The burden of complying with unclear and fragmented KYC regulations is having wide reaching impacts on banks and global finance. It has also been a growing inefficiency for corporates which is intensely frustrating because meeting the authorities’ aim of transparency should not be difficult.
Regulators are wary of Know Your Customer (KYC) requirements, the global efforts to prevent anti-money laundering (AML), becoming box ticking exercises so they generally make banks liable for knowing their customers and customers’ customers (KYCC) without specifying what they consider to be adequate due process for KYC. Since this liability has amounted to considerable fines over the last few years, the banks are understandably anxious. Compliance departments are therefore showing surprising creativity in trying to manage KYC and AML liability. The result, however: corporates end up facing fragmented KYC requirements.
The corporate view
Corporates respect the authorities’ need for KYC and AML, and have nothing to hide; they would just like to see their needs met in an efficient manner. Currently, there is frustration with the lack of progress with electronic bank account management (eBAM) and electronic bank services billing (eBSB). On eBAM, banks seem to be slowing the process because their IT budgets, post the global financial crisis, are heavily skewed to compliance, despite the considerable savings that banks themselves could enjoy with better BAM processes. On eBSB, interfacing seems to be an issue as well, but we cannot help wondering if the opaque status quo is just too juicy a profit centre for banks.
The confusion around fragmented KYC cannot be beneficial for banks. It is bad enough that each bank invents its own (overly elaborate) wheel. It gets increasingly burdensome when different branches and departments within banks ask for different KYC documentation. This represents a huge workload on corporates at a time when macro-uncertainty, as well as slowing growth, severely limits resources. Burning time on zero value added work does not improve customer satisfaction.
The bank view
Bankers do not like the current state of play either; compliance departments continuously up the ante with regard to KYC in their search for a safe haven from billion dollar fines. It is a Sisyphean task because no one knows what next year’s regulators will consider sufficient effort. The travails extend to the inter-bank space too. Previously, banks would tend to trust that their peers, being regulated entities, would be safer than non-banks. Western regulators’ AML zeal and appetite for fines has changed this. Problems with inter-bank KYC have become so fraught that KYC is threatening the global correspondent banking system, potentially leaving some developing countries unable to execute cross-border payments.
The regulator view
Regulators, keenly aware of the banking scandals of the last decade, have little time for banks’ challenges. They do however fear that if they set out clear guidelines as to what constitutes adequate KYC, such guidelines will become an alternative to deeper KYC – whatever that might be. This has resulted in a deliberate withholding of guidance while maintaining the threat of massive fines to terrorise the banks into trying to do thorough KYC, which they are arguably unable to do in reality. It does sometimes feel like this is a lazy solution to the lack of clarity in law and in regulation of the real economy that is being foisted unfairly on the banks. On the other hand, maybe it is fair to attach such burdens to rent extraction licences, but they weigh heavily on the real economy too.