Regulation & Standards

Question Answered: Know your customer

Published: Jul 2015

This issue’s question

“What value do banks’ Know Your Customer (KYC) processes really add for corporates? And how will utilities help to improve the KYC process for treasurers? We have heard talk of a growing trend around Know Your Customer’s Customer – what impact will this have for corporates operating in Asia?”

Paul Taylor, Director of Business Development, Compliance Services, SWIFT

Paul Taylor

Director of Business Development, Compliance Services
SWIFT

Due diligence processes, and predictability around Know Your Customer (KYC) information requirements, have changed fundamentally since the latest financial crisis and the further globalisation of banking. This has led to escalating levels of regulation and enforcement where regulation is seen not to be met – meaning that banks and other financial institutions (FIs) have increased controls.

Today, to prove that they know their clients in depth, more stringent checks must be made and more documentation must be sourced. For corporates, this presents a few challenges and concerns. Some corporates have reported that collecting KYC data to open an account takes between an entire day to up to 30 weeks. There are also concerns about the security behind the exchange of such personal information such as passports and signatures.

The rise of the utility approach to KYC is aimed at addressing the concerns around this process. The utility approach will provide a secure method for the exchange of information, and will also remove the need to share the information each time an account is opened, removing the redundant duplication of effort.

The utilitisation of the KYC process would mean that corporates and treasurers only need to provide data once, to the secure system of choice, and then grant access to their different banking partners. This allows more time for treasurers to concentrate on other operational functions and areas of more complex risk. From a bank’s perspective, they will receive the data in the format and detail expected, thus reducing the time to open accounts and to conduct ongoing due diligence.

For SWIFT’s KYC Registry, SWIFT has defined a common, global baseline of data requirements. Banks contribute an agreed ‘baseline’ set of data and documentation for validation by SWIFT, which the contributors can then share with their counterparties. Each bank retains ownership of its own information, as well as control over which other institutions can view it. Banks are not charged for data contribution or for using the Registry to share their KYC information with other banks.

Moreover, industry leaders and regulators alike have highlighted the importance of knowing your customer’s customer (KYCC). KYCC is a phrase increasingly used by regulatory bodies to reference the need for financial institutions to understand their clients to a deeper, more granular level of detail.

For correspondents, the focus would be more than simply understanding the relationship and risk of your immediate counterparty, but also to understand the greater systemic network risk. For corporates investing in assets or part of a wider correspondent/payment chain, they should be aware that they need to reference or identify their role as an actor in the transaction. It remains to be seen whether these increasingly-discussed requirements will add further complexity in terms of greater detail in the KYC data shared, as this is an evolving expectation.

Arin Ray, Analyst, Celent

Arin Ray

Analyst
Celent

Know Your Customer (KYC) is an essential part of banks’ and other financial institutions’ operations, particularly from a regulatory and compliance perspective. With increasing regulatory scrutiny and evolving regulations in recent years, banks are having to beef up their KYC and anti-money laundering (AML) policies and practices. This means banks’ clients, including corporates, are having to provide more information, on a regular basis, to every bank they deal with. This raises the level of difficulty in the KYC process for corporate treasurers. However, some of the leading banks and service providers in the industry have come together to alleviate some of the operational challenges of their clients through the conception of utilities in KYC.

The current practices in KYC are complex, requiring every customer to exchange information with every financial institution (FI) they deal with. Providing the correct documentation, and receiving verification can take weeks and on-going updates are required for each FI. Multiple exchanges of documents result in duplication of efforts and higher costs. The utility model, on the other hand, gathers all customer information at a single place that can in turn be shared with FIs. Bank customers can provide, or upload, all required documents to a single utility provider where FIs can access all the necessary information from this utility.

In this model, the providers of information (investment managers, hedge funds, corporates) are typically not charged whereas FIs can access this information by paying a price to the utility provider. The provision of this service is typically made through a web portal, requiring minimal effort from users in terms of technology and systems.

While ideally one would envision a single such utility catering to the whole industry, we have seen three or four utilities emerging in this area: these include utilities from Thomson Reuters, Genpact, Markit, DTCC and a group of six co-founding banks, and SWIFT (utility for correspondent banking). All of them are fairly new and currently cater to the developed markets, particularly the US and the UK. However, they all have plans to expand into emerging markets in the near future with particular focus on Asia. The utilities, once fully operational, have the potential to revolutionise the way KYC process is carried out in the industry.

By establishing a common standard and format, the utilities should minimise the need for operational changes for treasurers to submit and update information over time. Online portals can make the transmission and communication much simpler, especially compared to manual and paper based practices followed at many institutions at present. In addition to being free for corporates (and other bank clients), the utilities should free up time and resources of corporate treasurers allowing them to focus on their core business activities.

Neil Jeans, Head of Policy & Standards Org ID, Thomson Reuters

Neil Jeans

Head of Policy & Standards Org ID
Thomson Reuters
Raj Melvani, Market Development Manager, Thomson Reuters

Raj Melvani

Market Development Manager
Thomson Reuters

In the current climate, it goes without saying that the banks are undertaking Know Your Customer (KYC) due diligence to meet legal and regulatory requirements in the jurisdictions in which their corporate clients hold bank accounts. For the treasury department, it is certainly difficult to quantify what value KYC processes provide. Rather than adding value per se, they can be seen as a giving corporates ‘a ticket to the game’. In fact, KYC checks are now an intrinsic part of the business relationship between a financial institution and corporate client.

But it is the grey areas and duplication that make KYC seem so burdensome for everyone involved. In Asia, for instance, we see more de-risking happening in the banking industry – where entire portfolios, entire product lines or entire subsets of customers are de-risked by the banks because the associated risk is considered too great. As this risk-based approach starts to take hold in more jurisdictions, more people are pricing for risk to account for the reality that the cost of compliance, compared to the benefit of holding those accounts, doesn’t necessarily stack up. Moreover, the risk-based approach has created a degree of interpretation within the financial institutions. Whilst there is a common set of recommendations from the Financial Action Task Force (FATF), and you have a standard legal framework and regulatory framework within a country, each bank is invited to interpret that as part of its risk-based approach and therefore put in place measures that they believe are appropriate for addressing their risks. This leads to a lack of consistency.

Against this backdrop, utilities can help improve the KYC environment by providing a degree of certainty about what level of due diligence is required. Utilities are driving consistency – they have the ability to achieve economies of scale through standardisation. They can also minimise duplication since the corporate only provides compliance information to the utility once, rather than providing it to multiple banks. This reduces the cost of KYC to both the financial institution and the end-client.

Moreover, the global regulatory environment is getting more complicated – in Singapore, for instance, changes were only made recently to the Monetary Authority Singapore (MAS) Regulation 626 in response to increasing international anti-money laundering (AML) due diligence standards predicated by the changes made by the FATF in 2012. What this is doing is placing increasing focus on the financial institutions to understand their corporates and understand who is behind the face of those corporate clients. After all, whilst there are many stable and low risk economies from a money laundering and criminal perspective in Asia, there are also economies that are less so.

Banks, therefore, are concerned about ‘contagion risk’, enquiring about their customer’s customer – where am I sending and receiving money on behalf of my customer and what trade finance transactions are occurring, for instance. And because we are seeing banks fined significantly for not managing these exposures, they will be less inclined to simply accept polite declines for information from their corporate clients. KYC and Know Your Customer’s Customer (KYCC) processes are not only on the banks’ agenda; it is our experience that, in a number of jurisdictions, they are on the political agenda too – not least because of tax transparency and corruption issues.

So, whilst we have painted a fairly challenging picture for corporates in Asia, there is also the value that co-operation is bringing as corporate treasurers and the customers of financial institutions start to have more of a voice in Asia. Policymakers are beginning to realise the impacts that some of these regulations are potentially having on the economic viability and health of particular industries. KYC could act as a catalyst for encouraging a co-operative effort to tackle some of the inefficiencies that the industry has had for many years. The benefits of which will be felt by corporates, financial institutions and the regulatory and political regimes in many countries alike.

Next question:

“The bank agnostic model is becoming ever more popular among large Western corporates – but how easily can this be achieved in Asia? Also, what technologies or developments in the region should corporate treasurers be looking out for as a means to foster a bank agnostic operating environment?”

Please send your comments and responses to qa@treasurytoday.com

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