AML FOR E-COMMERCE – OVERVIEW

AML compliance for E-Commerce: Automated Real Time Sanction Screening

Required: compliance with AML regulations without compromising the online service level. Ensuring uninterrupted flow of customer/seller onboarding and transactions.

From Financial Institutions to E-commerce businesses

Financial Institutions have a long history of combating financial crime. Their efforts are managed and monitored by Regulating Authorities, local and International. Being in the business of financial transactions, e-commerce companies and organizations also fall under the AML (anti-money laundering) regulations and KYC (know-your-customer) requirements.

In the last decade the Regulating Authorities have step up control over the organizations’ compliance to the said regulations. Strict measures are required to be taken and due diligence protocols need to be followed to mitigate the risks of financial crimes being committed in the course of transactions carried out by banks, exchange houses, law firms, e-commerce companies and other legal bodies involved in financial operations. Moreover, the Regulating Authorities impose considerable penalties on companies if they consider that a company’s AML efforts are insufficient or do not meet the required standards.

How does AML apply to e-commerce

Any business, e-commerce included, needs to ensure that its customers, suppliers, and partners are not involved in money laundering, terrorism financing, or any other type of criminal activities. This is in order to (1) avoid orders cancellation and (2) comply to AML regulations, as non-compliance leads to considerable fines and reputational damage.

E-commerce is even more vulnerable to the risks of becoming a target of or a funnel for financial crimes due the virtual customers and suppliers identification processes. As security and cyber-security technologies available for e-commerce businesses become more sophisticated, so do the tools used for fraudulent activities.

AML or Anti-Money-Laundering is a set of rules and procedures aimed at stopping financial criminal activities. These procedures must be implemented within governmental and financial institutions, large corporations, e-commerce businesses, and others to monitor and prevent fraudulent activities and to comply with strict AML regulations.

KYC or Know-Your-Customer is a process of validating the identity of the customers.

KYB or Know-Your-Business is a process of validating the identities of the Ultimate Beneficial Owners (UBO’s) of the suppliers and partners.

Both KYC and KYB are, in essence, are a set of standards and regulations aimed at verifying and ensuring the validity of customers, suppliers, partners, and other counterparties of a given business.

AML compliance and KYC procedures are crucial to ensure that a business does not become a funnel for money laundering and other types of financial crimes. By carrying out AML procedures the businesses also ensure their conformity with corresponding directives and regulations.

Why e-commerce businesses need to incorporate AML procedures

  1. To comply with local and international regulations imposed by the Regulating Authorities and to avoid multimillion dollar fines
  2. To ensure the validity of the transactions
  3. To avoid reputational damages that might be caused by illegal transactions funneled through your business and by associated law suites
  4. To assist Law Enforcement agencies fighting money laundering, terrorism financing, and bribery, if and when required.

How is AML compliance implemented – What needs to be done

The purpose of all AML compliance procedures is to ensure that a business is capable of detecting sanctioned entities (individuals or other businesses) associated with money laundering and/or terrorism funding. Such activities and entities need to be reported to the appropriate authorities.

Implementing AML compliance procedures, a business must build and maintain internal controls and systems capable of identifying and reporting potential risks. To do so, the e-commerce organization need to identify any and all sanctioned entities (individuals or companies) that are attempting to onboard and/or carry out a transaction via their platform. This includes customers, suppliers and other business counterparties. To do so, e-commerce companies must develop and maintain and AML Compliance Program.

Commonly AML compliance programs rely upon (1) a technological solution and (2) compliance staff.

The AML Challenges for E-Commerce

Most of current AML systems are struggling to provide solutions that would suit the dynamic nature of any e-commerce business:

  1. Real Time – allowing immediate, seamless buying/selling experience, with no interruption or delay.
  2. Automatic Process – automating as many processes as possible, minimizing manual resolutions or intervention
  3. Reducing processing times and minimize compliance staff workloads
  4. Global/international Solution – covering Global markets, buyers/sellers from different countries and regions registered in different languages and/or with transliterated names, resulting in names alterations.
  5. Accurate Name Matching (how accurate your results are) and Recall Rate (finding what you are supposed to find). The very aim of the AML solution is to find sanctioned or restricted accounts, while not creating unreasonable overheads. In other words, AML Solution needs to be Effective and Efficient.
  6. Identity/Entity Resolution – allowing the resolution of identity based on UID, where the Name of the individual/entity must be the key, while the capability to add additional parameters (birth date, phone, address, etc.) into aquation to achieve higher accuracy. In addition, it is paramount that the system is capable of working across separate silos with different data formats, languages, systems (CRM, supplier lists, KYC forms, restricted accounts…)
  7. Working with different lists/databases/data formats – Sanction lists, 3rd party providers, internal lists, etc. – covering different requirements in different locations/jurisdictions.
  8. ‘Always updated’ – maintain data integrity, updated sanction and internal lists, history log of past decisions, etc.
  9. System Validation (Proofing), Auditing and Reporting – automatic “system test”, proofing performances, logging history and decisions, automatic auditing reports.

The problem of legacy solutions:

  1. Can’t support Realtime – due to technology plus the extensive need for manual resolution.
  2. Not designed to match names by phonetic-proximity, not accurate: >13% misses, >30% are false alerts, invoke AML-discrimination (alerting without justified real phonetic proximity), creates extensive operational workload and overheads.
  3. Not supporting search in different languages – original alphabets & transliterations.

Compliance Teams’ Role

The compliance team comes into the pictures when the technological platform alerts a listing that needs human intervention to be resolved (i.e., to be either cleared or flagged and reported). The more efficient the technological platform is, the fewer human resources are required.

Important

AML screening is required by local and international regulators, financial authorities, and law enforcement agencies.

Sanction lists, watch lists and PEP lists are being constantly updated. To comply with AML regulations the businesses must monitor these changes on a regular, preferably real-time, basis.

Non-compliance with AML regulations may and does result in heavy fines and other financial losses, as well as long-term reputational damages.

for more information, please visit:
REAL TIME SANCTION SCREENIING FOR E-COMMERCE
@ FINCOM.CO

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