This article is part of Kyckr’s new 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 Chris Siddons, Senior Director of Financial Crime Compliance at LexisNexis Risk Solutions.
What’s the current state of KYC compliance?
Know Your Customer (KYC) compliance is the practice of performing due diligence on your clients to determine whether engaging in a business relationship with them will create legal risk for your business. Financial firms in particular and regulated firms in general are required to perform this type of due diligence activity on their clients. Although all corporations are required to comply with sanctions and other kinds of restrictions, not all companies use KYC methods to administer those internal controls.
The kind of regulatory information that clients screen against in the KYC process can vary widely. All companies are required to screen their clients against sanctions lists at a base level, as these present legal restrictions against whether a firm can transact with sanctioned parties. Beyond sanctions, regulated financial institutions will screen against politically exposed persons (PEP) lists and a range of other lists to comply with anti-money laundering (AML) requirements.
How has KYC compliance evolved over the past 5 years?
Adoption of KYC processes exploded in the early 2000s in the wake of 9/11, the USA PATRIOT Act and the broader movement against terrorism globally. Initially KYC processes were done on paper by checking against external databases, but more recently we’ve seen significant adoption of automated methods for performing KYC checks. Purchasing KYC datasets has eliminated the need to pull unformatted data from various ever-changing sources to keep up to date with the regulatory environment. By employing automated KYC screening solutions, businesses can perform compliance checks at scale, in a regular fashion and in a manner that produces results that are demonstrable to regulators, auditors and internal executives alike.
How has KYC compliance changed in the midst of COVID?
COVID has accelerated the adoption of managed cloud (also known as ‘Software-as-a-Service’) and private cloud solutions to digitise compliance processes. Digital compliance processes are more scalable than locally hosted alternatives, as computational resources can be scaled up and down according to needs. Staff no longer need to be collocated to facilitate screening, opening up a wider labor pool. COVID has introduced the real possibility of interruptions to business continuity and digitisation of operational processes is seen as an important step towards eliminating that operational risk for clients. Additionally, KYC activities are strained, causing delays in customer onboarding. In fact, financial institutions in the U.S. reported a 7% increase in costs related to KYC activity in 2020*, largely due to the impact of the pandemic. (*True Cost of Financial Crime Compliance, U.S. and Canada, October 2020)
What are the top trends shaping the future of KYC compliance?
While the past 10 to 15 years has seen the continued bundling of KYC solutions with other related tools and datasets, we anticipate the future of KYC will come with providing specialised solutions that enable businesses to accurately perform KYC checks on a particular kind of process. KYC checks on consumers for example require different data inputs than those same checks on corporate clients; these different categories of clients will also manifest different kinds of risk to financial and regulated firms.
In addition to KYC technology, regulations are an important factor in the adoption and transformation of KYC programs. The AML Act of 2020 in the US is expanding the definition of financial institutions to antiquities dealers, crypto asset providers and other financial intermediaries to adopt KYC and AML screening requirements. Increasing penalties for enabling PEPs to conceal source of assets and funds, and introducing regulation for the internal technology processes for development, implementation and use of internal and 3rd Party KYC technologies will also drive heightened focus on identifying these clients
What’s the future of KYC compliance?
The future of KYC compliance comes not from recontextualising how KYC checks fit into the overarching legal and ethical obligations that firms have to their stakeholders. KYC intersects with a number of broader trends concerning the role that companies should play and the factors they must consider when shaping their business strategy and operations, including Environmental Social and Governance (ESG) factors, safe and legitimate supply chains and third-party risk, as well as Environmental Health and Safety (EHS) obligations firms have to their employees.