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 have recently had with Sandra Ciaraite, AML Analyst at Danske Bank.
What’s the current state of KYC compliance?
SC: European Union states are going through never-ending financial compliance revolution since enforcement of the 5th AML Directive which brought major changes to beneficial ownership (“UBO”) requirements and due diligence of customers background in general. The tension financial institutions experience to be digitally advanced and yet compliant is greater than ever before. In order to save costs and optimize the KYC process, more and more financial institutions are moving towards full automation where human interaction is limited to decision making.
However, two-speed Europe is emerging with northern countries that totally rely on technology and the rest that follow the more traditional KYC approach, with some still requiring hardcopy forms to be signed by ink.
Another emerging trend is alternative banking, and FinTech companies are among them. Customers are attracted by facilitated KYC procedures and full digitalization. Such companies usually do not have physical presence in the region and offer greater flexibility when it comes to application of new technologies. Time will tell if such a route pays off or such service providers will drown in KYC deficiencies.
How has KYC compliance evolved over the past 5 years?
SC: The recent five years have brought dramatic changes to the European market. Firstly, the previously barely known Baltic market became popular as a loophole for money laundering for capital originated from the East. The Deutsche Bank case brought to light the poor KYC compliance culture even among top tier banks and this was followed by similar concerns related to major Scandinavian banks. This was all accompanied by a number of laundromat cases taking place nearby. This was a wake-up call to European banking and resulted in massive internal and external audits of the banks.
Secondly, the 4th and 5th AML Directives are bringing major improvements to due diligence procedures. Most importantly, beneficial ownership and political exposure of individuals came under scrutiny, inevitability creating the need to set unified beneficial ownership registers. By now, EU members states should already have local UBO registers set up and running and be ready for the next step – unification of such local register into one pan-European data base. Money laundering respects no borders and globalisation and cross-border cooperation in KYC compliance is a must.
How has KYC compliance changed in the midst of COVID?
SC: In the wake of Zoom and Skype calls, digitalization of European banks is the main goal, where both the employees and the customers remain at home. Most Scandinavia based banks have already been moving towards automation driven organisations rather than labour, and transferring their operational centres to lower cost countries such as the Baltic states, Poland or Middle-East. Yet, currently major financial institutions are experiencing a slowdown in such technology development – in order to save costs and survive the pandemic redundancies programs have been announced.
As for customers, online verification of identity became a new norm, due diligence processes were adapted to expect the delays of documentation if some forms still must be signed by ink. Deviations in financial data, given the financial downfall, became rather expected causing adjustments to KYC procedures and risk expectations.
FSAs and law enforcement agencies have been known to be operating in their own course, yet, even such organisations introduced encrypted documentation share solutions instead of physical inspections.
What are the top trends shaping the future of KYC compliance?
SC: In terms of organisation of labour, KYC compliance departments are becoming more complex as we speak. Many years ago there may have been one compliance officer (a lawyer, as a rule) being responsible for everything related to financial crime. Now there are KYC analysts, compliance officers, compliance risk officers, MLROs. But also, compliance departments shifted from being run by lawyers to being led by data analysts resulting in updated KYC compliance approach.
Technology advancements play an important role, undeniably. The alternative banking is still more familiar to the buzzwords like FinTech and RegTech and traditional banking is still rather a conservative area and sticks to well known systems. Yet, the importance of digital solutions is growing since it is a key factor to ensure competitiveness and availability of banking services.
What’s the future of KYC compliance?
SC: In the long term new generation banking will definitely change the KYC process that will be employing new technologies like blockchain or similar for facilitation of KYC compliance requirements. The potential of RegTech is also awaiting to be unlocked and will benefit compliance departments in reducing labour costs. Contactless identity verification and account opening will be a new norm and financial institutions are getting ready for it. Probably the last dinosaur to go extinct will be documentation certification as we understand it now, given it is still a valid requirement in quite a few European jurisdictions and UK.
As per regulatory development, the 6th AML Directive is at the doorstep and will tackle the quality of the technology financial institutions apply and having sound KYC compliance procedures will not be enough. The directive extends the list of activities to be recognised as money laundering, including cyber-crimes. This means that financial institutions soon will be asked to develop and strengthen cyber-crime prevention units, as well as personal data management which goes hand in hand with cyber security. Lastly, it is a rather clear trend within recent regulations that full transparency of the ultimate beneficial ownership is on top of the agenda and will demand new solutions.
