📈 The Rising Cost of Compliance: How AML and EDD Are Shaping the Financial and Crypto Sectors

Firms in the financial sector, particularly those in the crypto industry, are facing increased scrutiny from regulators regarding their AML obligations. Terms such as "Know Your Customer," "Onboarding," and "Customer Due Diligence" have become integral to the daily operations of these companies.

The cost of complying with AML regulations for UK banks is estimated at £34.5 billion per year, indicating the scale of the challenge. Even with all this spending to implement controls to strengthen AML compliance procedures, in 2021/22, UK banks closed 343,000 accounts due to AML concerns. The crypto sector is also under increased scrutiny, with firms like CB Payments Ltd (CBPL) from the Coinbase Group recently fined £3.5 million by the FCA for AML lapses.

But how do you identify a high-risk customer, and what exactly does EDD involve?

Q: How do you know you have a High Risk Customer? Identifying and managing high-risk customers is crucial to maintain a profitable and secure business environment. High-risk customers are individuals or businesses that present a greater potential for causing financial, legal, operational, or reputational harm to your company, often due to their poor security, financial instability, industry, regulatory status, or business practices. The correct classification of a client is particularly important given that for some European economies, the shadow economy averages 15 to 20 percent of GDP in the EU. That’s 1 in 5 transactions! High-risk customers can fall into various categories based on their characteristics, activities, or backgrounds. Although not an exhaustive list, there are some common types of high-risk customers: Politically Exposed Persons (PEPs), Sanctioned Individuals or Entities, amongst others. Q: What is EDD? EDD in banking and finance is a critical component of the KYC compliance procedure. It involves gathering information to authenticate clients' identities and quantify the AML risk the customer poses. If a customer’s risk assessment reveals that they are at a normal level of risk, it’s enough to proceed with Customer Due Diligence. However, High-risk customers trigger enhanced due diligence processes which embed a more robust version of the average KYC measures.

Establishing an EDD process is essential for managing risks in these situations but brings significant challenges, including financial costs, operational complexities, extensive documentation, and compliance risks like fines and increased scrutiny. Companies must balance these burdens against the potential legal, financial, and reputational damage of not implementing EDD.