KYC remediation projects are often a headache for regulated firms and the complexity is driven by multiple factors. KYC remediation projects require huge investments in budget, staff, training, resources, and most importantly — time.
Remediation is incredibly time sensitive. Banks need to adhere to strict deadlines and quality standards. A recent visit from the regulator may be a call to action but KYC remediation should not be left to the last minute as this may result in regulatory fines and reputational damage.
Let’s explore the most common KYC remediation challenges financial institutions face today and how they can be overcome.
Challenge 1: Connected risk identification
Customer data files need to be assessed but can often present issues when they are incomplete or missing key information — which they often are. These missing documents present a heightened risk of fraud.
The convergence of crime and emergence of new criminal typologies, compliance teams must assess a wide range of compliance and fraud risks. KYC reviews place a huge emphasis on screening individuals and entities against PEPs, sanctions, and other regulatory and law enforcement lists. As identity fraud and other types of fraud are on the rise, there must be a holistic, connected risk identification approach to KYC remediation examining not only fraud but money laundering and other predicate offences.
Challenge 2: Changing risk appetite
Another common challenge is the changing nature of customers and a financial institution's risk appetite. Customers may have a different risk profile and status compared to when they were onboarded. Risk profiles are constantly changing. For example, the transparency international corruption perception index is updated yearly. Other indices and risk indicators used to calculate a risk tolerance score may also change. There is a fine line between a medium and high-risk customer but a significant difference in due diligence efforts.
One of the first steps in getting your data ready for remediation and filling the gaps as missing KYC documents may result in missing red flags. Out-of-date records will hinder customer due diligence, therefore ensuring that up-to-date information is present in the customer files is of paramount importance.
Challenge 3: Lack of transparency in Beneficial ownership
The lack of transparency on beneficial ownership and challenges retrieving corporate ownership documents from specific registries globally can present a big challenge. Some documents are freely available, others require payment. Then there is the issue of offshore tax havens and limited information on beneficiaries, shareholders & directors, and controllers. KYC Analysts must assess a number of other sources including financial statements, annual reports, regulator websites, stock exchanges, third-party data sources and so on. It is important to remain methodical in your approach, stick to the risk-based approach but also use your initiative – if something does not feel right it normally isn’t. Today there are a growing number of automated solutions that can help determine the beneficial owners of companies.
Prioritise high-risk customers
Identifying the areas of highest risk is an effective way to prioritise remediation efforts. Too often banks tackle remediation without the correct segmentation. Not only should you categorise customers into high, medium, and low risk, but drill deeper into the segmentation per se.
Reduce use of excel
Regulators frown upon heavy use and dependency of excel spreadsheets. This is often a result of legacy systems that are unable to communicate well with one another. Customer data is often kept in multiple siloed systems. Manual extraction and uploading of data can present issues. Transition to cloud based scalable infrastructures to reduce the use of expensive on-premise deployments requiring extensive IT resources delivers unparalleled value to your compliance function.
Delivering remediation projects on time and budget is a challenge. Banks often underestimate the time and effort required despite this being a cyclic event. The remediation effort is compounded by the changing dynamics of the customer and regulatory landscape. One way to keep on top of KYC is to introduce dynamic, contextual, continuous monitoring. Real-time updates in customer records with a transparent audit trail can significantly reduce the time taken to update documents in the remediation lifecycle.
Investing in staff training is a key requirement. Education, knowledge transfer and retention from tailored classroom training and e-Learning modules on AML & CFT, fraud and cyber-crime will better prepare your team for remediation. The result is more effective risk mitigation.
Replace outsourcing with tactical tools
Banks outsource KYC projects to large consulting firms often due to overwhelming volumes. While this may help in the short-term, costs can quickly spiral out of control. A more effective approach is to invest in tactical tools while you build a longer-term sustainable plan.
In summary, there are numerous challenges in KYC remediation projects but if handled correctly with the right tools at your disposal, remediation can be less of a burden. A growing number of tools exist to streamline the remediation process, it’s up to forward-thinking compliance leaders to identify and integrate the right tools given their specific needs.