The Role of Banks in Combating Money Laundering through KYC Verification

KYC verification is essential to prevent money laundering. With the changing global financial landscape, banks must also evolve.


Know Your Customer or KYC translates to a series of steps that help to authenticate the identities of business clients and customers. In today’s digital era, KYC verification is a critical process that is now indispensable in the pursuit of preventing money laundering and other financial crimes. Today banks must comply with KYC regulations. These regulations are set by the Financial Action Task Force (FATF) and many other international and national regulators.

Understanding the Role of Banks in KYC Verification

Banks make up the largest organizations actively involved in the transfer and engagement of funds from all regions over the globe. This puts a great responsibility over their shoulders to carry out effective KYC verification steps to keep the world safe. For example, funds may be in transfer from politically exposed persons (PEPs) or entities to off-shore accounts or terrorist groups. In such cases, ineffective KYC verification processes can lead to disastrous implications related to national security and public safety. Thus, to say that banks play a vital role in KYC verification might be an understatement. This is because the responsibility of banks is too big to simply be termed “vital”. 

For KYC verification, banks are responsible for collecting and verifying customer information. This information can include names, addresses, dates of birth, and taxpayer identification numbers, among other credentials. Banks may also have to verify customer ID by means of government-issued ID documents. These can include national IDs, passports, or driver’s licenses. 

The Relationship between KYC Verification and Money Laundering

To define it, money laundering refers to the conversion of illegal financial proceeds to make them legal. In other words, it is how you make dirty money look clean. Thanks to the digital age, criminals today are actively using a diverse range of novel methods to launder money. This can launder from any part of the globe to any other part of the globe. Banks, however, make up a considerable channel of transportation for this money.

KYC verification allows us to prevent money laundering by making it increasingly difficult for criminals to open and make use of bank accounts. By verifying the IDs of their customers, banks can make sure that all suspicious individuals and accounts are identified. They can then report such suspicious activity to the regulatory authorities.

KYC Verification Process –  Trends and Regulations

The global KYC landscape is constantly evolving, with new smart technologies and strict regulations emerging within the domain all the time. With the advent of this technology, the needs and goals of KYC identity verification can change drastically as well.

Increased use of technology

Banks today are using technology at exponentially increasing rates to achieve their goals of automating and streamlining the KYC process. For example, banks are using facial recognition, AI, and other technologies to verify customer identities and detect suspicious activity. One such example is the Bank of America which is using facial recognition technology for KYC online verification of its users on their mobile apps.

Building focus on risk assessment

Stringent risk evaluation is one of the key components of KYC authentication and banks are increasingly focusing on it today. When it comes to KYC, increasing focus on risk assessment means tailoring your KYC processing and stepping down to the very specific risk that you and businesses like yours face. For banks,  the clients they engage with bring these risks primarily. 

Industry Collaborations

The world of today is highly interconnected. Thanks to technology, we have organizations from various industries sharing databases with one another to strengthen global security. For example, financial regulators may collaborate with governmental security entities to keep a record of financial criminals. Similarly, banks, being the ones directly engaging with potential risks, also can engage with such external organizations to keep them and themselves updated. This allows for the sharing of information and best practices on KYC verification.

What happens when banks do not take effective measures

The consequences of ineffective KYC & AML verification processes and practices can be drastic for national security as well as global politics and international relations. This goes without saying, but a bank not taking and executing its responsibility effectively can put the public, at large, at great risk. However, the damage is not just external and banks frequently have to pay the price themselves too. For example, in 2021, HSBC was fined with a charge of  $1.9 billion. This was due to its failure to prevent money laundering and a subsequent transfer of funds by terrorist and trafficking entities. Similarly, just last year, Santander was also fined £108 million for similar reasons.

To sum up

KYC verification is critical for banks in order to prevent money laundering and other financial crimes. There are many national and international organizations working round the clock to ensure that banks are actively executing this particular role of theirs.