Susanne Hofrichter/ October 23, 2018/ Uncategorized

Know your customer (KYC) –is one of the most important topics in bank compliance. It includes several preventive measures to accurately identify the customer. Financial institutions are faced with the enormous challenge to prevent money laundering and terrorist financing. To minimize risks, it is necessary to obtain information about your clients and their financial transactions.

Anti-Money Laundering Directives, KYC and Customer Due Diligence

The legal framework of the European Union from 2015 (AML 4) has been recently revised (AML 51) in order to mitigate risks and to prevent the misuse of the financial system. Compliance with “Know-your-Customer” directives is necessary. It ensures that obliged entities shall apply  Customer Due Diligence (CDD) requirements when entering into a business relationship, including information about the nature and purpose of the business. Ongoing monitoring of transactions and maintaining and updating of client information has to be assured.

The KYC Registry

KYC registry by SWIFT (Society for Worldwide Interbank Financial Telecommunication) was developed in cooperation with financial institutions in 2014 to fulfill compliance requirements, but to keep costs low. This service supports approximately 4000 correspondent banks in over 200 countries. Member institutions share their data in response to standardized access requests from their counterparties who in turn use the data as part of their KYC processes. Each institution retains ownership of its registry data, and full control over which counterparties can access it. In July 2017 SWIFT extended KYC registry membership to all eligible supervised financial institutions, regardless of whether they are connected to SWIFT.

Aim: Standardized and Shared Data

The KYC Registry is the first step in the right direction.  Andreas Krautscheid, chief executive of the Federal Association of German banks, still sees room for improvement. European Union entries still fail to be standardized and shared across national boundaries due to different national standards and policies. Financial institutions and FinTechs, however, operate internationally. Standardized processes in consideration of national jurisdiction would simplify KYC procedures. New verifications and non-shared data increases time and effort, not only for the obliged entity, but also for the customers.

Although the European Supervisory Authority (ESA) implemented some basic innovative  changes in the KYC process, it is not enough according to Krautscheid. A process to share standardized data and to reuse identities is needed. At the moment datasets vary between countries and products (bank accounts, investment portfolios). Uncertainty delays innovations and weakens the capacity to compete internationally. At present, disagreements over valid identification documents and their security features are a major concern.

The solution –  a KYC database

The solution might be the development of a common platform to store customer information centrally.

Currently, four of the major German banks appear to be working on such a large-scale project. The participating private institutions are Commerzbank and Deutsche Bank, as well as the public banks Landesbank Hessen Thüringen (Helaba) and the Landesbank Baden-Württemberg (LBBW). If the cooperation is successful, the exchange of information and the admission of new clients will be straightforward and efficient. Institutions would assess information only once and share the obtained data with their members. In the near future more institutions could be added.
It is still unclear, if this idea will succeed and who would be implementing this as KYC utility. Arvato, a subsidiary of Bertelsmann, is favored at present. Essentially for the successful implication of the platform, data sets will need to be transferred quickly and safely. In addition, the access to personal and business information has to be secured. One approach could be a biometrical authentication of the client.

There are still many legal obstacles to overcome, but an efficient KYC process would be a great improvement for compliance. A standardization would save time and money for all  parties involved.

References:

1 http://europa.eu/rapid/press-release_STATEMENT-18-3429_en.htm

https://ec.europa.eu/info/policies/justice-and-fundamental-rights/criminal-justice/anti-money-laundering-and-counter-terrorist-financing_en

Susanne Hofrichter

About Susanne Hofrichter

Susanne Hofrichter is Product Manager at targens GmbH. For over 10 years, she has been responsible for new and continued developments in the area of compliance. Her technical focus is on the topics AML, Fraud and KYC. Innovative topics such as data analytics, blockchain and distributed ledger technology are just as important to her as the fulfillment of regulatory requirements.