KYC – Hindrance or Help?

Author

Paul Devenny

Associate

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Published
Wednesday 5th September 2018
KYC

KYC – Hindrance or Help?

Working in the financial services industry, you may have heard the term KYC being referenced as more of a hindrance than a help.  Despite this, it is an area of financial services that remains a key focus. So, what is KYC and why is it important?

What is KYC?


“Increasingly stringent regulations are putting greater demands on companies to have a deep understanding of those they do business with.  For those active in the financial services sector, it is essential to carry out due diligence on clients to verify their identity, fraud, money laundering and terrorist financing” (1)

At its most basic level, KYC – or Know Your Customer/ Client – is the process of identifying account holders and understanding the anticipated activity on their accounts.
For personal bank accounts, this will be straightforward - photographic ID and a recent utility bill will provide evidence of who you are, your date of birth and proof of residence.  You will also be asked about the nature of the account (to assist in identifying unusual transactions).

For corporate entities however, the KYC process requires more detailed information such as the structure of the entity, formation documents, confirmation and proof of signatories, directors, beneficial owners, and more.  The requirements will be dependent on the entity type, the involved parties, the countries the entity trades with, and the level of risk attributed internally.

On a more granular level, KYC includes the understanding and application of the various regulations that govern banking activities, not least the Proceeds of Crime Act, Financial Services and Markets Act, Terrorism Act, Money Laundering Directives, etc and the requirements to allow an entity to transact with a particular institution, though seemingly arbitrary, are in fact driven from multiple regulations.


Key Reasons for KYC:


From the financial services institution perspective, clear and accurate KYC records help to understand the client and in turn offer services in line with their needs.

Perhaps more significantly, however, a robust KYC process provides the framework to prevent the bank from being used, intentionally or unintentionally by criminal elements for money laundering activities in that, when the bank knows what activity is expected they can identify activity that is unusual, thus managing risk.

For the client, where the bank holds information on the expected activity on your account, they in turn can identify unusual (“suspicious”) activity.  As a result, your bank could identify any potential fraud on your account and prevent loss to you as the consumer.

Historically, only new banking clients were subject to KYC requirements, however the financial crisis of 2008 placed a spotlight firmly on the banking sector and the key role financial services can and should play in combatting financial crime. A KYC process, drafted in accordance with the various regulations, will assist in preventing criminals using financial products or services to move money around illegally.

 

KYC Controls


KYC controls typically include the following as a minimum, and apply to both new and existing customers:

• Collection and analysis of basic identity information such as Identity documents "Customer Identification Program" or CIP


• Name matching against lists of known parties of interest (such as "politically exposed persons" or PEPs)


• Creation of an expectation of a customer's transactional behaviour


• Monitoring of a customer's transactions against expected behaviour and recorded profile as well as that of the customer's peers.

Risk Based Approach:


The Financial Action Task Force (FATF) have been driving changes since the early 1990s and have been established as a G7 initiative to develop policies to combat money laundering.  They have been the prime movers behind the adoption of a risk-based approach (RBA) designed to move compliance on from a rigid, ‘one size fits all’ methodology to a more pragmatic style.

This risk-based approach means financial institutions can direct their resources more efficiently, so that the greatest risks receive the highest attention. The less welcome side-effect has been the allowance for banks (and their national regulators) to interpret KYC policies and procedures as they see fit, leaving corporate entities struggling to keep up with different requests from their various banking partners.

A recent survey from Thomson Reuters highlights the true scale of the KYC burden on corporate entities globally, with 89% saying they have not had a good experience, leading to 13% of them to change banks as a result. Adding to their burden is the fact that the original regulations, some developed in a pre-digital age, can involve the submission of personal and legal documents, making security a key issue for one third of survey respondents.

KYC procedures are greatly lengthening client onboarding.

• 27% of corporates reported it could take over 3 months for a bank to onboard them, and 9% reported it could take 4 months or longer.

• Corporates are contacted an average of 8 times by banks during the onboarding process.  (2)

                                                                                                                                                      While it is well known anecdotally that some corporate entities have found the current KYC process frustrating, it does not negate the need for compliance with requirements.  It does however emphasise the importance of having unambiguous directives globally, and clear processes internally, with all necessary resources in place.   

Non-Compliance with KYC:


“If a company is in breach of complying with appropriate regulation, it could be subject to fines and even prohibited from selling specific products or services.  At the extreme end of the scale, those responsible for fraud or money laundering could be imprisoned.” (1)
 

While many consider fines to be of little deterrent given the overall financial standing of the corporate entity, fines coupled with reputational damage and trade restrictions, can have significant adverse effects on the institution itself.

It is not difficult to find examples of entities considered to be in breach of the regulations that govern them.  In June 2018 The Financial Conduct Authority (FCA) fined Canara Bank £896,100 and imposed a restriction preventing them from accepting deposits from new customers for 147 days as they “failed to maintain adequate AML systems and failed to take sufficient steps to remedy identified weaknesses, despite having been notified of shortcomings in its AML systems and controls.” (3)

 

While KYC may be considered a hurdle in the account opening process and a hindrance to business development, the reasoning is clear - financial institutions must work to prevent the placement of illegal funds in their accounts.

They should see KYC as an opportunity to personalize themselves and bridge stronger communications with their clients as they work together to combat financial crime.

 

 

  1. Resources and References:(1)tmf-group.com/en/news-insights/articles/2017/may/kyc-non-compliance/

  2. Thomson Reuters – Sound Principle. Complex Reality. An independent survey discussing the real impact of global changes in Know Your Customer (KYC) regulation on CORPORATIONS.

  3. FCA.org.uk/news/press-releases/fca-fines-and-imposes-resttriction-canara-bank-anti-money-laundering-systems-failings

 
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