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 Braden Perry, Partner, Kennyhertz Perry, LLC.
What’s the current state of KYC compliance?
What CEOs want out of CISOs is the ability to see the forest through the trees. Information Security is increasingly complex. Today, BSA/AML leadership not only must deal with their trained due diligence skills but use ever-evolving business skills, including financial management and leadership skills. That leadership needs to understand the context of the organisation – and its risk strategy and deal with stakeholders in varying ways depending on the circumstances.
How has KYC compliance evolved over the past 5 years?
FinCEN put into effect the most stringent KYC regulations to date in 2018, requiring financial institutions to comply with new Customer Due Diligence (CDD) standards on beneficial ownership. Although guidance has been provided, many financial institutions see the rule as confusing and are finding that the collection and processing of beneficial ownership information is costly.
How has KYC compliance changed in the midst of COVID?
Since the emergence of H5N1 in 1996, both industry leaders and government officials have known that an influenza pandemic will occur with a new subtype of influenza capable of efficient person-to-person spread and to which few of the world’s population are immune. Many have also known that it will be a global pandemic with all countries being affected within a matter of months. Many industry leaders and government officials have prepared for this and outlined detailed responses. It’s obvious that some industries and countries are more prepared than others. Those that didn’t prepare or prepared enough and are now caught in a disruptive corporate environment and at the mercy of outdated BSA/AML processes and procedures and other tech-related issues as most companies are working remotely. Proactivity will be the new standard, and companies that don’t look forward at risk potential will be massively behind when the next business disruptions arise.
What are the top trends shaping the future of KYC compliance?
One of the biggest challenges for BSA/AML departments is the constantly changing perceptions of risk. Risk changes based on regulation requirements, market happenings, and changes within internal policies. An organisation must be able to tweak and adapt the entire regulatory process at service level in real-time. Whenever a change or new adaptation of risk interpretation is applied, the compliance program must reassess all the subjects in the database, re-calculate the risk and alert the compliance team should the subject have moved across the brackets of the risk-based approach.
Furthermore, documents can be counterfeited; ownership structures can be covered. And, monitoring transactions become difficult with practices like trade-based money laundering. This makes it necessary for financial institutions to adopt better technologies to help compliance and risk teams. There are many technology trends that are changing the way institutions gather, verify, screen, monitor and store customer information. And companies must understand that automation is the key to the future. But automation can only go so far, and traditional “boots on the ground” compliance will always be a key to a proper program.
What’s the future of KYC compliance?
While managing risk is imperative, over-managing risk can also hinder business practices. So it’s imperative that BSA/AML staff are capable of striking the balance of managing risk and procedures while ensuring the business is functioning correctly and securely. This is where I see what CEOs want in compliance leadership. If the forest becomes too dense to see the trees and the tone at the top (i.e. the CCO/Head of Risk) allows the company to become reactive, meaning that they do not anticipate issues but wait for issues to arise and then act or “react.” This leads to short-sightedness, looking at the near-term, and not focused on long-term goals. This is opposed to the “proactive” approach and forward-looking, not only in anticipating issues that might arise but in having clear directions and goals.