KYC Importance: Why it is no longer just a compliance parameter?
Let me start with a staggering set of numbers. Between 2008 and 2016, the world’s 50 largest banks paid US $321 billion in penalties for non-compliance of KYC and AML Regulations. According to a survey by Thomson Reuters, large banks spend an average of £40m a year on KYC compliance. In fact, JP Morgan admitted in a letter written to shareholders in 2016, that the company spent £1.6bn on setting up its Compliance Department, employing over 13,000 people.
Of course, for banks and financial institutions (FIs), dealing with complex, continuously changing and rapidly expanding KYC/AML regulations has become a way of life. As money laundering and terror financing networks become increasingly hi-tech, it is crucial for FIs to comply with regulations and spot the bad apples, while they are still early in their game. In fact, regulations now suggest a clear deadline – 60 days in some countries – for banks to file official SARs (Suspicious Activity Reports).
As of Jan 1, 2017, the New York Department of Financial Services (NYDFS), mandates every FI working in the New York area to ensure “ongoing monitoring” with specific measures taken to run a robust transaction monitoring and filtering program, ensuring complete and accurate data capture. In the UK, the Financial Services Authority regulates KYC/AML compliance requirements and requires that each transaction report includes information about the financial instrument traded, the firm undertaking the trade, the trade counter party, the person on whose behalf the firm has dealt (where applicable) and the date/time of the trade.
I guess, we’ve made the point. Broadly summarising, here are some of the challenges banks and FIs are grappling with:
- Increasingly stringent, complex and dynamic regulations
- Cost of compliance is going up rapidly (Thanks to the need to setup new business processes and hiring a sizable team)
- Change in workflow and processes adds another layer of complexity
- In spite of taking the efforts to comply, the financial risk of missing key compliance tasks are staggering, thanks to rising penalties
- And, finally, compliance to KYC/AML Regulations means capturing huge amounts of data on transactions, geography, background, demographics and nature/type of financial transactions
However, an emerging trend we’re noticing is about how financial institutions are changing the culture around KYC processes. It is no longer just about compliance; rather it is an effort to truly, deeply, get to know a customer. Ongoing due diligence and effective prioritization of KYC tasks have also become very critical.
To ensure seamless, ongoing due-diligence, FIs are embracing the following trends:
- Creating tight processes around continuous sourcing of data from reliable sources
- Building enterprise-wide systems to manage KYC data, rather than geography or business unit-centric systems
- Having a clear understanding of which part of the KYC process is as per regulations and what is done to meet internal policy requirements
- Having a clear list of data sources, both internal systems and public sources
- In general, customers fit into various buckets based on risk profile. Effective prioritization by customer bucket is crucial to deliver an efficient KYC process.
- Training programs, to run efficient data gathering and analysis processes, with key focus on data accuracy is crucial.
- Scalability of software and computing infrastructure, as more and more data gets into the system
- Dashboard and visualization of customer history, especially for those with investigation history
- Consistent, fair, transparent and importantly a robust process to arrive at a reliable risk profile for all customers is critical.
We believe, even as banks work towards ensuring 100 per cent compliance, there is an opportunity waiting to be tapped that goes beyond compliance requirements. Over the last decade, the role played by Business Intelligence and Analytics in FIs has been well documented. Overall, data analytics in banking has had three layers:
- Analytics for KYC/AML and Regulations
- Customer & Marketing Analytics
- Product & Portfolio Optimization Analytics
Even as advanced analytics layers are setup to stay abreast with regulations, there is tremendous value that can be drawn from both structured and unstructured customer data, gathered for KYC compliance purposes, but used to gather business insights to enable strategic decisions.
Having a single window into truly knowing one’s customer can help FIs take data-driven, nuanced decisions based on customer behaviour. The direct benefits of a robust KYC process are clear. It results in lower compliance risk, lower cost of KYC operations and greater efficiency of the workflow.
Over the long-term though, the real benefit of a good KYC process may come from intangible factors – better ability to cross-sell and upsell, reliable customer risk scores, and using KYC data to develop robust analytical models for consumer behaviour and product roadmap optimization.
At Cenza Technologies, we’ve proven expertise in helping FIs meet regulatory compliance requirements, implement and improve their KYC on-boarding process and manage on-going customer due diligence programs. Specifically, we specialize in the following services:
- Client On boarding
- Client Identification Program (CIP)
- Standard / Enhanced Due Diligence KYC Remediation
- Periodic Refresh
- Anti-Money Laundering (AML)
- Centralisation of Documents
- Customer Risk Profiling and AML Screening
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