Regulation was very much the main response of financial authorities to the 2008 financial crisis, with the aim of creating greater transparency and accountability, as regulations such as 4AMLD and the FinCEN Final Rule placed greater emphasis on KYC processes. These rules have pushed banks and other financial institutions to review their compliance strategies – a process that the majority have found challenging. Three-quarters of senior compliance and correspondent banking professionals have encountered added complexity in interpreting and adhering to local legislation, according to the Financial Counterparty KYC Survey conducted by Accuity. The firm conducted the survey in 2017 but has just published the results, which show that different local interpretations of know-your-customer (KYC) rules are one of the main difficulties facing compliance professionals, while seven out of 10 respondents (69 per cent) said they find collecting accurate ownership and ultimate beneficial owner (UBO) information difficult. The respondents, 69 per cent of which were banks, said that some of the biggest challenges they face include:
- the rising costs of compliance to meet regulatory requirements;
- changing regulatory requirements; and
- a lack of data and technology and standardisation.
Some of the other key findings from the survey include:
- interpreting local regulations is complex and having up-to-date access to existing counterparties have also emerged as notable challenges over the past year;
- banks and other financial institutions have gone through a journey of standardisation and process improvements and there is evidence that the changes banks have made are now affecting the way they manage KYC;
- derisking is continuing, but it has slowed down significantly; and
- the highest priority for respondents is avoiding regulatory fines and enforcement action, followed by protecting their organisation’s reputation and customer relationships.
Change needed on KYC and AML compliance
But the compliance challenge is by no means limited to banks; corporates have long been vocal critics of the laborious KYC requests they are subjected to. In an article this week on iTreasurer, international treasury director at Coca-Cola, Jim Aschmeyer, calls for far-reaching change and simplification of what he terms an “increasingly painful approach to complying with anti-money laundering (AML) and know your customer (KYC) regulations”.
Although Mr Aschmeyer says that “AML/KYC is a process that clearly has no winners”, it's also clear that regulations have been designed to create a secure and stable financial system, protecting the system itself from being manipulated or exploited by criminals. However, the lack of standardised KYC data requests from banks remains a huge and painful problem for all.
Simplifying KYC data exchange
The iTreasurer article goes on to discuss Bloomberg's Entity Exchange platform, which offers a service that could hold the key, at least according to Mr Aschmeyer, by enabling the secure sharing of client data and documents. It remains to be seen whether Entity Exchange, which is so far backed by Citibank, Bloomberg, Coke, Merck, UPS, Cargill and Procter & Gamble, will take off. If it does, it would make a lot of corporates and banks involved with KYC compliance very happy. Mr Aschmeyer adds: “The transformation snowball is already starting to roll. I’ve had discussions with most of our other key banking partners and without exception they have all been pushing to join the project.”
CTMfile take: Accuity's survey underlines what a painful process KYC compliance is for both financial institutions as well as their corporates customers. And from the corporate's perspective, Mr Aschmeyer's “death by a thousand paper cuts” analogy is amusing but not inaccurate. CTMfile will be watching Entity Exchange closely because, with the backing of five large MNCs and “eight of the top 10 global banks”, it could get very interesting.
KYC compliance in minutes through process automation
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KYC: Outsourcing is the answer……?
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KYC is persistent problem in trade finance
The global trade finance gap, or unmet demand for trade finance, remains stable at $1.5 trillion in 2017 but KYC requirements are putting banks off financing transactions for smaller firms