results that enhance the customer experience. In an era where consumers expect instant services, this speed could become a significant competitive advantage.

Furthermore, eIDV may strengthen security by employing sophisticated algorithms and anomaly detection to identify fraudulent activities. For example, eIDV systems might detect if an identity has been used multiple times across different institutions or if there are inconsistencies in the provided information. This proactive detection is vital in preventing money laundering schemes before they infiltrate the financial system.

For organizations operating globally, eIDV offers the possibility of scalable compliance solutions. The adaptability of eIDV systems means they can adjust to the specific requirements of various jurisdictions. Whether it’s accommodating different types of government-issued IDs or aligning with local regulations, eIDV solutions could be tailored accordingly. This flexibility not only ensures potential compliance but also reduces the operational complexities associated with managing multiple verification processes across different regions.

Digital Wallets as Tools for Identity and Compliance

Alongside eIDV, digital wallets are evolving rapidly, moving beyond simple tools for storing payment information to becoming secure repositories for personal identity credentials. They are playing an increasingly significant role in AML compliance by facilitating more efficient and secure identity verification processes within the broader identity ecosystem.

Digital wallets have the capability to store verified credentials, such as government-issued IDs, biometric data, and other personal information authenticated by trusted authorities. This transforms digital wallets into portable identity hubs that users control.

One of the key advantages of digital wallets is the control they offer individuals over their personal data. Users manage their data-sharing preferences, granting access to their information only when necessary. This control enhances privacy and ensures that personal data is handled with consent, aligning with global data protection regulations like the GDPR.

In terms of security, digital wallets enable secure transactions through advanced encryption and security features that protect data integrity. When users know their information is secure and under their control, they are more likely to engage fully with digital services, improving customer satisfaction and loyalty.

For identity professionals and financial institutions, Accessing pre-verified information stored in the wallet simplifies Know Your Customer (KYC) procedures. Instead of collecting and verifying documents each time, organizations can rely on the authenticated credentials within the digital wallet. This not only speeds up verification but also reduces the administrative burden on both the organization and the customer.

How ID Dataweb and Trulioo’s GlobalGateway address AML challenges

ID Dataweb offers an identity orchestration platform designed to simplify and enhance identity verification processes.

Key Features

• • Seamless integration: The platform connects various identity verification services through a single interface, reducing complexity.

• • Scalability: Supports organizations of all sizes, accommodating growth and increasing compliance demands without significant additional investment.

• • Customization: Allows for tailored workflows to meet specific regulatory requirements, adapting to the unique needs of different jurisdictions and industries.

Impact on compliance

By streamlining identity verification, ID Dataweb helps organizations reduce operational burdens, improve accuracy, and maintain compliance with evolving regulations.

Trulioo’s GlobalGateway

Integrating with Trulioo’s GlobalGateway, ID Dataweb enhances its global AML compliance capabilities.

Features of GlobalGateway

• • Electronic identity verification (eIDV): Provides real-time verification using reliable data sources, including government records and credit bureaus.

• • International coverage: Supports identity verification in over 100 countries, including major markets like the UK, Japan, Germany, and emerging economies.

• • Industry versatility: Serves a diverse range of sectors, including e-commerce, finance, insurance, gaming, and social media platforms.

Enhancing verification processes

GlobalGateway enables organizations to perform thorough due diligence by accessing a vast network of data sources, ensuring compliance with local and international regulations.

Supporting compliance with accurate attributes and assertions

Attributes and assertions are critical components in identity verification, providing detailed information that supports compliance efforts.

Available Attributes

• • Full Name: Verifying the individual’s legal name.

• • Address: Confirming residential information.

• • Phone Number: Validating contact details.

• • Date of Birth (DOB): Establishing age and identity.

Available Assertions

• • Full Name Matches Address: Ensuring the name and address correspond in official records.

• • Full Name Matches Phone Number: Confirming that contact details are associated with the individual.

• • Phone Number Matches Last Name: Additional validation of identity through cross-referencing.

• • Full DOB Verified: Confirming the date of birth matches official records.

• • Year of Birth (YOB) Verified: Verifying the birth year for age-related compliance.

Leveraging detailed attributes and assertions provides organizations with several concrete benefits for regulatory compliance:

Fraud reduction through precise external-source verification: Assertions such as “Full Name Matches Address” and “Full DOB Verified” offer definitive proof that the individual’s provided information aligns with authoritative data sources. This precision minimizes the risk of identity fraud and helps prevent illicit activities like money laundering or financing terrorism.

Speedier cross-referencing: Access to a vast network of data sources allows for real-time cross-referencing of information. Organizations can quickly identify discrepancies or red flags in an individual’s profile, streamlining the due diligence process required by regulations like the USA PATRIOT Act or the UK’s Money Laundering Regulations.

Global Compliance Readiness: With the ability to adapt workflows to the regulatory requirements of over 100 countries, organizations are better equipped to expand internationally. This global readiness ensures that businesses can operate confidently across borders, adhering to local laws such as FINTRAC in Canada or AUSTRAC in Australia.

Audit Trail and Reporting: Detailed verification processes provide a clear audit trail, which is essential during regulatory inspections or audits. Organizations can demonstrate compliance efforts by showing documented evidence of verified attributes and assertions.