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The Future of KYC Compliance — Insights from Allison Spagnolo

Future of Compliance
March 24, 2021

This article is part of Kyckr’s Future of KYC Compliance series, which interviews leading industry professionals and thought leaders to learn more about the trends that will shape the future of KYC compliance.

The following is an interview we recently had with Allison Spagnolo, Managing Director at Guidepost Solution.

The Future of KYC Compliance — Insights from Allison Spagnolo

What’s the current state of KYC compliance?

While the overall objective of KYC compliance remains the same, the landscape is evolving through both the increased use of digitisation and automation, and the introduction of tools like artificial intelligence. These improvements can decrease risks of manual or human errors and increase the likelihood of consistent, standardised approaches to collecting information and performing due diligence. Notwithstanding the benefits of automated tools, though, institutions must thoughtfully incorporate them into their processes, especially when deploying any type of machine learning – such as artificial intelligence aimed at verifying beneficial owners. That artificial intelligence can supplement the work of trained specialists but will never be able to replace it. KYC compliance analysts must continue to oversee and validate machine outputs.

How has KYC compliance evolved over the past 5 years?

In my experience, there have been two primary changes in KYC compliance over the past 5 years. First, there has been an increasing emphasis on internal support for a KYC compliance function such that it is now aligned with anti-money laundering and financial sanctions compliance measures in terms of significance, prioritisation, budget, and resources. Institutions have realised that robust KYC and customer due diligence efforts can be the first line of defense against financial crime.

Second, I have seen an expansion of KYC compliance measures to include Know Your Transaction (KYT) information, especially with respect to virtual currencies. KYT is separate and apart from anti-money laundering transaction monitoring that uses scenarios and thresholds to detect suspicious transactions. Instead, KYT leverages a robust KYC program and knowledge of a customer’s habits to identify transactions that may be suspicious as to that customer even if they do not rise to a specific level of suspicion under an AML scenario. KYT analysis allows for a more dynamic customer profile.

How has KYC compliance changed in the midst of COVID?

Since face-to-face interactions with customers have all but ceased during the COVID-19 pandemic, institutions have had to rely more heavily on automated tools. Given in-person limitations, KYC and customer identification are arguably even more important. Traditional financial institutions have had to use alternate methods to satisfy themselves that the due diligence conducted on customers is vigorous and complete.

FinTech organisations, on the other hand, have not been as hindered by the pandemic’s restrictions. Their business model assumes no face-to-face contact and they have the capability to verify identity and perform customer due diligence using sophisticated KYC tools that contemplate a lack of in-person verification. Additionally, with many FinTechs moving into the banking world – such as Square Inc. announcing the commencement of banking operations under its Square Financial Services – we will likely see more FinTech efficiencies adopted by the larger, brick-and-mortar financial institutions. 

What are the top trends shaping the future of KYC compliance?

International changes and concerns will shape the future of KYC compliance in the next several years. First, there is a growing tension between KYC information and privacy concerns, especially for European banks and customers. Institutions’ ability to collect personal and sensitive data from individuals is dependent on compliance with intricate privacy laws and regulations, which will increase the time and resources needed to conduct customer due diligence. Relatedly, organizations will have to contend with balancing privacy requirements with eliminating siloes of customer information. The information that comprises a customer’s full “KYC file” is typically housed in multiple systems that are not designed to communicate with one another, often on purpose to segregate information that cannot be accessed in other jurisdictions or by other departments due to privacy and secrecy concerns. However, the ability to see the “full picture” of a customer is an important safeguard and this will continue to be an operational challenge.

Second, we are likely to see enhanced global regulations in customer due diligence and KYC, such as the passage of the Anti-Money Laundering Act of 2020 and Corporate Transparency Act in the United States, which imposes new beneficial ownership reporting requirements on companies formed or registered in the United States. As criminals become ever more sophisticated, lawmakers will continue tightening regulations and requiring adherence to stricter guidelines.

What’s the future of KYC compliance?

The next step in KYC compliance will be the adaptation of traditional KYC compliance concepts and regulations to emerging technologies like cryptocurrency. KYC compliance must be a fundamental component of these technologies, but the traditional methods (like paper applications) are not workable in these new environments. Ultimately, regulators may need to establish new guidelines that address the specific complexities and unique nature of these technologies. Until that time, though, cryptocurrency creators will have to thoughtfully incorporate KYC compliance measures that respond to current KYC regulatory schemes.

Future of Compliance
March 24, 2021

This article is part of Kyckr’s Future of KYC Compliance series, which interviews leading industry professionals and thought leaders to learn more about the trends that will shape the future of KYC compliance.

The following is an interview we recently had with Allison Spagnolo, Managing Director at Guidepost Solution.

The Future of KYC Compliance — Insights from Allison Spagnolo

What’s the current state of KYC compliance?

While the overall objective of KYC compliance remains the same, the landscape is evolving through both the increased use of digitisation and automation, and the introduction of tools like artificial intelligence. These improvements can decrease risks of manual or human errors and increase the likelihood of consistent, standardised approaches to collecting information and performing due diligence. Notwithstanding the benefits of automated tools, though, institutions must thoughtfully incorporate them into their processes, especially when deploying any type of machine learning – such as artificial intelligence aimed at verifying beneficial owners. That artificial intelligence can supplement the work of trained specialists but will never be able to replace it. KYC compliance analysts must continue to oversee and validate machine outputs.

How has KYC compliance evolved over the past 5 years?

In my experience, there have been two primary changes in KYC compliance over the past 5 years. First, there has been an increasing emphasis on internal support for a KYC compliance function such that it is now aligned with anti-money laundering and financial sanctions compliance measures in terms of significance, prioritisation, budget, and resources. Institutions have realised that robust KYC and customer due diligence efforts can be the first line of defense against financial crime.

Second, I have seen an expansion of KYC compliance measures to include Know Your Transaction (KYT) information, especially with respect to virtual currencies. KYT is separate and apart from anti-money laundering transaction monitoring that uses scenarios and thresholds to detect suspicious transactions. Instead, KYT leverages a robust KYC program and knowledge of a customer’s habits to identify transactions that may be suspicious as to that customer even if they do not rise to a specific level of suspicion under an AML scenario. KYT analysis allows for a more dynamic customer profile.

How has KYC compliance changed in the midst of COVID?

Since face-to-face interactions with customers have all but ceased during the COVID-19 pandemic, institutions have had to rely more heavily on automated tools. Given in-person limitations, KYC and customer identification are arguably even more important. Traditional financial institutions have had to use alternate methods to satisfy themselves that the due diligence conducted on customers is vigorous and complete.

FinTech organisations, on the other hand, have not been as hindered by the pandemic’s restrictions. Their business model assumes no face-to-face contact and they have the capability to verify identity and perform customer due diligence using sophisticated KYC tools that contemplate a lack of in-person verification. Additionally, with many FinTechs moving into the banking world – such as Square Inc. announcing the commencement of banking operations under its Square Financial Services – we will likely see more FinTech efficiencies adopted by the larger, brick-and-mortar financial institutions. 

What are the top trends shaping the future of KYC compliance?

International changes and concerns will shape the future of KYC compliance in the next several years. First, there is a growing tension between KYC information and privacy concerns, especially for European banks and customers. Institutions’ ability to collect personal and sensitive data from individuals is dependent on compliance with intricate privacy laws and regulations, which will increase the time and resources needed to conduct customer due diligence. Relatedly, organizations will have to contend with balancing privacy requirements with eliminating siloes of customer information. The information that comprises a customer’s full “KYC file” is typically housed in multiple systems that are not designed to communicate with one another, often on purpose to segregate information that cannot be accessed in other jurisdictions or by other departments due to privacy and secrecy concerns. However, the ability to see the “full picture” of a customer is an important safeguard and this will continue to be an operational challenge.

Second, we are likely to see enhanced global regulations in customer due diligence and KYC, such as the passage of the Anti-Money Laundering Act of 2020 and Corporate Transparency Act in the United States, which imposes new beneficial ownership reporting requirements on companies formed or registered in the United States. As criminals become ever more sophisticated, lawmakers will continue tightening regulations and requiring adherence to stricter guidelines.

What’s the future of KYC compliance?

The next step in KYC compliance will be the adaptation of traditional KYC compliance concepts and regulations to emerging technologies like cryptocurrency. KYC compliance must be a fundamental component of these technologies, but the traditional methods (like paper applications) are not workable in these new environments. Ultimately, regulators may need to establish new guidelines that address the specific complexities and unique nature of these technologies. Until that time, though, cryptocurrency creators will have to thoughtfully incorporate KYC compliance measures that respond to current KYC regulatory schemes.

Build your Customer Due Diligence and KYC processes on a robust foundation with Kyckr.

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