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A HooYu reportin association with Consult Hyperion

The five challenges of business clienton-boarding & Customer Due Diligence

2A HooYuReport - The five challenges of business client on-boarding & Customer Due Diligence

Introduction

Section 1:

Section 2:

Section 3:

Section 4:

Contents:

How do regulated firms go about on-boarding a business client today?

Five factors that make business client on-boarding complicated & costly

How could business on-boarding be streamlined to deliver a better digital customer journey?

How can HooYu help with KYB & KYC?


Introduction:

The rise of fintech has seen a revolution in consumer financial services. Banks and fintechs have digitised the financial services industry, attracting new customers and creating great customer experiences with obsession around the digital customer journey. However, the digitisation of financial services for business users, and in particular SMEs, lags be-hind. In this revolution, not all financial services firms have yet embraced new models and ways of thinking. Some notable fintechs such as challenger banks Countingup and Tide are leading the market in digital financial services for businesses. More recently the incumbent high street banks are now starting stand-alone digital business bank brands.

As with consumer financial services, one of the ways that these companies stand out is how they approach customer on-boarding. In the main though, customer on-boarding for business clients is still a painful & protracted process that creates a leaky bucket with potential lucrative clients going elsewhere. At the same time regulated firms are being asked to increase their levels of KYC compliance against a backdrop of regulatory fines for AML and CTF failings. Consult Hyperion and HooYu have joined forces to produce this report where we examine the frustrations, complications and ways to improve business customer on-boarding and KYC pro-cesses.

Steve PanniferCOO Consult Hyperion


How do financial services firms go about?on-boarding a business client today?

The processes employed by financial firms to on-board business clients can be time-consuming and complex, often involving manual steps and protracted back and forth with the prospective client. Whilst this may not be an issue for larger businesses where the firm and client concerned are investing time in an important and valuable business relationship, for SMEs this is much more problematic. In the UK there are 5.7 million SMEs (defined as less than 250 employees) which equates to over 99% of all businesses.

From the client’s perspective, these protracted processes cause friction at a key time when a business has a pressing and time-sensitive need for access to a financial service. The process typically involves the following steps:

1 Source = https://www.cipfa.org/about-cipfa/press-office/archived-press-releases/2017-press-releases/councils-detect-and-prevent-%C2%A3336,-d-,2m-worth-of-fraud

Agreement management

CreditReferencing

On-boardingrequest

Client Due Diligence

Customer Setup

The start of the process, at the point the customer decides they wish to apply for a financial product, such as a business bank account. Key facts must be delivered at this point as well as Terms & Conditions and GDPR compliance.

A key regulatory requirement ensuring that the customer is identified and the identity of the customer is verified. This also involves not only verifying the identity of the business itself but also the identity of any beneficial owners, and Persons of Significant Control.

Depending on the product being requested, the bank will need to undertake additional checks to determine affordability. This is commonly done via a search performed at a credit reference agency, for others it may require the presentation of even more documents.

Once the due diligence processes are completed the bank needs to ensure that the customer has received and signed the agreements relevant to the financial product being applied for.

Finally, everything is in place and the bank can go ahead and complete the setup of the customer within their systems, activating the financial product requested.


How long does business on-boarding take?

We have worked hard on our account opening process so that we offer convenience to our new customers but have adequate defences against

financial crime. We check name, address and date of birth against identity databases and we check ID documents from every single customer. Our account

opening can take as little as five minutes.

This depends on the complexity of the financial product being purchased, the client being on-boarded and the Risk-Based-Approach.

Determining who the beneficial owners are and then performing CDD on them can be a complex and involved process taking days or even weeks to complete the process depending on the customer.

Here’s some commentary from firms that on-board business clients to share insight into how long it takes:

It should be noted that business on-boarding processes at lenders often take the affordability and credit referencing stages at the front and leave the KYC to the end. In this on-boarding model, once the decision to lend has been approved in principle, firms typically seek to reduce “time to lend” so that it can get the loan value onto the books. This creates pressure on the KYC stage to

be performed quickly and sometimes with less due diligence than is appropriate.

Our consumer account opening and KYC strategy uses automated KYC but for business account

opening, we deploy a manual process where we work closely with the business principal to help them provide us with all the documentation we

need to open their account. Our business account opening process can take up to half a day.


All our account opening involves due diligence businesses and the beneficial owners of those

businesses. In the past we have seen fraudsters pass traditional name, address and date of birth checks, so we use other tools such as ID document checks.

However, the longest part of account opening for us is loan decisioning which can take a day or more.


Five factors that make business client on-boarding complicated & costly

There are several factors that make business client on-boarding more complicated & costlier than consumer customer on-boarding. Whilst consumer CDD can be quite quick and straightforward in terms of complying with the 2017 MLR and the JMLSG Guidance notes, there are many more factors to consider in business on-boarding. The process of understanding the structure of a business and gaining access to the right information can be complex and time-consuming. This may require multiple interactions between the firm and the client business obtaining additional documentation, identifying the business’ beneficial owners and understanding the rationale for the business client’s use of the financial instrument. Here are some of the factors that drive cost & time:

TYPE OF ORGANISATION

BEING ON-BOARDED & ACCOMPANYING

KYC PROCESS

1.

4. 5.

2. 3.IDENTIFYING &

VERIFYING UBO, DIRECTORS,

SHAREHOLDERS AND PSC’S

LIMITATIONS OF THIRD-PARTY

DATABASE CHECKS

4. 5.

REQUIREMENT FOR ADDITIONAL

DOCUMENTATIONONGOING

DUE-DILIGENCE


• Partnerships - partnership agreement or contract of co-partner• Limited companies and limited liability partnerships – certificate of incorporation• Clubs, societies, associations, churches or charities – a copy of the organisation’s

constitution• Trusts – the trust deed and any subsequent amendments• New businesses and start-ups – your business plan and cash flow forecast• Established businesses – two years’ worth of audited accounts• Non ‘home bank’ customers – six months’ worth of business bank statements

Fulfilling these obligations places a burden on SMEs who usually may not have dedicated human resources to follow the process through compared to bigger organisations. According to Thompson Reuters, 84% of small businesses and 85% of corporates complained of poor KYC experiences in 2017.

2 http://www.betterbusinessfinance.co.uk/find-an-account/post/opening-a-business-bank-account

3 https://www.refinitiv.com/content/dam/gl/en/documents/reports/kyc-compliance-the-rising-challenge-for-corporates-special-report.pdf

Identifying and verifying Ultimate Beneficial Owners, Directors, Shareholders and Persons of Significant Control

2.

Perhaps the main difference in on-boarding consumer vs business clients is the additional entities upon which CDD needs to be performed. Whereas consumer on-boarding (apart from joint accounts or financial instruments for children plus parents) tends to focus only on one entity, there are multiple entities that need identifying and verifying when it comes to business account opening.

There are many different pieces of evidence that may need to be examined depending on the organisation in question. Better Business Finance, (managed by UK Finance, a banking industry trade body) suggest that common types of evidence per type of organisation being on-boarded could include:

Type of organisation being on-boarded & accompanying KYC process

Offering a financial service to business clients entails on-boarding many different types of organisations with widely varying structures. Whilst the aim of customer due diligence checks is the same regardless of the type of organisation, the tools used and the process for performing those checks will vary.

1.

In all cases it is necessary to establish complete understanding of the way the business is structured as well as the details of partners, trustees, directors or anyone else exercising significant control over the business.


Banking industry trade body Better Business Finance also advise businesses and organisations opening accounts that they need to be ready to provide Personal details (for all Partners/Directors/ Trustees/ Owners or any other person exercising significant control over the business)

• Personal name and address• Date you moved into your home address• Previous address details (if at current address for less than three years)• Existing bank account details• Date, country and city of birth; and country of nationality and residence

What do the regulations say re business on-boarding?

Part 3 Section 28 of the 2017 Money Laundering Regulations carefully lays out the Customer Due Diligence measures required for business on-boarding.

It is important to note the difference between identifying an entity and verifying that entity, these are two separate steps of the on-boarding process.

The geographical challenge

In today’s global age, company directors and beneficial owners can reside anywhere and may not conveniently reside in the same country as the principal applying for the account. Whilst one process may be used to verify the identity of Shareholder A, it may be necessary to use a different process to verify the identity of Shareholder B. This challenge can make KYC for business on-boarding longer and more complex.

Danger over subsidiaries, shell companies, LLC’s and SLC’sUncovering layers of beneficial ownership takes time and a lot of effort, especially when ultimate beneficial ownership could be obscured via subsidiaries and shell companies.

Banks in particular have been fined millions of pounds in recent years due to lax KYC of shell companies where the ultimate beneficial owner was not identified and verified.


Limitations of third-party database checks

3.

Firms often use data from multiple third parties such as Companies House and Credit Reference Agencies. These third parties may use different identifiers for the same entity making the process of ensuring that the checks are complete and accurate difficult.

There is also a growing level of concern over the quality and accuracy of Companies House data when used to reference company formation, structure, directorship and shareholder insight. There are many documented cases where fraudsters have used fraudulent data when registering companies in a bid to obfuscate investigation and obscure links to disqualified directorships and companies that closed unfavourably.

The location of the organisation being on-boarded is also a limiting factor in the efficacy of the data that can be used for client due diligence. In markets like the UK, parts of Europe and in North America, third party database checks are a feasible means to perform KYC at on-boarding. In other markets no such data exists.

Some regulated firms, in particular Payment Service Providers, when on-boarding business clients, take the time-consuming step of physically seeing all their new customers so that they can review clients’ passports or other proof of ID. This adds time and expense to the business on-boarding process and of course makes the on-boarding process clunkier from the client perspective, driving abandonment and drop-out at point of account opening.

Requirement for additional documentation

4.

Increasing non-standardised regulatory requirements across jurisdictions is a major factor in KYC CDD compliance. Business account opening often requires documentation to be collected and held on file.

Obtaining these documents can often take much time and in some cases, it is a manual back & forth process between financial institutions and their clients. Inadequate internal or departmental integration and mismanaged handoffs between teams within financial


institutions often results in duplicate requests to clients at different times, thereby prolonging the process.

According to Reuters, “average on-boarding times have risen from 28 days in 2016 to 32 days in 2017, while some averaged at 45 days up to two months or more.” Moreover, “corporates are contacted an average of eight to ten times or more by banks during the on-boarding process”.

Additionally, the process can be protracted by clients concerns about the secure transmission of their documents and who is able to access and view their documents. “32% of corporates felt security was a key concern during the KYC process.”

The hidden costs of CDD Ongoing due-diligence

5.

In the US, financial institutions with $10 billion or more in revenue have seen their average spend on CDD-related procedures increase to $150 million in 2017 from $142 million in 2016 . Globally for 2018, this was projected to be up to $749 million .

The true cost of CDD is often hidden including:

• Loss of business due to length and complexity of on-boarding process• Inefficiencies when customers are passed from one department to another, with no

single shared approach to KYC.• Ongoing CDD costs - the ownership, leadership and operation of a business client may

change many times requiring additional due diligence steps to be taken.• Hidden people cost not directly accounted for by banks• Hidden technology costs not directly accounted for by banks• Audit and compliance management costs• Customer education and staff training


How can business on-boarding be streamlined to deliver a better digital customer journey?

Here’s a methodology to help inspire your business on-boarding journey and understand how HooYu can help you to maximise business on-boarding success rates and increase the level of KYC compliance.

Identify the business

• Be sure to capture the relevant information at point of first interaction

• Get the balance right between asking for too little information and too much.

• Asking for company registration number early in the process is relevant to trigger any credit referencing process but asking for articles of incorporation at this stage may be too early

Verify the business (KYB)

• Check that the business exists via Companies House or other reference source

• Check that the address and company reference number matches to Companies House data

• Check to see if the suffix on the email address provided tallies to the company site url

HooYu Investigate helps compliance teams reveal

corporate structures by instantly revealing

parent companies, subsidiaries, directors,

shareholders and other connected people.

HooYu Investigate also uncovers intelligence such as disqualified

directors and links to companies that have closed unfavourably.

Identify stakeholders

& relevant entities (KYB)

• Use a tool to identify the shareholders, directors and other relevant entities such as subsidiaries, Ultimate Beneficial Owners (UBOs) and Persons of Significant Control (PSCs)

• By using an external tool the regulated entity does not need to wait for the new client to gather, collate and provide such data

• The data gathered during this KYB informs the necessary KYC on directors and shareholders enabling on boarding to proceed quickly

Verify shareholders, directors and Person’s (KYC)

• Shareholders, Directors and Persons of Significant Control then need to undergo Customer Due Diligence using a Risk-Based-Approach

• Build your blend of database checks, ID document validation, LinkedIn digital footprint analysis, Proof of Address checks, geo-location and facial biometrics

• Get the balance right between compliance & convenience to minimise account opening abandonment

1.

2.

4.

3.

HooYu Identify blends a range of identity

verification techniques into one service from

which our clients pick & choose depending on

their needs. This allows them to build their ideal customer on-boarding

process balancing the twin objectives of security and

convenience.


How HooYu can help with KYB and KYCSection 4 :

HooYu Investigate is a web-based platform that links UK people, businesses and addresses together in a visual graph that reveals otherwise hidden connections. HooYu Investigate helps compliance teams reveal corporate structures by instantly revealing parent companies, subsidiaries, directors, shareholders and other connected people.

Corporate structures can be complicated and obscure. Our graphical display reveals

all - how companies are connected, who owns them and who controls them.By traversing the graph in any direction, investigators can unlock complicated structures and ownership.

HooYu Investigate speeds up the business client on-boarding process by helping regulated firms to collect and verify all the relevant data on their new client with just a few clicks.


How HooYu can help with KYB and KYCSection 4 :

HooYu Identify is a global identity confirmation service designed to help companies deliver effective customer on-boarding even when database checks are not an option. HooYu Identify can be integrated into your on-boarding process to create a smooth digital journey to maximize customer on-boarding success rates. HooYu Identify blends a range of identity verification techniques that regulated businesses can deploy depending on their needs.

Our experience of working with financial services and online gaming clients is that up to half of all account applications are abandoned because of inadequate data sources and cumbersome manual ID validation processes.

Many different kinds of organisations use HooYu Identify to maximise success in the customer account opening funnel and to reduce account opening abandonment.

ID DOCUMENTVALIDATION

PROOF OFADDRESS

BIOMETRICCHECK

ADVERSEMEDIA

FRAUDRULES

GEOLOCATION

DIGITALFOOTPRINT

PEPS ANDSANCTIONS

DATABASE CHECK

HOOYU IDENTITY SCORE


For more information ask our team of customer on-boarding specialists to give you a demo of HooYu Investigate & HooYu Identify - just email

[email protected]

Using a combination of HooYu Identify and HooYu Investigate, financial institutions can both comply with account opening regulations without compromising the experience of the account opening process.HooYu Identify and HooYu investigate offer:

• AMLD 5 compliance• Lower friction for customers• Less application abandonment• Reduced administration costs

• Faster business and customer identity verification

• Lower risk of fines

mailto:simon.kelman%40hooyu.com?subject=The%20five%20challenges%20of%20business%20client%0Don-boarding%20%26%20Customer%20Due%20Diligence%0D

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