Banks and other financial institutions were the first ones to come under the regulatory obligations of KYC and AML screening. It all started with the Banking Secrecy Act of the U.S and now every country has its own KYC/AML laws while some global authorities such as FATF are also developed.
Nowadays every financial institution is obliged to perform some sort of customer due to diligence screening on their customers before onboarding them. Let's see why it is important for banks to perform KYC Bank on their customers
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Fraud is increasing
As per a study, 3 million identities were stolen in the U.S in 2018 and most of those stolen identities were used to conduct a financial crime (credit card fraud) with a bank or a business.
This fraud causes millions of dollars to banks and often these losses are unrecoverable when the bank is unaware of the true identity and where of a customer. It often happens due to the unwise behavior of the bank towards risk management and regulatory obligations.
Sometimes it happens due to the ignorant behavior of the bank employees. So it is important to practice stringent security measures to manage risk associated with customers. Screening the customers before onboarding them will reduce the risk of serving fake identities.
Regulatory authorities are becoming strict
The scandals like Panama Leaks and Danske bank money laundering scam shook the global entities, in reaction to that the global regulatory authorities introduced rigid AML/KYC regulations. KYB (Know Your Business) regulations are developed to reduce money laundering conducted while hiding behind shell companies and fake merchant identities. It will help banks to prevent the risk coming from their B2B relations.