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 Rachel Woolley, Global Director of Financial Crime, Fenergo.
What’s the current state of KYC compliance?
RW: A number of scandals and other issues brought to light in recent years have served as a reminder that “compliance”, in and of itself, is not an effective method to prevent financial crime. In particular, the publication of the FinCEN Files in September 2020 highlighted the need for a more effective, collaborative approach to financial crime prevention. With many financial institutions still focusing on meeting minimum standards, coupled with disconnected stakeholders, our approach as an industry to financial crime prevention, including the fundamental process of KYC, needs a rethink and thankfully that is now underway.
How has KYC compliance evolved over the past 5 years?
RW: Legislation has continued to evolve in response to industry challenges, rather than proactively addressing the need for a more effective regime. The publication of the Panama Papers in 2016 triggered a wave of beneficial ownership reforms, with many countries introducing measures to increase transparency in the ownership and control of legal entities. In many ways, this has led to an increased operational burden for financial institutions rather than a more robust KYC process. In the EU in particular, financial institutions are obliged to report beneficial ownership discrepancies to corporate registries, adding additional manual steps to an already cumbersome process.
How has KYC compliance changed in the midst of COVID?
RW: Perhaps for the first time, global regulators are on the same page in their response to the pandemic. Acknowledging the critical need for continuity in the financial services industry, many regulators published guidance for financial institutions to consider, particularly in light of social distancing measures. Encouraging the use of remote onboarding processes and the implementation of flexible measures to identify and verify customers were common themes, effectively endorsing the use of technology solutions. Critically, technology can enhance our approach to financial crime risk management; this is particularly important as criminal organisations seek to capitalise on vulnerabilities and increased anxiety related to COVID.
What are the top trends shaping the future of KYC compliance?
RW: Many factors are influencing how we, as an industry, must consider the future of KYC compliance. The checklist or “tick-the-box” approach is no longer sufficient. Fenergo research has found that over $46.4 billion USD has been issued in enforcement penalties since 2008 for financial crime related violations, including AML, KYC and sanctions compliance failures. The question is whether such penalties are really enhancing our response to financial crime or merely a cost of doing business? Manual processes continue to be a significant operational burden. Creating an effective, end-to-end onboarding process that leverages the use of technology solutions can help to automate typically manual tasks, allowing subject matter experts to focus on areas of higher risk. A holistic approach to KYC compliance can enable greater efficiencies, improve AML risk management, and ultimately improve our response to financial crime prevention.
What’s the future of KYC compliance?
RW: With the focus now on enhancing AML regimes to become more effective, AML reform proposals are underway across the globe. The EU is expected to publish an AML Regulation in 2021, a departure from the use of AML Directives. Reform is also expected in the USA in the form of the AML Act of 2020, which is making its way through the legislative process. With regulators focussing on increased effectiveness, the traditional rules-based approach to KYC compliance is shifting to a process more focussed on outcomes. As a result, the adoption of technology solutions, will no doubt play a crucial role in how we, as an industry, enhance our response to financial crime prevention.