The Anatomy of Payment Security: Decoding the Foundations of Payment Compliance

Neha Chowdhury

• 6 min read
The Anatomy of Payment Security: Decoding the Foundations of Payment Compliance
The Anatomy of Payment Security

In an increasingly interconnected world, cross-border payments drive global commerce, making payment compliance essential for trust and security. Beyond regulatory obligations, payment compliance safeguards against financial crimes like money laundering and terrorist financing while protecting businesses from hefty fines and reputational damage.

As businesses navigate these complexities, understanding the foundational elements of payment compliance becomes paramount. This blog will explore critical components such as Know Your Customer (KYC), Know Your Business (KYB), Anti-Money Laundering (AML), Sanctions Screening, Enhanced Due Diligence (EDD), and Politically Exposed Persons (PEP) screening, and how these elements work together to create a robust compliance framework.

Core Components of Payment Compliance

1. Know Your Customer (KYC)

KYC is a fundamental component of payment compliance that involves verifying the identity of customers before establishing a business relationship. The KYC process typically includes:

  1. Customer Identification: Collecting essential information such as full name, address, date of birth, and government-issued identification numbers
  2. Verification: Validating the information provided through reliable sources such as government databases or third-party verification services
  3. Ongoing Monitoring: Continuously monitoring customer transactions to detect any suspicious activities or changes in risk profile
  4. Risk Assessment: Formulation of risk assessment policy helps in risk categorization and segregation of customers. Establishment of a department with individuals that are well versed with these policies is essential for Glomo 

By implementing robust KYC processes, businesses can mitigate risks associated with fraud and ensure they are not inadvertently facilitating criminal activities. Glomo does this at the policy level by framing the Customer Acceptance Policy for ensuring compliance with all applicable regulatory guidelines while establishing Merchant relationships. 

2. Know Your Business (KYB)

Just as KYC focuses on individual customers, KYB is concerned with verifying the legitimacy of business entities. Key aspects of KYB include:

  1. Corporate Structure Verification: Understanding the ownership structure of the business to identify beneficial owners
  2. Business Registration: Confirming that the business is legally registered and operating within its jurisdiction
  3. Sanctions Screening: Checking the business against sanctions lists to ensure it is not involved in prohibited activities

Effective KYB processes help businesses assess potential risks associated with their partners and clients, ensuring they engage only with reputable entities. To drive corporate transparency, Glomo ensures L2 level of Ultimate Beneficial Ownership (UBO). Verifying the UBOs within its network of clients, suppliers, and business partners, helps Glomo in reducing risk and makes the transactions compliant with the company's policy and regulation. 

3. Anti-Money Laundering (AML)

AML regulations are designed to prevent money laundering and other financial crimes. A comprehensive AML program typically includes:

  1. Transaction Monitoring: Implementing systems to monitor transactions for unusual patterns or behaviors that may indicate money laundering
  2. Suspicious Activity Reporting (SAR):  Filing reports when suspicious activities are detected to alert authorities
  3. Risk Assessments: Conducting regular assessments to identify vulnerabilities within the organization’s operations

By adhering to AML regulations, businesses can protect themselves from being used as conduits for illicit activities while contributing to the integrity of the financial system. Here is our article on AML and CFT measures for an in-depth look into how Glomo manages AML.

4. Sanctions Screening

Sanctions screening is a critical component of payment compliance that involves checking individuals and entities against global sanctions lists. Key aspects include:

  1. Understanding Sanctions Lists: Familiarizing oneself with various sanctions lists such as those maintained by OFAC (Office of Foreign Assets Control), the United Nations, and the European Union
  2. Automated Screening Tools: Utilizing software solutions that automate the screening process to ensure timely updates and reduce human error
  3. Initial Risk Categorization: Glomo uses multiple parameters to categorize risks of every transaction once the screening is done such as Threshold Exceedance, Geographic Risk, Alert Management among others

By conducting thorough sanctions screenings, risk of engaging with sanctioned individuals or entities can be avoided and potential legal repercussions can be mitigated.

5. Enhanced Due Diligence (EDD)

EDD refers to additional scrutiny applied to high-risk customers or transactions. Key elements include:

  1.  Risk Evaluation: Assessing factors such as geographic location, industry type, and transaction volume to determine risk levels
  2. In-depth Investigations: Conducting detailed investigations into high-risk customers or unusual transactions to understand their legitimacy
  3. Ongoing Monitoring: Implementing enhanced monitoring measures for high-risk accounts to detect any suspicious activities promptly

EDD is essential for businesses operating in high-risk environments or dealing with complex ownership structures. Glomo handles EDD through all the necessary gateways like obtaining additional information and enhanced monitoring of business relationships. Glomo specifically applies EDD measures, proportionate to the risks, to business relationships and transactions with natural and legal persons (including financial institutions) from countries for which this is called for by the FATF.

6. Politically Exposed Persons (PEP) Screening

PEPs are individuals who hold prominent public positions or have significant influence over public affairs. Due diligence measures for PEPs include:

  1. Identification: Recognising individuals who qualify as PEPs based on their roles and responsibilities
  2. Source of Wealth Verification: Investigating how PEPs acquired their wealth to ensure it is legitimate
  3. Ongoing Monitoring: Continuously monitoring PEP accounts for any changes in risk profile or suspicious activities

Given their elevated risk levels due to potential exposure to bribery or corruption, proper PEP screening is vital for maintaining compliance.

7. Suspicious Transaction Reports (STR) and Financial Intelligence Unit (FIU)

Suspicious Transaction Reports (STR) are regulatory filings submitted by financial institutions and designated entities when they detect transactions that appear unusual, inconsistent with a customer’s profile, or indicative of potential money laundering or terrorist financing activities. These reports play a crucial role in identifying and preventing financial crimes.

The Financial Intelligence Unit (FIU) is the central agency responsible for collecting, analyzing, and disseminating financial intelligence to law enforcement and regulatory authorities. FIUs operate under national AML and CTF frameworks, ensuring compliance with global standards such as those set by the Financial Action Task Force (FATF). While FIUs serve a common purpose worldwide, they operate under different names in various jurisdictions—for example, the Financial Crimes Enforcement Network (FinCEN) in the U.S., the UK Financial Intelligence Unit (UKFIU) in the UK, and the Financial Transactions and Reports Analysis Centre (FINTRAC) in Canada.

STRs submitted to FIUs help authorities trace illicit financial flows, support investigations, and enhance the overall integrity of the financial system. Institutions are mandated to report suspicious activities promptly to prevent misuse of financial channels for unlawful purposes.

 The Role of Key Regulatory Bodies


Several regulatory bodies play critical roles in shaping payment compliance standards globally:

1) Financial Action Task Force (FATF)

The FATF sets international standards for combating money laundering and terrorist financing. Its recommendations guide countries in developing effective AML/CFT frameworks. Recommendation 16 emphasizes the importance of information accompanying wire transfers, ensuring traceability throughout cross-border transactions.

2)  International Financial Services Centres Authority (IFSCA)

The International Financial Services Centres Authority (IFSCA) oversees financial transactions within India's IFSCs, ensuring regulatory consistency. IFSCA has been specifically set up to regulate and facilitate international financial transactions originating from GIFT City, India's first IFSC, ensuring seamless cross-border payments.

It sets rules for payment service providers, covering digital payments, remittances, and fintech innovations.

IFSCA promotes a secure and efficient cross-border payment ecosystem, aligning with global standards. By regulating financial intermediaries, it fosters a robust fintech landscape within India's IFSC framework.

3) Other Regulatory Bodies

In addition to the above, various national regulatory bodies enforce compliance within their jurisdictions:

  1. OFAC: Oversees U.S. economic sanctions and enforces compliance among financial institutions
  2. European Banking Authority (EBA): Develops guidelines for AML/CFT compliance across EU member states

These organisations work together or sometimes at odds to create a cohesive regulatory environment that businesses must navigate.

Interconnectedness of Compliance Components


The components discussed KYC, KYB, AML, sanctions screening, EDD, and PEP screening—are interconnected elements that form a holistic compliance program. Each component informs and enhances the others:

  1. KYC processes feed into AML efforts by providing crucial customer data
  2. KYB complements KYC by ensuring that business partners are legitimate entities
  3. Sanctions screening works alongside KYC and KYB checks to prevent engaging with prohibited individuals or entities

By integrating these components into a unified compliance strategy, businesses can better manage risks associated with cross-border payments while ensuring adherence to regulatory requirements.

The Future of Payment Compliance


As technology evolves, so do compliance challenges. Emerging technologies like artificial intelligence (AI) and machine learning are increasingly being leveraged to enhance transaction monitoring and fraud detection capabilities. These innovations enable businesses to adapt quickly to changing regulations while maintaining robust compliance programs.

In conclusion, building a solid foundation for payment compliance is essential for navigating the complexities of cross-border transactions. By understanding and implementing key components such as KYC, KYB, AML, sanctions screening, EDD, and PEP screening—and recognizing the role of regulatory bodies; Glomo is fostering trust in its operations while mitigating risks associated with financial crime.