Welcome to the digital finance age, where technology has changed the way customers manage their money and interact with their financial institutions. Customers can transfer their money in seconds, do their banking through an app, and may never step into a branch again.
But with the evolution of digital finance must come the evolution of Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance on the part of financial institutions doing business with their customers. In a digital world, regulated firms need to focus on keeping their customers and data safe. However, while some organisations are eagerly embracing the future of both fintech and compliance, some are still lagging in the past.
What does the future of AML compliance hold? What role will technology play in KYC processes? How is the customer experience changing? Here are our eight predictions on the future of KYC compliance.
1. Artificial intelligence and machine learning
Artificial intelligence and machine learning are being leveraged across every industry in order to provide more personalised services for customers and to streamline customer processes. RegTech and FinTech have already started adopting machine learning, artificial intelligence, blockchain, and robotic process automation for KYC and Customer Due Diligence (CDD).
Forward-thinking firms are using artificial intelligence and machine learning to scrutinise customer behaviour, exact their risk profiling, analyse AML transaction monitoring alerts, and identify adverse media and reputational risks. Artificial intelligence and machine learning automation have the ability to transform how firms operate, reducing manual intervention and high rates of false positives.
2. Perpetual KYC will be the norm
Regulated firms that are serious about compliance need to be aware of the risk certain customers may carry, and many financial institutions have been fined for not completing periodic high-risk customer reviews. High-risk customers are typically reviewed every year, as compared to medium-risk customers reviewed every three years, and low-risk customers every five years.
With regulators increasing pressure on financial institutions, firms are moving away from traditional periodic reviews and adopting dynamic or continuous KYC. Automating change in customer profiles, such as risk ratings and scoring reduces the remediation burden and the legacy project-based approach to remediation. Moreover, perpetual KYC minimises risk by reducing the time window for criminals to launder proceeds of crime. We expect to see more financial institutions adopt continuous KYC and move away from static one, three, and five year review cycles.
3. Internet of Things (IoT)
The Internet of Things, or IoT, is an interconnected system of physical devices, digital machines, or objects that have unique identifiers and the ability to transfer data with each other over a network. While still new in its usage, it’s going to be the foundation of a fully digital and interconnected life for individuals.
The IoT market is growing at an annual compound growth rate of 25%. Coupled with artificial intelligence, it will become a powerful tool for KYC, creating digital personas and providing information on identity, transactions, and behaviour. KYC processes and artificial intelligence will also enable real-time risk identification and profiling. IoT does, however, open the way for cybercrime, fraud, and money laundering, so skilled KYC professionals and subject matter experts will be needed for risk mitigation-based decision making.
4. Cloud technology will become de facto
While financial institutions are currently undergoing a major transformation to begin a new phase of digitisation, they are also exposed to unprecedented levels of heightened risks due to abuse of the financial system by criminals. Because technology plays a critical role in risk identification and mitigation, banks need to combat criminal risk, and can do so through cloud adoption.
KYC solutions can be deployed on-premise that allow financial institutions to be in full control of data and solutions installed on their preferred environment, or they can be deployed as cloud-based Software-as-a-Service (SaaS) applications delivered over the internet. Fortunately, legacy on-premise solutions are being slowly phased out as migration to cloud services offers greater scalability, lower costs, and flexibility in terms of deployment. Expect to see more banks adopt cloud technology as transformation projects accelerate.
5. Opaque ownership will continue to be a problem
Opaque ownership structures and limited information on beneficial owners in corporate registries continue to hinder KYC efforts. Access to corporate registries in specific jurisdictions is either restricted to only financial institutions, don’t provide sufficient information, or don’t reveal ultimate beneficial owners (UBOs). Governments should establish mandatory public registers that disclose the beneficial ownership of trust funds and companies. Otherwise, complex and opaque corporate structures make it easy to hide the beneficiary, rendering KYC and AML efforts obsolete.
6. Global regulations will become stricter, but will take time
AML regulations continue to lag behind the evolving criminal landscape. By the time new regulations have been enacted, criminals have moved on to newer methods to defraud financial institutions and launder money.
Unfortunately, there are many countries that have failed to implement rules against these criminals. The EU Anti-Money Laundering Directive should have been fulfilled by June 2018, but a number of countries missed the deadline. Fortunately, the European Commission has asked the European Court of Justice to fine countries which continue to fall behind in enacting money laundering directives into local law. Global regulations will become stricter, but don't expect countries to achieve compliance by the deadlines stipulated by regulations.
7. More data sharing
Financial institutions, law, and regulatory enforcement agencies will share more data. New KYC data-sharing consortiums and joint ventures will facilitate faster onboarding and exchange of documents using advanced distributed ledger, or blockchain, technology.
8. More pressure to act
Finally, pressure is mounting on regulators and governments to take tougher action. The media is increasingly focusing efforts on shining the light on institutions that fail to act against financial crimes. The Companies House in the United Kingdom is under growing pressure to undergo reforms and verify the identity of persons incorporating businesses. More suspicious activity is being leaked, which only cranks up the pressure on governments to act. All of this pressure will only make banks and financial institutions more compliant and accountable.
Stepping into the future of AML and KYC compliance
Welcome to the digital finance age, and the future of AML and KYC compliance. It’s a future where banks and financial institutions will leverage technology to improve their processes, combat cybercriminals, increase data-sharing, and keep up with ever-evolving compliance regulations. Above all, technology will allow financial institutions to be more data-driven as the market becomes more competitive and regulators less sympathetic.
