2020 was quite the year. The banking industry, which tends to be reluctant to adopt new techniques and technology was thrust into digitalization brought on by the pandemic. Credit Unions especially, who value face to face interactions with its members, were forced to shut down their lobbies and conduct business remotely. With everything new comes challenges, but in this case, it also comes with increased risk. When Jane Smith wants to open a new account and a remote transaction is the only option, it becomes a lot harder to verify Jane’s identity. And when Jane is a criminal, it also becomes a lot easier for her to defraud the bank. Since the beginning of the pandemic, there has been a dramatic increase in the number of fake businesses being created by organized crime groups in order to launder money. With just an Employee Identification Number (EIN), and a physical U\32222.S. mailing address required to create a business, creating a fraudulent business is far less complicated than it should be. While money laundering may not seem like something your average CU member should worry about, unfortunately the consequences of large-scale money laundering schemes trickle down to all of us.
With most credit unions relying on manual ID checks when onboarding new members and processing loan applications, the time to innovate has come. The federal government Is cracking down and being caught with your pants down certainly doesn’t bode well in creating trust with members. Being fined for non-compliance with AML rules is a stain on the reputation of any business.
A Move Away from Manual ID Checks
Verifying member information is vital to any onboarding program but takes a lot of time and money, usually because of the lack of information available. In addition to lack of information, many of the documents required for verification are simply too easy to fake. Especially when a majority of transactions are happening online or over the phone. The solution lies in moving to electronic verification. What was once a tedious process is now done in seconds, with far greater accuracy. Automating electronic verification can also benefits CUs far beyond onboarding. Credit Unions can now monitor if any changes occur with any of their members on an ongoing basis. From change of address to the opening or a new business, it not only keeps them abreast of new information to combat fraud, it keeps member records up to date for marketing purposes.
Another, more urgent, reason to adopt an automated electronic verification system is new AML legislation that requires more stringent checks of businesses and members.
Anti-Money Laundering Act of 2020 (AMLA)
‘Know Your Member’ is nothing new for CUs. But, with the introduction of the Anti-Money Laundering Act, its now more important than ever for lenders to step up their compliance. As part of National Defense Authorization Act (NDAA), the Anti-Money Laundering Act of 2020 (AMLA) includes the most substantial legislative reforms to U.S. anti-money laundering (AML) and counter-terrorism financing (CFT) laws since 2001.
What does this mean exactly? It means stricter reporting requirements and more severe consequences for non-compliance. In January 2021 the Financial Crimes Enforcement Network (FinCEN) penalized Capital One to the tune of $390,000,000 for “willfully failing to implement and maintain an effective Anti-Money Laundering (AML) program to guard against money laundering.”
Private banks, non-federally insured credit unions and certain trust companies were previously exempt from the requirement to establish a formal AML compliance program. As of March 15, 2021, they are now also required. The industry has long needed this kind of change, but now that its here its going to put technology adoption into overdrive and puts the onus on lenders to seek out and implement the right solution to keep them in compliance.
For example, one of the focuses of the AMLA will require certain corporations and limited liability companies to disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN) of the US Department of the Treasury. With some automated systems CUs will be able to simply enter the name of the institution and a zip code and in turn, they will confirm the existence of the business, be provided with lists of executives and owners and validate the corporate structure.
No matter what solution is chosen, banks must be prepared to collect, verify and defend their processes. In addition to electronic verification many CUs are turning to AML platforms for an end-to-end solution to combat fraud. AML platforms perform all anti-money laundering checks and searches, validate documents and complete electronic identification verification. They have partnerships with major data suppliers like Experian, Equifax and Dow Jones in order to provide the most up to date information available.
What are you waiting for?
AML compliance should be part of every credit union’s business strategy – not only to remain in compliance with federal regulations, but to protect itself and its members from exposure. The directive brought on by the AMLA is an opportunity to automate and improve outdated processes and invest in technology that will create efficiency and improve customer service. As regulators have shown this is now a priority, its time for us all to do our part to combat fraud to protect our economy.
Martin Cheek is Vice President of SmartSearch, a provider of an Anti-Money Laundering verification service based in Lehi, Utah.