Terrorists, kleptocrats and other criminals often fund their enterprises through illegal activities, laundering those proceeds through financial institutions, hiding their identities and the original source of money.
The US government has responded by imposing rules which attempt to close banking loopholes that currently exist and (hopefully) stopping money launders and terrorists from sending dirty money through the banks. Enter the impending beneficial ownership rule meant to strengthen customer due diligence and Know Your Customer (KYC) requirements on financial institutions.
Thomson Reuters, in partnership with Biz2Credit, recently tackled these issues in a timely webinar titled, KYC Challenges, Processes and Best Practices in Today’s Regulatory Environment.
May 11th, It Begins
The webinar focused on helping financial institutions wade through some of the upcoming regulatory changes. Beginning May 11, 2018, the Financial Crimes Enforcement Network (FinCen) will begin enforcing the Customer Due Diligence Rule (CDD) with a focus on beneficial ownership identification and verification. According to FinCen, the four requirements of the CDD Rule (which includes beneficial ownership requirements) are:
- Identifying and verifying customers;
- Identifying and verifying beneficial ownership;
- Understanding the nature and purpose of customer relationships to develop a customer risk profile; and
- Providing ongoing monitoring for reporting suspicious transactions and, on a risk-basis, maintaining and updating customer information.
Moderated by David Curran, Global Director of Risk & Compliance for Thomson Reuters, the webinar included panelists:
- Angel Kadelski, VP and Head of Small Business Distribution Strategy and Sales Effectiveness at TD Bank;
- Christine Campbell, Supervisor in the Compliance Customer Identification Program at Vanguard; and
- Dr. Venkatesh Bala, Economist and Chief Risk Officer at Biz2Credit.
What Does an Effective KYC Policy Look Like?
Curran started the conversation with a level-setting question: What does an effective KYC policy look like? All panelists agreed that an effective KYC policy, one that will stand the May 11th test, will need to take into account the continuously changing risk of each client, as well as the regulatory environment. And the process needs to be ongoing.
Monitoring account activity and transactions flowing through an institution is one means of ensuring that appropriate processes are in place that allow for the identification of unusual activity and patterns of transactions. “We need to use the big data out there to reduce the white noise,” Campbell said. She emphasized the need to balance the risks you have with what data is available and to really use technology efficiently and appropriately.
While there isn’t a one-size-fits all approach to KYC, the challenge financial institutions face is to siphon out high-quality data about potentially problematic customers. “It is almost a data overload,” Kadleski explained, adding that having too much knowledge or intelligence about individuals creates overwhelming amounts of data that doesn’t provide a complete picture of the customer.
Dr. Bala suggested that “KYC is a means to an end.” He challenged the audience to think about how we can make it easier for the customer to comply with KYC and meet compliance requirements. Simply put, banks don’t want to make too many onerous demands on the customer.
Curran agreed. “You could have a compliance program that scares off all customers — in essence, a KYC firewall that would keep everyone out if you make it cumbersome enough,” he said.
One way is alleviate this problem is through properly using the technology at our disposal, such as artificial intelligence, automation, and even facial recognition software to close gaps in verification practices of businesses and owners. This could also allow for the verification of third-party data. “You want to have something that analyzes KYC information upfront, but also is ongoing in a smart way,” Dr. Bala stated.
Dr. Bala added that he sees enormous promise with technologies such as blockchain, viewing it as “the wave of the future, and all financial services should look at it closely.”
Yet, even new technologies can present challenges for financial institutions attempting to keep good records about their clients and weed out the bad actors. Kadleski opined that we should think of much more conservative methods when approaching newer technologies. “Incremental steps are the best way to go,” she said. “Making a leap takes money and time, and a wrong leap can lead to much harder situation.
Take Your KYC Process to the Next Level
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