Dictionary: Compliance Terms
Do you find it confusing with all the expressions and abbreviations that has become a norm in the banking and finance landscape? This dictionary gives you simple definitions of frequently used compliance terms.
Compliance can be explained as complying with regulations. Compliance work will thus mean routines, processes, and systems that exist to comply with these laws and regulations. When we use the word compliance, it is often in relation to specific laws our banking and finance customers and prospects are subject to as obliged entities (see the section below explaining this). The regulations that apply to different customers vary, but we often talk about the Money Laundering Act, GDPR, and MiFID II.
Money laundering can be defined as any method that aims to hide the origins of money that are obtained illegally and then put back into the legal economy. There are countless methods of money laundering, and the origins of the funds can be many. The complexity of methods and origins is one of the things that makes money laundering difficult to combat. Money laundering is a threat to healthy, economic growth and huge sums are being invested worldwide to reduce the effects.
AML is an abbreviation for the English term «Anti-Money Laundering». It is a collective term for initiatives created to combat money laundering and terrorist financing. This can be anything from regulations and technology, to internal routines and processes.
KYC is short for the English term «Know your customer». The KYC principle is mainly about being able to verify a customer's identity, get an overview of important information, and assess suitability for financial processes. KYC is thus a separate term, but it is often used in combination with AML, as it is a very important part of anti-money laundering work to know your customers. In the AML world, KYC is also used to explain routines and processes created to get an overview of a customer's financial behavior and other factors that may affect the customer's probability to commit any type of financial crime. KYC is thus both an initial identification of a newly established customer, but also an ongoing follow-up process once the customer relationship has been established (see the next section).
Customer Due Diligence
Customer Due Diligence (CDD) is part of KYC in the sense that it is the actual process that financial institutions use to collect and evaluate information about existing and new customers. This process should be ongoing as information about customers and their affiliated companies change continuously. The CDD measures should aim to reveal information about increased risk or potential criminal activity. The measures should be risk-based where customers go through different CDD processes based on their risk classification.
Obliged entities are the industries mentioned in section 4 of the Money Laundering Act that is required to report suspicious matters. These industries include specific financial institutions and other businesses with financial objectives. It is stated under the act that they must continuously identify and assess the risk of money laundering and terrorist financing as they are exposed to being misused for money laundering and terrorist financing. This takes us on to the next concept:
Business Specific Risk Assessment
All obliged entities (see section above) must prepare a risk assessment for their business. This must identify possible risks of money laundering and terrorist financing, with specific assessments for each product and type of customer. The risk assessment must be able to be presented to The Financial Authority for supervision and must contain specific measures to counter money laundering and terrorist financing.
The type of onboarding we talk about here is not about the start-up process of a new hire, but about obtaining the necessary information about a "legal" or "natural" person before establishing a customer relationship with a company subject to reporting. This is step 1 of the KYC work and a thorough onboarding is important in order to be able to identify any risk factors at an early stage. Onboarding requires that information be filled in by a potential customer, and often uploading documents. Different companies have different onboarding routines, but common to all is the aim to uncover information that the reporting entity has established as risky. A good onboarding process has become crucial, both to comply with regulations, but also to ensure a user-friendly start to the customer relationship.
Fintech is an abbreviation of "Financial Technologies" and is a term used to explain innovative technology that improves products and services in banking and finance. Fintech is a broad concept and points to all types of technology that can simplify the everyday life of employees in financial institutions and/or their customers.
Regtech is short for "Regulatory Technology" and is a term used to explain innovative technology that improves regulatory processes. Regtech is often an important part of fintech, as banking and finance are subject to major regulatory requirements. Regtech is largely about automation, processes, and availability of information in order to be able to pick up deviations, risk drivers, and suspicious conditions. Streamlining of heavy and extensive processes related to compliance characterizes regtech.
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