KYC Is Knotty Problem

Terry Flanagan

With the changing dynamics of the financial world and stricter control measures, performing and implementing KYC (Know Your Customer) laws is a greater challenge than before.

“As new regulations continue to be added to the existing mandates, they have to be integrated with the existing process and the additional information then has to be obtained from the client,” Alan Paris, principal at eClerx, which works with financial institutions across the buy and sell side, on outsourcing. “This may be difficult as regulatory laws of a country may not permit critical client information to be shared outside its boundary but it may be mandated by the operating bank.”

The Depository Trust & Clearing Corporation, together with six banks, earlier this summer launched a platform, Clarient Entity Hub, to centrally store client data and documentation to allow the industry to meet regulations such as Know Your Customer, the Foreign Account Tax Compliance Act, Dodd-Frank and the European Market Infrastructure Regulation.

The need to tackle continuously changing complex international patchwork of regulatory and legal requirements while continuing to serve clients locally threatens to stretch already thin resources even further.

“The manpower has to be imparted with extra training on the new laws in order to perform the KYC process,” said Paris. “Extra control measures needs to be implemented to avoid errors and ensure that the entire KYC process being conducted covers the entire spectrum of the KYC laws.”

Excel-based workflow is a cumbersome process prone to manual errors. Since the level of control that a firm has in an excel based workflow is limited, eClerx has deployed an internal work flow tool with localized business and regulatory rules that helps in structuring the process better and providing a high level of accuracy, according to Paris.

The repercussion of a bad/incorrect/incomplete KYC review can have an adverse impact on any institution’s reputation.

“If the review fails to detect any suspicious activity of a particular entity or is unable to highlight involvement of key officials in any money laundering act, the entire purpose of a KYC review is defeated,” said Paris. “Tougher control needs to be in place to identify and alert the organization with the clients they are dealing with. Failure to do so may result in corporate action, including court cases, restriction in conducting business, investigation by various regulatory bodies, loss of customer confidence and penalties imposed by government/regulatory body.”

The time it takes to onboard and transact with clients due to unstructured KYC process is yet another problem.

“As per our understanding, it may take 3-4 weeks to onboard a client in absence of a structured process,” Paris said. Generally speaking, eClerx can provide this service within the same day, 24 hours or a 2-3 day turnaround, based on negotiated SLA’s and KPI’s, he added.

Featured image via ra2 studio/ Dollar Photo Club

Related articles

  1. Investors are seeking the tax efficiency, trading flexibility and cost benefits of ETFs.

  2. Low Bond Yields Force Pensions’ Hand

    US Department of Labor has allowed pension plan fiduciaries to consider ESG factors.

  3. Goldman Sachs Asset Management agreed to pay a $4m penalty.

  4. FINRA membership marks further momentum in WisdomTree Securities' digital strategy.

  5. The prior administration’s restrictions on retirement plans and ESG were removed.