Advancing Digital Finance: The Future of AI-Enhanced KYC and AML Compliance

Posted in Know Your Customer (KYC) on May 30, 2024
Advancing Digital Finance

Advancing digital finance is pivotal to driving economic growth, enhancing financial inclusion, and fostering innovation in today’s interconnected global economy.

As digital finance evolves, AML (Anti Money Laundering) laws and KYC also need to keep up with the pace of innovation. Historically, AML laws have mostly lagged behind criminal activity. However, businesses may soon see this change. What are the top predictions on the future of digital KYC and where do we go from here?

Artificial intelligence and machine learning will continue their momentum to overtake manual, laborious, and repetitive KYC tasks that otherwise consume a big chunk of time and effort.

Fintech, banks, cryptocurrency exchanges, and IT security service providers have already started implementing AI-based KYC solutions for Customer Due Diligence (CDD).

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Advancing Digital Finance

How can AI detect the authenticity of the document? By analyzing the document against several criteria, such as:

  • Font size
  • Spacing between words and sentences
  • Identifying morphed images
  • Checking document expiry
  • Identifying photoshopped documents
  • Identification of fake unique identifier numbers
  • Checking of the deep fakes

Some individuals and business entities will always carry more risk than others. In this case, a one-time KYC for onboarding high-risk entities may not be enough, which is why ongoing KYC will become an integral part of minimizing risks. High-risk customers such as PEPs (Politically Exposed Persons) need to be reviewed every year as compared to a three-year or a five-year KYC period for medium-risk and low-risk customers, respectively.

Instead of ongoing manual KYC, the automated method automatically highlights potential red flags associated with suspicious activities, such as:

  • Unusually large amounts of transactions
  • Change in business ownership
  • Conducting businesses with high-risk countries and companies

Suspicious activities will help companies determine the ongoing risks associated should they continue working with high-risk businesses and entities.

Additional user-related information would be required for the ID verification and ownership details as per swift changes in regulations.

However, contrary to this, unidentified business owners remain a big part of the KYC problem. There is often limited information on business ownership, becoming an obstacle to inefficient KYC processes.

Some jurisdictions that are known to be tax havens, may take some time to comply with the regulatory requirements or related changes in the existing regulations. In the future, the authorities need to share owner-beneficiary information to strengthen and comply with the process of KYC. The sharing of data with the regulatory authorities will keep on increasing. 

Many countries worldwide have made it mandatory for businesses of all sizes to share data on the companies and individuals they are working with. This is all done in an attempt to mitigate fraud and avoid hefty penalties for money laundering.

As AI makes digital KYC verification more efficient, it will expedite the process of customer onboarding and data sharing.

Advancing Digital Finance

Final Thoughts

The metamorphosis of digital finance requires a corresponding evolution in AML and KYC processes to thwart emerging malicious strategies. The days of protracted, manual KYC procedures are dwindling as AI and machine learning spearhead the revolution, optimizing verification by analyzing diverse document criteria, from font nuances to detecting deep fakes. Moreover, a static KYC approach will no longer suffice; continuous surveillance, especially for high-risk entities, is imperative. This continuous monitoring powered by automation can spotlight irregularities, such as anomalous transaction volumes or shifts in business ownership.

Paradoxically, while the urge for detailed ID verifications intensifies, a persistent challenge is the opacity around business ownership details, especially in jurisdictions with reputations as tax havens. As nations globally mandate rigorous data sharing to combat financial malfeasance, AI-driven KYC methods will not only fortify security but also streamline customer onboarding, striking a balance between diligence and efficiency.