No Pain, No Gain for KYC, AML Deployments

Firms are struggling to comply with laws governing financial crime in the wake of record-breaking fines.

Firms are struggling to comply with laws governing financial crime in the wake of record-breaking fines.

Increasing regulatory complexity and the massive fines, penalties and settlements   levied against several of the world’s largest banks due to Know Your Customer (KYC) and anti-money laundering (AML) violations mean financial services firms take these aspects of compliance seriously even if implementing fixes is proving to be painful.

Joe Dunphy - KYC / AML Compliance“KYC compliance is still a major pain point for large financial institutions,” says Joe Dunphy, vice president of product management a client onboarding and lifecycle management vendor Fenergo, based in Dublin, Ireland. “Take a look at the recent fines in this area. Financial institutions are still being penalized for breaches with AML and KYC compliance requirements – regulations that have been around for decades.”

Last year, French bank BNP Paribas pleaded guilty to two criminal charges and agreed to pay almost $9 billion to regulators to resolve violations of U.S. sanctions relating to Sudan, Cuba and Iraq. Earlier, in 2012, British bank HSBC agreed to pay a record $1.9 billion to resolve charges the bank was being used to launder drug money by Mexican cartels. Smaller fines imposed on banks like Wachovia, Standard Chartered Bank and others have further impressed upon the industry that regulators mean business.

Several vendors currently offer solutions aimed at streamlining the KYC and AML processes, and making them more effective, and many of them say compliance in these areas continues to plague clients.

Last week, news broke that asset manager BlackRock has gone live with Thomson Reuters’ Ord ID managed service, while this week financial messaging and services cooperative SWIFT announced that the Dominican Republic’s financial community has joined its SWIFT KYC Registry.

The SWIFT KYC Registry allows SWIFT’s correspondent banks to upload KYC-related counterparty information to a centralized database. SWIFT validates the information against a globally recognized baseline standard, and banks can then choose who to share the information with over the SWIFT network, reducing the need for duplicative KYC efforts down the road.

“We have regularly heard that 80 percent of the time spent on due diligence is on the ‘lower risk’ counterparties at banks,” says Paul Taylor, head of business development for Financial Crime Compliance Services at SWIFT. “One could argue this time would be better spent on ‘higher risk’ counterparties, hence why banks have looked to utilities to provide new services to mutualize costs,” Taylor says. “That’s how the KYC registry aims to help, by allowing banks to prioritize review of the higher risk counterparties as some of the operational work is dealt with within the new process,” he adds.

In Fenergo’s case, KYC and AML compliance are just one part of the vendor’s broader set of solutions.

“In Fenergo’s suite of solutions, KYC is an integral part of the client onboarding and client lifecycle management processes,” Fenergo’s Dunphy says. “Our independent regulatory rules engine determines what regulations are in scope based on a few key data inputs [such as] jurisdiction, products, legal entity type, role, booking entity etc.”

“So, from a KYC perspective, it determines the local KYC regulations that pertain to the legal entity based on the information submitted,” Dunphy says. “It determines the classifications that need to be performed and the specific KYC questions that need to be answered. It also identifies all of the data and documentation that needs to be captured or collected to support KYC compliance,” among other features, he adds.

In a nutshell, Dunphy says, Fenergo’s KYC and AML features allow most of the information needed for KYC and AML compliance to be collected immediately and automatically from previously known data sets, instead of painstakingly collected from scratch for each new client.

Underscoring why so many firms turn to solutions like Fenergo’s and SWIFT’s, Dunphy says recent Fenergo research found that client onboarding for some of their customers can take up to 34 weeks and cost up to $25,000 per client.

Thomson Reuters also offers a KYC and AML solution, their Org ID managed service. Org ID is an end-to-end client identity service that “collects, verifies, screens, determines ultimate beneficial owners, and monitors a legal entity for change,” according to a company statement. The service can be used for client onboarding as well as updating a firm’s existing portfolios.

Thomson Reuters did not immediately respond to a request for comment.

Dunphy says it may be quite some time before firms can let their guard down when it comes to KYC and AML, as regulation is likely to get even tighter in the future.

“It is definitely more difficult for financial institutions to stay compliant,” Dunphy says. “We’re seeing two paces of regulatory change occurring simultaneously.”

Existing KYC and AML regulations continue to be enforced, “resulting only very recently in some of the biggest fines and sanctions we’ve ever encountered in the industry,” Dunphy says. “The other path involves the introduction of new regulations and obligations such as the recent changes to KYC rules by FinCEN [Financial Crime Enforcement Network] and the proposed changes to the 4th Anti-Money Laundering Directive in Europe.” (FinCEN is a bureau of the U.S. Department of the Treasury.)

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