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Top 5 mistakes when building KYC and AML compliance

Published on
March 28, 2024
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Ignoring KYC and AML can cost millions in lost revenue, company reputation, and unwanted fees. We’ve gathered the top 5 most common mistakes that companies make when building compliance and how to avoid them.  

Know your customer (KYC) and anti-money laundering (AML) compliance is crucial and for all financial sector companies it’s required in order to prevent fraud, money laundering, and illegal transactions. Ignoring it can cost millions in lost revenue, company reputation, and unwanted fees. Any business that operates on a global scale, no matter size or niche, must spend a great amount of money, time, and energy on building compliance.

Many companies have their strategy figured out, but very few know how to properly implement it to sustain operational efficiency and profitability. The majority of these companies continue making the same mistakes. We’ve gathered the top 5 most common mistakes that companies make when building compliance and how to avoid them.

1. Not monitoring the evolving regulatory framework

Whatever the situation of a company, it’s obliged to comply with evolving industry standards, as well as local and global regulations. A good rule of thumb; when a company makes financial transactions or deals with personally identifiable financial data, there will always be a certain corresponding regulation associated. Every year these regulations get tighter and compliance rules get lengthier as well as wordier.

When the regulatory framework changes, a company must know where to change or adapt in order to stay compliant – such as its due diligence on new customers, monitoring of suspicious activity, or management of AML measures and so forth. Ignoring or not being very attentive of the current regulatory landscape may lead to critical errors in internal processes, along with big fines, legal penalties, and other regulatory repercussions.

2. Not keeping up with technology

Using outdated technologies, in-house quick fixes, or third-party services that never update due to costs is one of many common mistakes when building compliance. Staying up to date with technology is always good, but in terms of compliance and fraud detection, it’s even more important. Still, there’s a serious belief among companies that if the tech they currently use has performed correctly in the past and they haven’t had problems with data loss, breaches or detecting frauds – there’s no need to make any improvements. That’s a very dangerous assumption.

All types of scammers are well aware of the development of fraud detection technology and must be in order to bypass it. As criminal technology continues to evolve, so must security technology. As an example, the quality of fake documents has improved significantly recently. This will continue to improve further, thus making it more difficult to detect fakes and forgeries in the future. Therefore, making sure that your compliance technology is agile is a key factor.

3. Lacking internal communication

Lack of communication has ruined many businesses in the past. A high level of collaboration and coordination between a company’s many departments makes it possible to deal with rising concerns before they turn from miniscule problems to calamities.

The same of course applies to internal communication of compliance departments. It’s important to create a chain of communication that helps all parts of the team understand the value compliance provides. When everyone is updated on the latest compliance needs, the company will be better protected from any unpleasant surprises.

Remember, a compliance mistake affects the whole company and therefore everyone in the team should be capable of preventing one.

4. Relying on manual processes

The human touch is good, but sometimes it can be costly. Relying on manual process when collecting data or creating/editing old documents may potentially introduce errors into the compliance process.

When compliance officers create a document manually, there’s a risk they include outdated and invalid information based on old and unrelated regulations. In general, manual processing requires more resources such as staff, time, and focus. Altogether it complicates the task and decreases efficiency, bringing only frustration for both businesses and end-users.

Then there’s the companies who have automated their compliance processes, utilizing a compliance management system that automatically stores and updates data, documents, and transactions. This helps to ensure compliance departments avoid human error and helps the business stay fully compliant with all the regulatory updates.

5. Doing it in-house

In-house compliance is generally inefficient and often (as well as sadly), compliance officers get the bad reputation of being “business inhibitors”. Not many companies have the time, budget, and profound knowledge of regulations to build strong compliance. This makes it extremely difficult to provide (the needed) superior protection for the company.

In fact, and it may sound contradictory, compliance shouldn’t even be a company’s priority. It’s more productive to hire a third-party who specializes in compliance management. This allows companies to focus on their product’s quality and client satisfaction while the third-party handles compliance.

To strengthen this argument further, everything related to fraud, risk, and compliance must be constantly improved, optimized and, monitored. The analytics, competence, and agnostic levels of third-party specialists is hard to compete against. Outsourcing compliance will enable companies to improve operational performance, reduce operational risks, and increase efficiency.

Summing up

A problem is best solved proactively, yet a majority of companies do just the opposite. Waiting until the business faces a regulatory audit instead of taking the time to analyze and improve the compliance policies and procedures, is unproductive.

By reading up on and acting proactively on the common mistakes described in this article your company will avoid the lawsuits, penalties, and operational delays they easily can bring. It’s important that you’re being realistic about the risks you could be taking with your business.

ZignSec can help you avoid these common mistakes and offers you an all-in-one platform for online ID-verification and compliance. We’ve aggregated the market’s best solutions for KYC/B, AML checks, and age verification on a global scale, all through one single endpoint. Our aggregated solutions can be used individually, or in combination as powerful workflows, that help you secure your business from fraud and stay compliant to local and global regulations. In real-time.

We are listed at NASDAQ First North Sweden (ZIGN:SE0012930105) and follow every regulatory obligation. This includes strong reporting, corporate governance, licensing, as well as compliance with international laws such as GDPR, data localization laws and FATF.

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