By Financial crimes pose great risks all over the world. Every day we hear of new news related to money laundering, terrorist financing, corruption, bribery and other financial crimes. While financial technology and banking develop with the development of technology, financial crime methods continue to increase in parallel.
Almost all organizations operating in various regions of the world are under the threat of financial crime. Anti-money laundering, which means end-to-end methods of combating financial crimes, is a guide that shows how businesses have to fight financial crimes.
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Customer Screening Definition
Customer screening is one of the basic procedures implemented within the scope of anti-money laundering, know your customer and customer due diligence. The aim of this procedure is to collect information about customers’ identity, their legal status and the origin of funds used for transactions. Customer screening is carried out by banks, brokers or other financial institutions that provide financial services on behalf of clients.
The main purpose of client screening is to identify customers who pose a risk to the company’s reputation, business interests or even financial stability.
The term “customer” can be interpreted differently depending on the type of business. For example, a bank will consider any person who opens an account with it as a customer. On the other hand, a retailer will look at it from a different angle — only those people who purchase goods or services from their store should be regarded as customers.
Customer screening has existed since ancient times when sellers would check if their buyers are able to pay for what they want to buy before making a deal with them. Today’s banking institutions also conduct such checks on their potential clients by asking them questions about their personal and business background. The results of such checks help banks identify risks associated with each client and determine whether they meet all criteria necessary for opening an account with them or not.
Is Customer Screening Mandatory?
Performing client screening in the customer onboarding process is mandatory for organizations under AML and KYC obligations. AML regulations differ from country to country. These differences occur according to the risk level of the countries. Banks, fintechs, e-payment companies, crypto exchanges, investment companies have to check their potential customers during the customer onboarding process.
According to the guidelines issued by FCA (Financial Conduct Authority), banks should carry out customer screening on all new customers, existing customers who have not been screened for more than two years, current account holders with multiple accounts, high-risk customers and “politically exposed persons”.
Risk-Based Approach for AML
According to anti-money laundering regulations, companies should adopt a risk-based approach to combat financial crimes. The risk level of each new customer should be determined by performing customer screening. The risk level of sanctioned and PEPs is high for financial institutions.
The process of customer screening includes:
- checking a client’s identity through documents;
- verifying the authenticity of provided documents;
- conducting an analysis of transactions history;
- checking with third parties (credit bureaus).
Sanction and PEP Screening
Sanctioned people are prohibited from opening a bank account or conducting a financial transaction at a financial institution, as they are restricted. Also, because Politically Exposed Persons have broad powers, they have more opportunities to commit a financial crime. Companies should not open accounts directly with these people but should take a transaction based on their current risk level.
Financial institutions cannot open accounts with people who have been sanctioned. Financial institutions can open accounts for PEPs. But then, because PEPs have a high risk, their transactions must be examined.
Customer Screening and AML Compliance
AML compliance is a must for all companies that are liable within the scope of regulations. AML regulators aim to engage in an all-out fight with banks and other financial institutions to combat financial crimes. Customer screening is one of the key procedures to identify risks. For AML compliance, companies have to scan their customers during customer account opening processes.
Top 5 Customer Screening Software
Customer Screening Software is the name given to solutions that enable businesses to apply risk control to their existing and new customers to protect them from financial crime and regulations.
Customer screening software is a tool used by banks, financial institutions and other organisations that deal with large volumes of customers. The software helps them to manage their customer base efficiently by automating the process of checking customer identity details. This can include checking names, addresses and other information against databases such as credit reference agencies (CRA) or public records, such as court records.
The system uses an algorithm to check whether any part of the information provided by a potential customer matches data held on file by the CRA or public record database. If there is a match, it means that information has already been supplied by someone else who has taken out credit or applied for a loan in the past. As such, it will be flagged as potentially fraudulent activity in order to prevent fraudsters from taking out loans using false identities.
Screening software can also be used for anti-money laundering (AML) purposes – for example, if you want to make sure that your customers are not using your services for money laundering purposes (i.e. transferring large sums of money into your account).
The software offers a variety of features that can help you identify potential threats, mitigate risk and avoid fines or reputational damage.