AML/CFT Guide for Digital Bank

Last Updated on Aug 12, 2025, 2k Views

AML/CFT Guide For Digital Bank

1. Introduction

Purpose:
To outline the Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) compliance framework for a digital bank, ensuring adherence to global and local regulations while leveraging technology for efficiency.

Regulatory Basis:

FATF Recommendations – International standards.
Local AML/CFT Laws – Example: India’s PMLA, EU’s AMLD, U.S. BSA/USA PATRIOT Act.
Regulator Guidelines – e.g., RBI, MAS, FCA.

2. Governance & Responsibility

Board of Directors – Sets AML/CFT policy and risk appetite.
Compliance Committee – Oversees implementation, reviews reports, approves escalation protocols.
Money Laundering Reporting Officer (MLRO) – Senior officer responsible for suspicious activity reporting.
Operational Teams – KYC onboarding, transaction monitoring, and investigation teams.

3. Risk Assessment

Key Risk Categories for a Digital Bank:

Customer Risk – High-risk jurisdictions, politically exposed persons (PEPs), complex structures.
Product/Service Risk – Cross-border payments, instant transfers, virtual assets.
Channel Risk – Fully online onboarding, mobile app transactions.
Geographic Risk – Sanctioned countries, FATF high-risk jurisdictions.

Methodology:

Conduct Enterprise-Wide Risk Assessment (EWRA) annually.
Use Risk Scoring Models for customers and transactions.

4. Customer Due Diligence (CDD) & eKYC

Onboarding Requirements:

Digital Identity Verification – Facial biometrics, liveness detection, OCR document scanning.
Sanctions & PEP Screening – Against OFAC, UN, EU, HMT, and local lists.
Beneficial Ownership Checks – For entities, identify and verify individuals with >25% ownership.

CDD Tiers:

Simplified Due Diligence (SDD) – Low-risk accounts (e.g., small savings).
Standard CDD – Regular retail customers.
Enhanced Due Diligence (EDD) – High-risk customers such as PEPs, offshore entities, crypto-related businesses.

5. Ongoing Monitoring

Automated Transaction Monitoring – AI/ML models to detect anomalies, pattern recognition, and rule-based alerts.
Behavioral Profiling – Compare actual activity to expected customer behavior.
Periodic KYC Updates – Risk-based frequency (e.g., high-risk: annually, low-risk: every 3–5 years).

6. Sanctions & Watchlist Screening

Real-Time Screening – For customer onboarding and transactions.
Batch Screening – Daily re-screening of existing customer base.
List Sources – OFAC, UN, EU, HMT, domestic watchlists, and adverse media feeds.

7. Suspicious Activity Reporting (SAR/STR)

Internal Escalation – Alerts → Investigator → MLRO review.
Reporting Timelines – As per jurisdiction (e.g., 24–72 hours).
Confidentiality – Prohibition on “tipping off” customers.

8. Record Keeping

Maintain KYC documents, transaction records, investigation notes for at least 5–10 years depending on regulation.
Ensure secure, encrypted storage with audit trail.

9. Training & Awareness

Mandatory Annual Training – AML/CFT, sanctions, typologies, red flags.
Role-Specific Modules – Onboarding staff, investigators, developers.
Testing & Certification – Post-training assessments to ensure understanding.

10. Technology & RegTech Integration

Identity Verification Tools – Onfido, Jumio, Trulioo.
Transaction Monitoring Systems – Actimize, Feedzai, ComplyAdvantage.
Adverse Media Screening – Dow Jones, World-Check, Refinitiv.
Machine Learning Models – Adaptive to evolving typologies and fraud patterns.

11. Reporting to Regulators

Regular Returns – STRs/SARs, CTRs, threshold transactions, and AML compliance reports.
Audit Support – Provide system logs, case files, and compliance dashboards during inspections.

12. Continuous Improvement

Annual Policy Review and updates.
Implement lessons from internal audits, regulatory feedback, and enforcement cases.
Monitor emerging threats – crypto laundering, AI-based fraud, mule accounts.