KYC Programs: the Guardians at the Gate
When most people think of Anti-Money Laundering (AML), they think of investigations into illicit account activity and filing suspicious activity reports on various types of financial crimes. This integral piece, while important, is just one piece of the AML puzzle.
Having started my career as a prosecutor and then a member of a Financial Intelligence Unit, AML and financial investigations have a special place with me. But since my practice expanded into AML and sanctions compliance programs as a whole, I realized the vast and equal importance of Know Your Customer (KYC). Conducting adequate KYC is the true first line of defense. Know who your customer is, how they should act, and you will be better equipped to prevent the bad apples from entering the system and spotting their unsavory activities if they do. Properly guarding the gate will protect your bank and save you time, energy, and aggravation later on.
KYC programs may seem simple in concept, but to those of us who have tried to implement, audit, or run one, we know how truly complex they are. Global banks are faced with a list of requirements that can become expansive, repetitive and confusing. For individual customers, satisfying KYC obligations is relatively straightforward. But as you move into the world of corporate and investment banking, things get grayer and more complex. Customer types expand (private companies, public companies, banks, MSBs, and so on), and the CDD/ EDD requirements associated with them become nuanced. On top of that, US requirements differ from UK requirements, which differ from Hong Kong requirements, and so on and so forth. In some instances, these differences may be minor, but you can bet that each major regulator knows those differences and tests for them during examinations of a global program. Add those idiosyncratic jurisdictional requirements to the customer type specific ones, then mix in complex beneficial ownership structures, and you end up with quite the brain teaser.
Unraveling this web and making it easy to understand by operational teams collecting and documenting the information is no simple task. In the past, many banks used manual checklists to assist analysts in understanding what CIP/CDD/EDD information is required for each customer and related party (some still do). The inherent flaws in this system are version control (different people using different checklists), difficulty maintaining centralized oversight (each jurisdiction using its own checklists with no global standard), and inability to easily compare collected information to prevent duplicate efforts and provide consistency across a customer’s accounts.
Why leave one of the most complicated banking processes up to decentralized manual review? Utilizing KYC applications, banks can ensure that they are applying the correct KYC and due diligence rules to each customer relationship. Using Fintech to apply local and global regulatory expertise and experience, banks can develop rules that meet regulatory requirements, regulatory expectations and industry best practices. With a master customer relationship view, banks can enforce a globally consistent approach and reuse valid information/documentation that has already been collected to ensure a faster, more customer friendly process.
All great AML programs start by guarding the gates with an effective and efficient KYC program. Without FinTech, that task may seem insurmountable. However, if you invest in providing your AML professionals with the best KYC tools available, they will be able to protect the bank, assist law enforcement, and maintain customer loyalty.