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 Nenad Jovicic, AML/FT Expert at Erste Banka Srbija.
What’s the current state of KYC compliance?
Currently around the world is a process of increasing the standard of AML principles (such as the introduction of the 5th AML Directive and preparing the 6th), as well as increased regulators' control over financial institutions that implement these standards. Any increase of AML standards entails increased operating costs and the allocation of more resources. On the one hand, it is necessary to meet the requirements of the regulator and on the other, to minimise the risk to the business of the financial institution.
As a consequence of the rapid and sudden introduction of high standards in KYC processes, various problems occur, such as poor user experience, slow administration and complex on-boarding system – which is especially evident in legal entities with international and/or complex ownership structure. Large financial institutions have responded with layered and expensive operating systems to cope with increasing incoming demands, while smaller financial institutions that cannot ‘afford’ expensive KYC systems use labor force to reduce the risk.
As above stated, all these activities have led to a situation where AML & KYC risks are being recognised by top management and by regulators, as one of the most sensitive points of financial institutions.
How has KYC compliance evolved over the past 5 years?
In the last 5 years, KYC has been part of the Compliance universe of risks, where it evolved into a one separate AML & KYC risk, making it the "youngest" risk within the banking sector. The development itself was accelerated by the fact that the regulators of a large number of countries began diligently investigating KYC processes of financial institutions, where they began to penalise with large sums of money that attract the public attention. In addition, the complication at the global level on the questions of sanctions, money laundering and terrorism financing has pushed financial institutions and especially banks to the forefront, bearing the pressure of international organisations and countries' administrations. These pressures are reflected in fact that the banks are labeled as the main carrier of the world’s financial system and the main facilitator of money laundering, sanctions evasion and terrorist financing.
In order to effectively battle with the above stated challenges, the development of IT technologies is indispensable and irreplaceable. The development is reflected in the automation of repetitive processes, checks, shortening of time and enabling new ways of doing business. These new ways are video identification, usage of artificial intelligence in identifying potentially suspicious transactions, smart internet search and etc.
How has KYC compliance changed in the midst of COVID?
The Covid pandemic, in my opinion, had a dual impact on KYC Compliance. The negative impact is that the pandemic has revealed weak points of the KYC process itself in terms of onboarding, in situations where movement of the customer is restricted (or completely forbidden). The importance and significance of online/video identification has not been developed adequately and the lack of management vision to make this option for the organization more effective and more competitive.
Financial institutions that have adequately addressed this have prospered in the pandemic, while the vast majority of financial institutions have failed in this field and now are in a crash course of digitalisation and introduction of those new services. Another aspect of this problem is regulators' realisation that they need to ‘liberalise’ the laws in the AML area and to ease the implementation of video and online identification. This section applies in particular to third world countries, which have been late in implementing the latest AML rules.
The positive impact of the Covid pandemic on the KYC Compliance refers to the monitoring of transactions of customers, because in a way, the consequences of the pandemic are a perfect set-up for financial institutions. The limited mobility of customers reduces the cash transactions in real time and increases non cash transactions, which makes it easier for employees of financial institutions to identify money laundering and/or terrorist financing.
What are the top trends shaping the future of KYC compliance?
The biggest trend of course would be digitalisation. This includes several directions where digitalisation is used. Main direction is digitalisation of onboarding of potential customers, improving their user experience, reducing the time for the entire process. The second is increasing the efficiency of monitoring processes for the customers’ transaction. With the digitalisation of the monitoring process, financial institutions reduce the need for manpower, or those employees can focus on other job requirements. This is currently under development by using artificial intelligence, or machine learning.
Another trend is the tightening of the international regulations by introducing 5th and 6th AML Directives. This tightening of rules and regulations has a goal to regulate the fintech, crypto companies and to create a unilateral approach for assessment and management of KYC risks.
What’s the future of KYC compliance?
The future of KYC Compliance is reflected in further development of IT solutions that would enhance the ability of the financial institution in the KYC area, by improving the data quality, onboarding processes, monitoring processes, automating activities that employees spend a lot of time on, etc. On the other hand, in the future, financial institutions would need to spend less resources on a big number of employees, but on a skilled staff that would effectively use the digital data that is available.
Financial institutions need to be more agile and be able to quickly adapt to the new environment in order to stay relevant and competitive, especially when it comes to KYC Compliance risks. These changes have an effect on every employee and if not implemented, the consequences are great and dire.