The global fight against money laundering and the financing of terrorism has intensified in recent years, creating added pressure on financial institutions to identify their clients better than ever before. International regulations, such as the European AML 4 directive and counter-terrorist financing (CTF), are already in force and require a strict customer due diligence process, along with a continuous exchange of data with financial intelligence units across Europe. The knowledge of the customer is a fundamental process and a critical tool for banks to improve the control and management of risks, in particular—legal and reputational risks.
Although banks have established due diligence or know your customer (KYC) processes, these are often not followed or respected as established by law. Often, minimum requirements such as the place of birth, the indication of the authority issuing the documentation or even the names of the customers are recorded in an erroneous or incomplete manner in the banking systems. Not to mention significant oversights securing mandatory documentation, such as, proof of residence.
Behind the scenes, the underlying causes behind such unfortunate and avoidable lapses, include inadequate training of employees and lack of clear and complete information from the compliance department. Inconsistency between the established business goals of attracting more customers in less time and increasingly strict regulations, also contribute to the disorientation and lack of laser focus with employees.
There has been an upward spiral in controls by national and international regulators, in particular by US regulators, on transactions with a nexus to sanctioned countries or financing of terrorism. In this scenario, it is of the utmost importance that extreme care and precision is inculcated in the very DNA of the banking institution, to avoid heavy penalties.
Getting the KYC procedure right doesn’t have to be a painful ordeal. Here are 4 key and simple points that every bank should keep in mind:
- KYC is more than a name and an address
A complete analysis of the customer’s information is a complex process that includes a probe into the customer’s background and his occupation. Knowing whether he holds a relevant position within the public or private sector, is also vital. Income, country of origin, country of residence, the nature and purpose of the account, are other key information that enables banks to determine the level of total risk and the necessary measures to be implemented to mitigate that risk.
- Starting with the basics
Designing relevant training programs and complimentary support kits for the employees in charge of generating new business, is a basic minimum. This would entail, for example, teaching how to register passports from different countries correctly in the system and pointing out the particularities of various types of identity documents and immigration status. An approach of working with sample images from a pool of passports and ID papers, indicating which fields should be paid special attention to, is the logical starting point.
A one-size-fits-all approach, of course, will not work. The training has to be customized to the particular audience in each department. In the case of the sales team, it is necessary to raise awareness about the negative financial impact that may result from an incomplete or incorrect due diligence process.
- Collaboration is key
For the successful onboarding of a new customer, it is imperative that the employees in the business lines and in the compliance department, work in harmony. It is necessary that the compliance department has a dedicated team available to support the business with all types of questions related to sanctions, money laundering, terrorism financing and KYC requirements. The compliance department must be regarded as a key strategic partner and business enabler and not as the department that throws the spanner in the works. This requires both parties to work with complete transparency, as a unified team.
- Give time to calibrate
Finally, it is necessary to harmonize the business goals established by the banks with the increasing legal requirements imposed by the regulatory bodies. This would mean, providing the adequate time and tools to the employees on the front-lines, to carry out the due diligence process in a complete manner.
Today, it cannot be enough to just know your customer. Knowing your customers’ customer or the KYCC, is the new norm. With cryptocurrency and crowd sales gaining in popularity, devising a full-proof KYC procedure that is one step ahead of money launderers and terrorists, is the need of the hour.
Dr. Eric G. Krause
Partner, Infosys Consulting
Eric has more than 18 years of experience in the banking industry and heads up our financial services sector.
He joined Infosys Consulting in 2014 as a PricewaterhouseCoopers advisory partner and held different management positions at Capgemini and KPMG. Eric started his career as a banker, working for HVB/UniCredit and Dresdner Kleinwort Benson, before moving to consultancy. He holds a doctoral degree from Universität St. Gallen (HSG), CH.
Principal, Infosys Consulting
Gerardo Salonia is a principal within the financial services practice of Infosys Consulting, Germany.
He has extensive consulting experience within the e-commerce and financial services domain. Gerardo has enabled several European companies and financial institutions to overcome the challenges posed by disruptive technologies and transform into digital-oriented organizations. Gerardo holds an MBA in business administration from the University of Mannheim and has a risk management certification from the Goethe Business School – Frankfurt University.