Intelligent KYC and AMLThe importance of intelligent automation for KYC as part of the digitisation

process for better compliance with AML regulations.

White Paper2021

Core Topics

1. Background Page 4

2. Page 5 A Brief History

4. Page 8 Use Cases

5. Page 9 Ideal Solution

Page 7 Present and Future3.

Contents

Conclusion Page 12

About Sybrin Page 12

References Page 13

Executive Summary Page 3

Introduction Page 3

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Introduction

Research suggests that compliance is normally one of the last functions within organisations to embrace digital transformation. The

rapid advancements in digital technologies due to a series of fintech and regtech trends, along with the unprecedented circumstances

brought about by the coronavirus pandemic, have resulted in a watershed moment in the world of Know Your Customer (KYC) and

Anti-Money Laundering (AML) regulations. Organisations can no longer afford to have manual-driven processes in this perpetual and

fast-paced environment. Fortunately, recent advancements in technology have facilitated intelligent automation in the sector.

As we enter the beginning phases of the fourth industrial revolution, technology and digitisation are completely reshaping the financial industry as

well as people’s expectations of it. Digital transactions are replacing cash and allowing money to move anywhere in the world with speed and ease,

changing the way consumers and businesses exchange value. While this trend is overall positive for humanity, it’s also having a huge impact on the

fight against financial crimes such as money laundering, the financing of terrorism, as well as other forms of fraud and corruption.

Throughout the years, regulatory bodies have put added pressure on the obligated entities to establish systems as a means to combat these crimes

through the implementation of processes such as Anti-Money Laundering (AML) and Know Your Customer (KYC). This however has caused additional

challenges for the obligated parties due to the immense workload and the increased opportunities for fraud.

To gain a better understanding on this subject matter, this paper will address the following topics:

1. A General Background of the term and origins of money laundering as well as some global statistics.

2. A Brief History of how compliance procedures for AML such as KYC originated, as well as its evolution.

3. The Present state and Future of KYC to discuss current challenges and future insights.

4. Use Cases which outline the traditional business profiles for this solution as well as other less obvious ones.

5. What an Ideal Solution would look like for the foreseeable future.

Executive Summary

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Staggering amounts are involved in global money laundering activity

In the previous decade, a record-high of USD11 billion worth of AML-related

fines were issued in 2015², yet this is nothing when compared to the shocking

values of the crimes themselves. According to the United Nations Office on

Drugs and Crime (UNODC), global money laundering transactions can account

for up to 5% of the global GDP - that is USD2 trillion every year³. To put this

into perspective, this is nearly twice the combined net worth of the 10 richest

people in the world. It is enough money to give every single person on earth

more than USD25,000 each year, which is more than twice that of the median

annual household income worldwide.*

*These figures were calculated at the time of publication using the Forbes Real-Time Billionaires List, the estimated global population of the time, as well as the global annual household income for 2019.

Money laundering is a financial crime that masks illegal profits without compromising the criminals who wish to benefit from the proceeds by

disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention. It involves ways to conceal

ill-gotten funds which is considered ‘dirty money’ by making it appear ‘clean’ through elaborate and complex financial transactions also known as

‘cleaning’, ‘washing’, or ‘laundering.’

The term is said to have originated in a rather literal sense in the 1920s with the Italian Mafia and criminals such as Al Capone who allegedly acquired

'laundromats' to use as fronts to obscure their illegal profits from bootlegged liquor sales and other illegitimate businesses1.

Background1.

United Nations

global money laundering transactions can account for up to 5% of the global GDP...

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Congress.gov

Money Laundering Control Act of 1986

the US Money Laundering Control Act was one of the first and was soon followed by similar laws in other other countriescountries...

Prior to the 1980s, formal laws to deal with money laundering were

virtually non-existent; tax evasion was considered a more serious

offense. However, as the 20th century progressed, the drug trade proved

to be one of the biggest sources of money laundering4, yet at the time,

the drug trade itself was considered the bigger issue, and money

laundering was just an unfortunate side effect - fortuitously the war on

drugs of the 1980s changed all of that.

During this time in the US, the Reagan administration implemented

strong laws to prohibit money laundering as a way of curbing the

sale of illicit narcotics. In 1986, the US Money Laundering Control Act

was one of the first and was soon followed by similar laws in other

countries5. Money laundering became a federal crime for the first time

in history, however, it soon became clear that domestic laws were

not enough.

International Anti-Money Laundering (AML) initiatives rose to global

prominence in 1988, with the UN’s Vienna Convention Against Illicit

Traffic in Narcotic Drugs and Psychotropic Substances, and the

following year with the Group of Seven (G7) Summit in Paris, when

a group of countries and organisations around the world formed

the Financial Action Task Force (FATF), in response to the mounting

concern6. Its mission is to devise international standards to prevent

money laundering and promote their implementation. The task force

made 40 recommendations to be followed by the involved countries,

however not all countries follow all the recommendations. Today, the FATF includes 39 member countries and 37 jurisdictions7. Following the 9/11

terrorist attacks in 2001, FATF expanded its mandate to include combating the Financing of Terrorism (CFT)8.

In the interim, other intergovernmental organisations also started to form in order to proactively try and identify and stop financial crimes, most

notably; the United Nations Office on Drugs and Crime (UNODC) and their joint effort with the International Monetary Fund (IMF)9. Subsequently,

governments around the world have stepped up their efforts to combat money laundering and terrorist financing by forming and joining regulatory

bodies that require obligated institutions in the regulated sector to put systems in place to detect and report suspicious activity.

These systems are what we generally refer to today as Know Your Customer (KYC).

KYC is a process by which banks, financial institutions, or other obligated entities obtain information about their customers and verify the validity of

that information by checking it against numerous external watchlists and public record databases. Anti-Money Laundering (AML) and Customer Due

Diligence (CDD) are also critical processes that fall under KYC and comprise of regular checks and ongoing monitoring of clients. The purpose is to

evaluate the risk of potential illegal activities, and to prevent misuse of the businesses’ services by way of identity-theft, money-laundering, terrorism-

funding, and fraudulent financial transactions.

A KYC system should achieve the following objectives:

A Brief History2.

Identify customers and verify their identity.

Understand the customer profile and associated

money laundering risks.

Assign a risk rating to customers.

Conduct ongoing monitoring of customer risk and renew

due diligence based on changes to information and

activity that is different from what is expected.

Make informed decisions about customers based on

perceived risks.

1920/30s

1980s

1990s

2000s

2010s

2020s

Al Capone

Probably the most notable and notorious money launderer of the 20th century, Al Capone was caught and convicted for

tax evasion through his ill-gotten gains10. An ideal example of how money laundering usually interconnects with other

criminal activities and illegal trade.

Fine Tuning

A series of additional laws were passed throughout the decade, shaping the powers and reach of the AML regime. After

analysing the money laundering trends and methods, the FATF created the ‘Forty Recommendations’ in 199011.

The 1990s also gave birth to the United Nations Office on Drugs and Crime (UNODC)12.

Banking Scandals

Three of the largest scandals for money laundering involving banks were all exposed in the 2010s for either poor AML

controls, or facilitating in the process, amounting to nearly USD1 trillion in total. These include Wachovia13, Danske and

Deutsche banks14, as well as Standard Chartered15.

The War on Drugs

The war on drugs in the 1980s played the most significant part in the rise of AML to global prominence with the

1986 US Money Laundering Control Act, the 1988 UN Vienna Convention Against Illicit Traffic in Narcotic Drugs and

Psychotropic Substances, and the founding of the Financial Action Task Force (FATF) in 19895,6.

COVID-19 and the Digital Age

Financial regulators have started to replace diffidence with encouragement regarding technology adoption and digital

transformation for AML and KYC processes. This shift was massively accelerated by the coronavirus pandemic with

35% of customers already having increased their online banking usage16.

Additionally, m-payments have become crucial for developing nations in providing basic financial services for the

unbanked low-income earners, much of whom live in remote areas who cannot afford the charges levied by the formal

banking system. However, an Interpol report has found that this industry is being exploited by organised crime groups

in Africa – a trend only set to increase as the service is rolled out across the globe, hence prevention measures also

need to take into account the prevalence of m-payments and the fraud risks associated with it17.

Combating the Financing of Terrorism

Following the events of the 9/11 terrorist attacks on the US in 2001, many organisations expanded their regulatory

enforcements to also include Combating the Financing of Terrorism (CFT)8.

Important AML Moments

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United StatesIndiaTaiwanPakistanSouth AfricaTanzaniaUnited KingdomLatviaRomania

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Luxembourg

With a stringent and ever-evolving regulatory landscape, ensuring

compliance can be a very complicated process with banks and other

financial institutions having to meet standards set forth by local,

regional, and national governments. Failing to meet these requirements

can lead to hefty fines or even criminal prosecution.

The Global Enforcement Review 2020 by global financial consultancy

firm; Duff & Phelps, found that the global AML penalty values in

2020 have outstripped 2019, asserting that the first half of 2020 saw

an increase in AML fine values globally, with an increase of nearly

63%18. Of course, the monetary fine is just part of the overall cost.

Reputational damage and the effect on shareholder profit should also

be considered, along with the impact that will ultimately be felt by other

stakeholders such as employees and customers.

In response to this threat, financial institutions and other regulated

organisations have built substantial operations to enable compliance

and mitigate the risk of financial crime. These activities mainly

consist of changes to processes and the development of entirely new

operational units, resulting in considerable overheads.

A traditional KYC process involves the verification for a multitude of

documents at various touchpoints involving personnel from different

departments. This means the whole process is long and time-

consuming, resulting in an exasperating customer experience.

However, we have started to witness a shift in regulators’ approach to

establishing and enforcing their AML requirements. Guided by the FATF,

regulators across the globe have started to embrace digital technology

for remote onboarding more decisively than ever before, accelerating

the pace of regtech and fintech adoption even further19.

The new normal determined by recent trends and the COVID-19

pandemic, together with a renewed attitude of regulators towards

regtech and the possibilities offered by solution providers on the

market, are contributing to the creation of a new KYC compliance

paradigm. Instead of the traditional paper-based, manual, and

sporadic processes, the new approach to KYC compliance is

digital-first and customer-centric, powered by on-going and

on-demand scalable automation.

By embracing this new paradigm, financial institutions can leap ahead

of the competition, providing the type of onboarding experience

regulators demand and customers expect.

Yet, a general reluctance to steer away from established processes

caused the compliance process in many of the financial institutions

to remain manual. Even when it involves a digital element, it is often

through a traditional system within an on-premise IT infrastructure that

can only be accessed from the office.

According to a recent report by Forrester, the top three business

process focus areas for the digital transformation strategies of

their respondents were IT, finance, and customer service, while only

25% of the respondents focused on compliance, regulatory, or legal

processes20.

As daunting as these challenges may seem, the risk of doing nothing

is even greater. The FATF Annual Report 2019 - 2020 shows a 12%

growth in digital transactions every year, and they estimate that 60% of

world GDP will be digitised by 202221.

Thus, there is no place for manual processes in the future.

Respondents of the 2019 Thomson Reuters’ Cost of Compliance

Survey report predicted that the biggest change for compliance in the

next 10 years will be automation22.

Present and Future3.

According to an 'end of the decade' report done by Fenergo between October 2018 and December 201923, these were the countries that issued

the most AML-related fines:

The obvious use cases for KYC and AML solutions are aimed at industries that fall under the regulated sector and could be defined as any

organisation or institution that runs the risk of the possibility of their current or future customers being linked to money laundering, bribery and

corruption, terrorism financing, or any other form of financial crime. These organisations are normally legally required to screen customers and

transactions for AML purposes as well as broader KYC checks.

Use Cases4.

Telecommunication

These businesses typically include:

In some jurisdictions, these may also include:

Other

Outside of the financial services industry, the most notable industry which may also benefit immensely from an intelligent KYC solution would be the

communications sector. The use of mobile devices has increased exponentially over the past few years and it is projected that by this year (2021), the

number of these mobile users is going to cross 7 billion24.

SIM swapping is becoming a serious problem; in Uganda, more than USD11 million was lost to criminals through cybercrimes like SIM swaps in

201925. To prevent SIM swap fraud, and because of the fact that mobile devices have become such an important part of monetary transactions, many

countries are already compelling telecommunication service providers to register SIM cards when onboarding customers as well as to obtain and

verify other information such as identification and residency.

To a lesser extent, other potential customers can include any organisation that has to onboard customers or patients and keep record of their profiles

or files. These will most likely include businesses from within the medical and insurance industries. Additionally, transportation, ridesharing, and food

delivery businesses could also be considered, along with human resources, property hire, travel, tourism, and hospitality.

Banks and Credit Institutions

Stock Exchanges, Foreign Exchange Brokers and Money Services Businesses

Digital/Cryptocurrencies Exchange

Asset Managers

Company and Trust Formation Services

Accountants, Auditors, and Tax Advisors

Legal Professionals

Bookmakers and Casinos

Estate Agents

Insolvency Practitioners

Dealers in high-value goods where transactions involve cash payments

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Digital and Accessible

Automated Intelligent Vehicle

Scalable and Future-Proofed

Perpetual/Continuous Easily Integrated Shared Data Resources (entity resolution and

risk-based assessment)

Ideal Solution5.With evolving customer expectations and new advancements in digital technologies driving rapid change in this sector, relying on manual processes

that make customers wait while employees try to filter through multiple layers of data is no longer an option. Fortunately, this weakness can also

become a strength; as a data-driven process, KYC can be vastly improved by new technologies. An ideal solution that is future-proof for at least the

next decade will include the following aspects:

Digital and Accessible The solution should enable a seamless customer experience by being

digital from the very start, i.e. the onboarding process. Not only is

this essential during the current pandemic, but more people will be

inclined to adopt online baking in the future, this is an important part

of increasing financial inclusion. According to Deloitte, even customers

who were reluctant to adopt digital interactions have done so out of

necessity, gaining some level of comfort with these new methods26.

Aside from meeting the current and future trends and demands, there

are many benefits of having a digital onboarding feature. Onboarding

customers is normally one of the first interactions an organisation

may have with a client - and by saving them the hassle of a physical

in-person appointment with lots of paperwork, it allows for a good first

impression, which is what counts most when it comes to customer-

oriented services.

The ideal solution would not only be digital and remotely accessible for

customers, but the same should apply for employees. As remote work

becomes the norm rather than the exception, solutions that can be

securely accessed from employees’ homes are becoming a necessity

for digital KYC solutions. A centralised online platform can become

a great source of information for all team members, where data is

updated and sourced in real-time and all actions and decisions are

automatically tracked in an audit trail irrespective of the location of the

client or the employee.

Automated and IntelligentIn addition to being digital and accessible, the solution also needs to

be automated. Financial firms with a long history of AML compliance

are likely to have in-person, paper-based processes supported by

digital touchpoints. Applying real ongoing checks using a manual

approach is not only difficult, but also extremely inefficient. To have

sufficient coverage, compliance teams would have to manually

perform all their checks multiple times during the month, increasing

the risk of human error. According to a recent report by Deloitte, the

top operational challenge that organisations face while complying

with AML regulations is manual, time-consuming processes26. It has

therefore never been more important to embrace new technologies

that automate and streamline the compliance process.

Scalable and Future-ProofedOne of automation’s main strengths is its ability to quickly adapt to

regulatory and business changes, and consistently scale the efforts

needed to enforce compliance procedures across an organisation and

its locations in a way that limits frictions in the customer journey.

This is key to adapt to new regulatory requirements as they are

introduced, as the customer base sensibly increases within new or

existing markets, or as the team grows across jurisdictions around

the world.

Perpetual/ContinuousDeloitte found that more than 82% of banks have indicated that Wey

check for PEPs as part of the name screening process. However, only

63% respondents run regular adverse media searches26. Future KYC

compliance is all about providing continuous real-time, event-based

monitoring of changes in customer details and circumstances.

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Improved customer experience with a seamless

onboarding process

Reduced workflow

Reduced cost and improved compliance

Minimised risk

Scalability

Increased efficiency

Streamlined and more efficient process

Reduced time of KYC due diligence

Freed-up capacity for employees to focus on other important

tasks

Easily Integrated

Advantages of an intelligent and automated KYC solution

The ability to integrate multiple legacy systems through

a dynamic solution is fundamental to ensure the success

of any digital compliance strategy.

KYC CDD

EDDAML/CFT

Fraud

Core

Transactional/ Payments

Lending

Accounts

Onboarding

Transactional

Monitoring Onboarding requirements

as part of AML

In addition, KYC may also require Enhanced

Due Diligence (EDD)

All datais used

Apart from the aforementioned traits of an ideal and future-proof system, the solution also needs to be intelligently automated throughout the customer journey and at every touchpoint.

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As new regulations and attitudes enter the KYC arena, businesses now have the perfect opportunity to adapt. Technology will continue to evolve, as

will best practices and the expectations of regulators and governments. These trends have already begun to reshape the known world of KYC and the

current pandemic has removed traditional barriers by highlighting the need for digital transformation as a means to reach customers and maintain

operational resilience.

With the rise of financial crime and the costs associated with non-compliance, as well as the growing threat of digital disruption, it has never been

more important for financial institutions to embrace technologies that streamline compliance processes. Technology solutions that support a best

practice approach to detecting and preventing financial crime while automating low-risk tasks can help to alleviate the pressure on resources.

Sybrin was established in 1991 and has three decades’ worth of experience in the provision of bespoke solutions in the payment and information

management industries. We have sold more than 600 systems across Africa, Europe, and the Middle East with over 250 employees who are

dedicated, resourceful, and passionate about their work. Our solutions are currently deployed in 20 countries worldwide and we are actively expanding

into new territories, experiencing a consistent growth rate of over 30% year-on-year. Our rapid growth enables us to best serve our growing customer

base in and around Africa.

At Sybrin, we specialise in providing scalable, flexible, and dynamic digital KYC solutions to financial institutions around the world. The Sybrin

Intelligent KYC and AML offering is a complete solution for onboarding customers, automating cognitive KYC procedures, and performing CDD and

EDD investigations to prevent fraud and ensure regulatory compliance.

For more information on how Sybrin can help you with automated and intelligent compliance, onboarding, and other KYC-related requirements, visit

apex.sybrin.com/kyc-and-aml.

Conclusion

About Sybrin

References1. https://www.bbc.com/news/business-47772362

2. https://www.fenergo.com/report/global-research-report-on-financial-institution-fines-and-enforcement-actions-2/

3. https://www.unodc.org/unodc/en/money-laundering/overview.html

4. https://www.lawteacher.net/free-law-essays/commercial-law/the-early-history-of-money-laundering-commercial-law-essay.php

5. https://www.congress.gov/bill/99th-congress/house-bill/5077

6. https://www.fatf-gafi.org/about/historyofthefatf/

7. https://www.fatf-gafi.org/faq/membercountriesandobservers/

8. http://www.fatf-gafi.org/publications/fatfgeneral/documents/terroristfinancing.html

9. https://www.imf.org/external/np/leg/amlcft/eng/pdf/amlml05.pdf

10. https://www.fbi.gov/history/famous-cases/al-capone

11. https://www.lawteacher.net/free-law-essays/commercial-law/the-early-history-of-money-laundering-commercial-law-essay.php

12. https://www.unodc.org/southernafrica/en/sa/about.html

13. https://www.theguardian.com/world/2011/apr/03/us-bank-mexico-drug-gangs

14. https://www.reuters.com/article/us-deutsche-bank-moneylaundering/deutsche-faces-questions-from-authorities-investigating-danske-

idUSKCN1PH0JJ

15. https://www.theguardian.com/business/2019/apr/09/standard-chartered-fined-money-laundering-sanctions-breaches

16. https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Financial-Services/gx-fsi-realizing-the-digital-promise-covid-19-catalyzes-

and-accelerates-transformation.pdf

17. https://www.interpol.int/News-and-Events/News/2020/Report-Criminals-infiltrating-Africa-s-booming-mobile-money-industry

18. https://www.duffandphelps.com/insights/publications/compliance-and-regulatory-consulting/global-enforcement-review-2020

19. https://www.fatf-gafi.org/publications/fatfgeneral/documents/covid-19-ml-tf.html

20. https://www.fintechfutures.com/files/2020/05/The-State-Of-Digital-Transformation-In-Financial-Services-2020.pdf

21. https://www.fatf-gafi.org/media/fatf/documents/brochuresannualreports/FATF-annual-report-2019-2020.pdf

22. https://corporate.thomsonreuters.com/Cost-of-Compliance-2020

23. https://www.fenergo.com/report/global-research-report-on-financial-institution-fines-and-enforcement-actions-2/

24. https://www.statista.com/statistics/218984/number-of-global-mobile-users-since-2010/

25. https://qz.com/africa/1915884/uganda-banks-mtn-airtel-hacked-by-mobile-money-fraudsters/

26. https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Financial-Services/gx-fsi-retail-banking-in-the-age-of-covid-19.pdf