Treasury Today Country Profiles in association with Citi

Man, know thy customer

green traffic light

As regulation designed to combat money laundering and terrorist financing continues to bite both corporates and banks, new KYC utilities have emerged to help them manage the burden. But what added value do they offer users?

Know your customer (KYC) processes have come increasingly under the spotlight in recent times.

As regulation designed to prevent money laundering and terrorist financing has put pressure on both banks (to collect and screen the information they get from clients) and corporates (to provide ever-more detailed documentation), both sides have been calling out for ways to reduce the burden on their businesses.

For example, under the Foreign Account Tax Compliance Act (FATCA) in the US, banks have a due diligence requirement to screen their clients.

For institutions who fall foul of regulation, the penalties (and the accompanying headlines) can be unpalatable. Earlier this year J.P. Morgan agreed to pay a record $2 billion settlement relating to its failure to act after suspicions were raised about Bernard Madoff’s Ponzi scheme. And in 2012 HSBC was told to pay a fine of $1.9 billion to US authorities for money laundering-related offences in Mexico.

As a response to this burden, a number of providers have released KYC utilities to ease the strain on banks and corporates.

Last week Thomson Reuters announced the activation of the secure web-based portal for its Accelus Org ID KYC service. The portal facilitates client on-boarding, and identity collection and verification in a secure environment. Thomson Reuters says it will increase efficiency for both financial institutions and their clients, in addition to reducing operating and remediation costs associated with KYC compliance.

“For many years the industry has envisioned a central registry where participants could source client information, to help them understand the identity of a particular firm,” Anna Mazzone, Head of KYC at Thomson Reuters tells Treasury Today.

Where’s my data?

“End clients are concerned because as regulation has increased, banks have started to collect a lot more information about them,” she explains. “Corporates now have to share a lot of private data around executives or board members. A lot of the processing around KYC within financial institutions is done offshore, often by third-party providers. As a result, corporates sometimes don’t know where this information is being held, and they are worried about the risk of identity theft.”

Thomson Reuters’ solution is intended to act as a neutral central clearing house, building identity records which can be used as a global-standard ‘KYC passport’. The utility allows users to screen for money laundering risk characteristics, negative news and sanctions issues. Despite the utility’s functionalities, Mazzone says the duty of knowing their clients remains firmly with the banks. “We are not taking the responsibility of KYC from banks. What we are doing is creating a service that gives them more in-depth information, allowing them to do more analysis around who the legal entity is,” she says.

Indeed, regulators do not allow the outsourcing of the legal responsibility for KYC as the intention of legislation is to hold the banks accountable.

Chinese computer manufacturer Lenovo is one corporate to already have implemented the solution. “With increased attention being placed on complying with complex KYC requirements, so too is the compelling need to identify and work with trusted industry partners to ensure the collection and maintenance of accurate KYC information,” said Damian Glendinning, Treasurer at Lenovo, in a statement.

Real-time refresh

Mazzone says the utility is a direct response to what regulators are calling on banks to do. “Regulators want to see banks doing more real-time refresh. Corporates opening an account are not the problem – it’s understanding the life of the client after opening the account that regulators want banks to be aware of,” she says. She adds that using a shared solution is the best way to do this. “Banks realise that carrying out this process as individual institutions does not give them a competitive advantage. In fact it only hurts the whole industry when you have huge bank fines on the front pages, and this publicity continues to create mistrust. Institutions are therefore happy to come together and use a shared service where data is collected on their behalf, from their end-clients and then shared with the community of financial institutions the end client does business with. This approach to standardisation will begin to improve the quality of client records.”

Following the launch, Thomson Reuters has said it will continue to participate in a working group with financial services users to continue to develop the utility.

The Accelus Org ID service is one of several KYC platforms that are either active or in development. SWIFT is currently developing a centralised KYC utility, while KYC Exchange has launched a KYC communications platform. Mazzone says Thomson Reuters’ service is different from competitors in that it is already fully live, and that it is the only shared service to have agreed a global standard policy for conducting due diligence with a group of global banks.

The fact that a number of providers consider it necessary to provide such services only goes to show that KYC is proving a headache for corporates and for banks. If the squeeze of regulation continues to impose costly and time-consuming requirements on participants at both ends, the use of these utilities could well increase in the future.