kyc utilities: closing the compliance gap · 2019-08-30 · kyc utilities: closing the compliance...

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KYC utilities and shared service models may be the future vision for the financial services industry but it’s not a panacea for compliance. Banks and financial services firms still need to invest in KYC solutions and integrated IT infrastructure to ensure complete compliance – as regulatory liability ultimately remains with the banks.

In this article, we review the key considerations required by banks and financial firms entering this new world of KYC and client data management.

KYC Utilities: Closing the Compliance Gap

By Rachel Woolley, Global AML Manager

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Introduction

The Nordic banking landscape has witnessed significant upheaval over the past few years, moving from an untarnished reputation for having the safest banks in the world to being mired in a number of complex, global money laundering scandals.

Domestic and international regulators have roundly responded by imposing significant monetary penalties, amounting to nearly $20 million (which is expected to increase in the coming months) on some of the region’s leading banks, resulting in billions being wiped from their market value. This has reinforced the need for robust and effective Anti-Money Laundering (AML) and Know Your Customer (KYC) programmes from a reputational and competitive standpoint.

However, Nordic financial institutions are still facing significant operational challenges arising from new and enhanced regulations. For example, the collection, processing, validation and storage of client data and documentation required to comply with recently enhanced AML and KYC regulations (e.g. the Fourth EU Anti-Money Laundering Directive) has become a major operational headache for European banks and, indeed, many banks across the world.Nordic banks, in particular, have arguably come under greater regulatory scrutiny due to recent high-profile compliance lapses, largely caused by significant deficiencies in their AML processes and IT infrastructures.

In a bid to rebuild their standing in the eyes of both regulators and customers, six of the Nordics’ biggest banks have now joined forces to set up a joint platform for handling Know Your Customer (KYC) data. The Nordic KYC Utility will initially offer KYC services for large and mid-size Nordic corporate customers from 2020.

It is an encouraging move by the firms to up the ante in the fight against financial crime and rectify their compliance shortcomings.

However, there are a few considerations that require careful deliberation by Nordic banks to make this a success.

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Banks are allowed to outsource the majority of processes and services with one major exception: they cannot outsource their liability for non-compliance.

In fact, one of the thorniest issues facing shared platforms, according to a recent Deloitte report, is who bears ultimate responsibility in the event that data turns out to be inaccurate or an assessment fails to identify a fraudulent identity.1

The European Banking Authority (EBA) currently recommends that, since banks are still liable for information retrieved from third parties, they need to double-check any information obtained from a shared KYC utility. This means that to fully comply with AML and KYC obligations, financial firms must retain the final decision on whether or not an applicant has satisfied the requisite KYC checks.

A shared KYC utility does not absolve financial institutions from compliance with anti-money laundering obligations. Plainly speaking, this means that banks are still liable for AML and KYC

failures. Yes, a utility will certainly help ease the operational burdens of compliance, however, it does not eradicate the responsibility or the need to invest in robust onboarding and client lifecycle processes.

There is no doubt that the KYC burden and the provision of compliance-related information has a direct negative impact on the client experience. A shared KYC utility enables banks to radically speed up the process through efficient data sharing. Yet there are strict rules and protocols governing data privacy and banking confidentiality to navigate.

Depending on the nature of the shared platform approach, it may be necessary to share customer details in addition to transactional information. This may require legislation regarding data sharing to be reviewed and, at a minimum, ensuring consent has been obtained from the customer.

Ultimately, banks should work with the regional regulators to identify and drive forward the most pragmatic solution to make data sharing as efficient, compliant and secure as possible.

1 Deloitte-TheCityUK, Splitting the Bill: The role for shared platforms in financial services regulation: https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/financial-services/deloitte-uk-thecityuk- splitting-the-bill-the-role-for-shared-platforms-in-financial-services-regulation.pdf

2The Legal Ramifications of Data Sharing

1Addressing the Question of Liability

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KYC utilities have existed in various forms over the past ten years. The concept is simple: to collaborate with financial firms to provide an enriched, updated, centralised source of client data and documentation that can alleviate a bank’s need to repeatedly contact customers for information.

In our view, there is absolutely no doubt that there is huge merit in having a centralised KYC or reference data service utility that can be used by many financial institutions.

However, the utility needs to be set up for success. To do this, collaborating banks and financial firms need to devise a standardised way to classify and measure the risk posed by entities or individuals being onboarded. According to Fredrik Millde, interim CEO of the Nordic KYC Utility: "The difference with the Nordic utility is that it is based on a common standard agreed by the major financial institutions in the region, essentially a common view as to what data needs to be gathered and how that data needs to be validated.”2

This will have a wider ranging impact on banks’ own IT and compliance systems. To truly meet a standardised process that delivers common data and documentation in a consistent format, Nordic banks will need to adopt a standardised approach to solving KYC at bank level before uploading data and documentation to the utility.

Furthermore, in terms of regulatory change management, the banks must agree a common standard in relation to the interpretation of legislation coming down the line, such as the Fifth EU Money Laundering Directive.

What we’ve seen working best is where banks and financial firms in a local jurisdiction band together and collaborate to create a consistent approach to compliance.

From an operational point of view, we estimate that up to 80% of financial institutions’ AML and KYC programmes share commonalities (e.g. similar questionnaires, documentation, screening and risk-scoring processes, and continuous monitoring programmes etc.). This means that essentially every financial institution is performing the exact same compliance procedures and processes on the same entities and individuals, in a process that delivers zero differentiation or competitive advantage.

3Standardisation & Regulatory Alignment

4Collaborate to Differentiate

2 Global Trade Review, Nordic KYC Utility Takes Shape: https://www.gtreview.com/news/europe/nordic-kyc-utility-takes-shape/

In our view, there is absolutely no doubt that there is huge merit in having a centralised KYC or reference data service utility that can be used by many financial institutions.

To find out more about how Fenergo KYC can help your financial institution overcome customer due diligence

challenges, click here.

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Conclusion

The ability to download accurate, standardised and up-to-date KYC and other client reference data and documentation from a centralised repository will serve to accelerate KYC, AML and regulatory compliance processes. This, in turn, will help to expedite the onboarding process for clients and increase operational efficiencies. This is where differentiation lives. It should also help to drive an industry standard of compliance and stave off unwelcome regulatory scrutiny, in turn helping to protect reputational value.

However, liability remains a key issue with shared KYC utilities as each bank is still liable for compliance when obtaining information from third parties. In order to relieve this compliance burden and automate KYC and AML processes, financial institutions must invest in KYC solutions and integrated IT infrastructure. This will enable them to create a real sustainable competitive advantage: streamlined processes that deliver clarity of data, a consistent KYC process and an enhanced client experience.

Fenergo is the digital enabler of client and regulatory technology for financial services. It provides Client Lifecycle Management (CLM) software solutions for Financial Institutions including; Corporate & Institutional Banking, Commercial & Retail Banking, Asset Management, Private Banking & Wealth Management. Counting 70 global Financial Institutions as clients, its award-winning CLM suite transforms how Financial Institutions manage clients; from initial onboarding to KYC/AML and regulatory compliance, to client data management and ongoing lifecycle KYC reviews and refreshes. Fenergo CLM empowers financial institutions to deliver a faster, more efficient and compliant lientperience and achieve a single client view across channels, products, business lines and jurisdictions.

Instead, the utilities can offer significant opportunities to enhance overall client service by making it possible for clients to upload data and documentation to a utility once – regardless of how many accounts they hold with various financial institutions.

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