Over the past decade, regulators across the U.S., Europe, APAC and the Middle East have levied nearly $26 billion in financial penalties against financial institutions for anti-money laundering (AML), know your customer (KYC) and other sanctions-related violations. In today’s heightened business and regulatory climate, organizations should not only be concerned with making profits, but also being able to correctly identify who they’re doing business with, which means verifying customers’ identities and meeting KYC and AML guidelines.
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When a financial institution creates a new business partnership with individuals or organizations without fully knowing their past and present business dealings, it can expose them to hefty lawsuits, regulatory fines and reputational damage.
How have these regulations impacted the customer experience?
The problem with KYC and AML requirements is they have the potential to make something as simple as opening a new account a long and complex journey for regulated organizations. While estimates vary, banks take an average of 24 days to complete the customer onboarding process and many argue it’ll only get worse as regulations continue to increase.
Although the need to be thorough is important, especially in high-risk industries like finance, KYC and AML regulatory hurdles often create a less-than-ideal customer experience, which translates to abandoned customers and lost revenue.
Why the holdup?
Costly KYC and AML fines are often the result of some of the challenging nuances associated with Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD). CDD processes are critical for KYC, and involve identifying your customer and understanding their activities, which allows you to assess their risk profile. EDD is additional information that is needed for high-risk customers and provides a more detailed understanding of your customer to further avoid unnecessary risk. From there, your customer risk assessments can be used to determine how much due diligence is needed.
Below are some of the specific challenges associated with both CDD and EDD and why they need to be taken seriously to avoid costly fines.
- Rigorous and Robust: EDD policies must be “rigorous and robust” which requires significantly more evidence and detailed information.
- Detailed Documentation: The entire EDD process must be documented in detail, and regulators should be able to have immediate access to EDD reports. This demands more scrutiny when it comes to how data is captured and validating the reliability of those information sources.
- Reasonable Assurance: EDD requirements call for “reasonable assurance” when calculating a KYC risk rating. This means that the professionals responsible for making a “go” or “no go” decision must have completed all the necessary research steps and exercised professional skill and care in reaching their judgment about whether a new user is who they claim to be.
- Special Attention for PEPs: Special attention must be paid to politically exposed persons (PEPs) — they’re viewed as a higher risk because they are in positions that can be potentially abused for money laundering.
Is it possible to have your cake and eat it too?
Thankfully, EDD and CDD processes can be streamlined and automated through better use of technology. The quickest way to do so is by implementing an online identity verification process, which involves using a government-issued ID (e.g., a driver’s license) and a corroborating selfie. Emerging identity verification technologies also include a certified liveness check to ensure the applicant is physically present and not spoofing the system with a picture of someone else or a doctored video (e.g., a deepfake). The result is increased compliance, as well as faster customer onboarding times.
Although today’s regulatory landscape may seem like a lot of hoops to jump through, KYC and AML mandates are effective means of protecting your company and customers alike. While these hurdles may prove tedious, there are modern technologies that can be deployed to improve ease of use and streamline the necessary KYC and AML checks. By doing so, companies can avoid the steep fines associated with mismanaged KYC and AML while also delivering a frictionless user experience. Adopting CDD and EDD processes communicates to customers, and prospective customers, that your focus is on lawful business. Thanks to emerging identity verification and AML screening technologies, banking customers can now identify themselves from anywhere in the world.
