The Consequences of Non-compliance
- Legal risks: This focuses on the potential disruption of the operations of a bank. Through the means of lawsuits, unenforceable contracts or controversial judgements, the conditions of a bank are at risk. In the case of failing to adhere to mandatory KYC standards banks may be subjected to lawsuits and, perhaps, be penalised in the forms of fines, imposed by supervisors.
- Operational risks: Subsequent risks stem from the inability to practice efficient CDD and ineffective control procedures. The business of a bank could suffer adverse effects if it is unable to manage its operational risks, for example, a weakness in the implementation of banks' programmes.
- Reputational Risks: The reputation of a bank is of the utmost importance for its depositors, creditors and the general marketplace. A bank`s reputation may be at risk if deemed, true or not, to be in the involved in terrorist financing, and or, other criminal activities. This leads to a loss of confidence in the integrity of the whole institution. Banks are frequently a vehicle for illegal activities, thus, they are significantly susceptible to reputational risks. Following KYC protocols and an effective CDD may mitigate these risks.
- Concentration Risks: In need of robust information systems in order to identify credit concentrations and the restriction of the banks` exposure to single borrowers/groups of related borrowers. With a strong customer due diligence measurement, to know precisely who your customers are, banks could measure their concentration risks.
Stamping Out Criminal Activities
- "Adoption of know-your-customer procedures within individual jurisdictions, as part of effective customer due diligence programmes; and
- Sharing of information related to terrorist financing and money laundering with other supervisors and law enforcement agencies." (BIS, 2002)
Sourced Image: Pixabay