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.