Last year we started publishing our Future of KYC Compliance Series which featured interviews with over 20 KYC and AML professionals and thought leaders to learn more about the trends that will shape the future of KYC compliance.
You likely don’t have time to read each and every interview so we’ve gone through and pulled together some of our favorite answers to the various interview questions. Here’s what we learned:
What are the top trends shaping the future of KYC compliance?
Allison Spagnolo, Managing Director at Guidepost Solutions
International changes and concerns will shape the future of KYC compliance in the next several years. First, there is a growing tension between KYC information and privacy concerns, especially for European banks and customers. Institutions’ ability to collect personal and sensitive data from individuals is dependent on compliance with intricate privacy laws and regulations, which will increase the time and resources needed to conduct customer due diligence. Relatedly, organisations will have to contend with balancing privacy requirements with eliminating siloes of customer information. The information that comprises a customer’s full “KYC file” is typically housed in multiple systems that are not designed to communicate with one another, often on purpose to segregate information that cannot be accessed in other jurisdictions or by other departments due to privacy and secrecy concerns. However, the ability to see the “full picture” of a customer is an important safeguard and this will continue to be an operational challenge.
Second, we are likely to see enhanced global regulations in customer due diligence and KYC, such as the passage of the Anti-Money Laundering Act of 2020 and Corporate Transparency Act in the United States, which imposes new beneficial ownership reporting requirements on companies formed or registered in the United States. As criminals become ever more sophisticated, lawmakers will continue tightening regulations and requiring adherence to stricter guidelines.
Greg Pinn, Head of Strategy for Merlon.ai
The last few years have focused on UBO and cryptocurrency. The next few will be shaped by digital transformation, bringing new technologies and solutions to a market that has been using the same tools for decades.
FIs must innovate to keep up with compliance demands. Fines, like the fine against Capital One, will continue to grow and push FIs, both large and small, to look to new technology to solve these challenges.
Joel Lange, Managing Director, Risk & Compliance Division at Acuris Global
As the wider umbrella of KYC becomes bigger and bigger I see more and more demand for specialised sector-based solutions.
A KYC solution for a big retail bank is not and should not be the same for a large gaming organisation or large corporate doing diligence on its global supply chain.
This means KYC providers becoming more specialised to service the needs of sector specific customers, leveraging common technology and data, but aligning it to the needs of the sector they are serving.
Joe Ciccolo, Founder of BitAML
Operationally, KYC compliance will likely continue to become much more automated with stronger intelligence capabilities led by machine learning, stronger algorithms, and a desire to remove friction from the process in stronger alignment with customer experience of fintech, crypto, and online/mobile banking applications.
While advancements such as sovereign digital identity and artificial intelligence are likely several years away, perhaps even further out, iterative improvements in technology will continue to yield an increasingly seamless KYC process, as well as faster and stronger review and remediation.
Jehan Jeyaretnam, Head of Compliance Services, Acuity Knowledge Partners
We believe the following are some of them:
Perpetual KYC: Organisations will look to invest in solutions that provide real-time surveillance
Use of data analysts: KYC compliance operations will see a spike in the use of data analysts, who could slice and dice customer data to find hidden patterns, leading to a greater control on overall compliance.
Segmented KYC: The depth of KYC review required for a large bank vs a new-age gaming company will very likely be different. KYC service providers who cater to the needs of specific sectors would, therefore, increase significantly.
Agile planning: Organisations should ensure that the systems and procedures they implement today are able to adapt to the regulations of tomorrow, or the regulations of other jurisdictions in which they want to grow their business.
Miriam Goldman Epstein, Operations Manager, SQOPE S.A
Over the coming years, I believe that transparency demands from the public will continue to shape government policies, with even some of the more opaque jurisdictions required to provide more information, such as ultimate beneficial ownership details.
In line with this, we see that there are more calls and policies being drafted to impose greater KYC regulations on other industries, such as the art market and real estate, as well as other forms of currency, such as crypto.
Finally, we notice that there are more technological solutions being developed to assist compliance professionals in their research.
Braden Perry, Partner, Kennyhertz Perry, LLC
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.
Eyal Barsky, CEO of OCR Solutions
Ongoing Monitoring – There was a time when financial institutions reviewed customers on a periodic basis and assigned a risk rating to each one. This was a tedious and practically manual process that could take an average of 10 days per file. The future of KYC compliance needs to remain constant. Today, the expectation is higher and regulations are tightening on a nearly daily basis.
Simplified Digital Adoption – Currently, adoption lies in the hands of larger enterprises but the cost of KYC compliance is exceptionally high. Banks are able to allocate very large sums to secure their clients but this is simply something that small businesses cannot afford. As soon as adoption and numbers of clients grow, smaller players will have a market of providers in this niche industry.
Global Regulatory Pressure – This era is the wild west of technology– there are no rules and there are a lot of unchartered territories. Regulators know this and take it on as a challenge to develop new tools and processes so they can identify rulebreakers and outlaws. If they find a process that works, sadly, they will double down and increase regulations. This is an ever-evolving and historic behavior that we have all seen happen through the years.
Rachel Woolley, Global Director of Financial Crime, Fenergo
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 $10 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.
Brad Elbein, Partner & Government, Regulatory and Compliance Practice Co-Chair, Culhane Meadows
The most significant trend is that, in the best traditions of capitalism, KYC regulation has become a great business opportunity.
Businesses that hated having to obtain and report this information to law enforcement have now realised that “knowing their customer” opens opportunities for them.
A KYC effort helps them broaden their relationships with customers. Additional information about business associates is so valuable that these efforts will undoubtedly continue in the future.
KYC compliance solutions are built around a compliance management structure and are supplied with data. The increasing amount of generated data is the primary trend shaping the future of KYC compliance. This boost is guided by the huge quantities of produced data– big data (BD) and by the improved opportunities for screening this data. Furthermore, technology is the other trend shaping the future of KYC compliance. Artificial intelligence and machine learning are the main ways working the volume of produced data according to compliance requirements. Increased necessity for increased data analytics being carried all the way towards the entire process length, will be adjusted to the increasing volume of data being generated. In addition, emerging transaction activities occurring with a similar pace across the world is the other trend pushing forward compliance regulations towards uniform best practices and international standards for uniform KYC compliance in different sectors of the economy.
Chris Siddons, Senior Director of Financial Crime Compliance at LexisNexis Risk Solutions
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 U.S. 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.
Sukh Vairea, Compliance Manager
Transparency and interoperability with the compliance ecosystem will be a continuing trend for the foreseeable future. Some organisations are digital from day one, others continue to transition from legacy on-prem infrastructures to cloud-based technology. A top trend will see the continual transition to cloud.
Another top trend is partnerships particularly software vendors. Businesses will share KYC as a service through blockchain which saves duplication and onboarding efforts. An individual or business once onboarded does not have to go through the onboarding process again. Storing data on distributed ledger technology will become more popular leveraging economies of scale.
Future trends will see improvements in tech – faster, bigger volumes of remediation and seamless KYC onboarding. Digital footprints will be shared quicker between government entities, associations, and other public services to serve domestic and international customers. Artificial intelligence, deep learning and machine learning will become the de facto.
Phillip Hamilton, Senior Compliance Investigative Analyst, Compliance Department, Sutton Bank
The top trends shaping the future of KYC compliance are digital currencies like bitcoin, the decline of face-to-face customer contact (doing business electronically, i.e., via email), and the fraud exposure that comes with the expediency by which companies conduct business.
KYC must become more than just a function necessary to meet regulatory requirements.
KYC compliance will quickly become the first line of defense in keeping bad actors away from the business’s doorstep.
Oonagh van den Berg, Founder and Managing Director of Virtual Risk Solutions
- Skill sets adaptation.
- Holistic automation which is interwoven across risks so we have one source of the truth and streamlined reporting which is effective and efficient in risk identification.
- Big Data challenges are preventing a move towards artificial intelligence and machine learning adaptation – we need to take one step back to fix this before we can quantum leaps forward.
On the risk agenda the big focus areas are:
Trade based money laundering – there is going to be increased focus now on whether banks have really understood their clients business activities during KYC assessments and inadvertently facilitated fraudulent trades and transactions related to products that would not fit into the clients profile.
Modern day slavery risk typologies – this is becoming an increasingly important focus by government and industry groups and much more needs to be done through Public Private Partnerships (PPP) to facilitate information sharing to identify and better understand these complex networks.
Illegal wildlife trading risk typologies – this is becoming a much more prominent issue due to the focus by environmental groups and charities such as United for Wildlife. Together with government task forces we will see a lot of positive work happening in this area in the coming 12-18 months.
Michael Ronickher, Partner at Constantine Cannon LLP
The creation of a more robust whistleblower program for BSA violations will have a critical role in the future of KYC compliance. The whistleblower program will provide a new avenue for those who identify noncompliance and find their alerts to management falling on deaf ears.
By incentivising people of integrity to come forward, the program will assist honest compliance professionals in doing the right thing, and it will provide regulators another means of identifying problematic activities. If the program is half as successful as the SEC’s, it will have an enormous impact on compliance.
Nishank Khanna, CFO of Clarify Capital
As tech and automation increases the accuracy of compliance measures, regulation will transform in tandem.
Rather than over-see adoption alone, regulation will shift to measuring how efficient company compliance is.
A new trend should evolve towards decreasing inaccuracies and setting benchmarks and metrics that more easily define what successful KYC compliance looks like.
Sandra Ciaraite, AML Analyst, Danske Bank
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 an updated KYC compliance approach.
Technology advancements play an important role undeniably. 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.
Verification of the client’s identity is a mutually beneficial process. Banks and financial institutions set the level of customer tolerance for risk, investment preferences and the likelihood of involvement in illegal activities. In turn, customers precisely receive the categories of accounts and services that best meet their real needs. Standard KYC mechanisms include customer approval, personal identification process, tracking of unusual transactions, risk management, such as installing filters that regulate the type and number of financial operations for a particular customer.
On a regulatory and practical side, the main trends are related to:
- More Ultimate Beneficial Owner /UBO/ detailed information required
- Better management of the sanctions
- Implementation of the crypto currency rules and regulation
- Enhanced due-diligence of high-risk countries
- Online client onboarding process
Of course, the above will develop with many various regtech solutions based on AI, blockchain, machine learning and big data. The most effective way to meet the requirements is to use regulatory technologies. Regulation and technology are two key trends that have shifted the tectonic plates of global finance. After the financial crisis, authorities around the world began to introduce new – comprehensive and more cautious – regulatory measures.
Marc Buklis, Principal, Mark Buklis Associates
KYC compliance continues to evolve, with several key drivers:
- New technology, for data capture, automation and decision-support
- Adaptation to ever increasing online banking, with changes to models and rating to reflect the new basis of activity and behaviour.
- KYC compliance is being driven by data management and data science.
- Data security and privacy will only become more important, as automated KYC compliance becomes even more automated and digitised.
Financial institutions already carry massive amounts of valuable, sensitive data. The increase in online trends and the increased automation of the process will only make this data more valuable and more in need of protection.
Andreea Rainer, Founder Attorney at Law of Andreea Rainer Law Office
On the one side, in order to counterbalance the specific risks entailed by remote relationships, it is expected that the relevant KYC regulations will be tightened. This trend is already noticeable in the context of the adoption of the European Union 6AML Directive, i.e. Directive (EU) 2018/1673 on combating money laundering by criminal law. For the purpose of addressing increasing cybercriminal offences, the latter and related sanctions in the area of money laundering are better defined, expanded and strongly discouraged. On the other side, lawyers and clients are expected to become “more digital”. Law offices are going to implement both fully digital KYC solutions and more sophisticated security systems tackling high risk business relationships. Legal services’ beneficiaries seem happy and relieved that they are able to benefit from electronic solutions within the onboarding and monitoring process.
Alejandro Leáñez Rieber, International Legal Counsel
An increasing number of job openings within the KYC compliance teams require specific specialisations in order to apply for such openings. Candidates are companies that are looking for well-educated candidates in KYC compliance, and with a clear background.
Increase digitalisation with Artificial Intelligence like machine learning, allow KYC compliance systems to actually think, train, and enhance the accuracy of the systems. Many software sold to major financial institutions has an enhanced machine learning feature.
Moreover, the cryptocurrency industry is expanding at unprecedented levels which presents a unique challenge to the KYC compliance teams dealing with cryptocurrency, since these are the preferred method for money launderers globally.
Finally, high-risk countries are also subject to enhanced review by the KYC compliance teams, once there is a red flag from a country like Iran, North Korea, Syria, Venezuela, or Libya an enhanced procedure of compliance begins.
Nenad Jovicic, AML/FT Expert at Erste Banka Srbija
First and biggest trend would be digitalisation in the full sense of the word. 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’ transactions. By doing this financial institutions reduce the need for manpower, or those employees can focus on other job requirements.