The comprehensive level of sophistication for bad actors to successfully move illicit funds through banks has put added pressure on strengthening so-called know your customer (KYC) processes. Financial institutions are struggling to verify the trustworthiness and true intent of newly onboarded customers or companies in need of financial services.
Against the backdrop of Russias ongoing war in Ukraine, and actions by the U.S., U.K. and the European Union to delist Russian banks from the SWIFT financial messaging network, banks around the globe are feeling the need to interrogate vast quantities of financial data more effectively and efficiently to make sure that bad actors are not slipping through the cracks.
KYC processes often still rely on time-consuming manual processes that make human errors even more of a reality, which can lead to regulatory scrutiny. Recent regulatory updates require additional information to be added to the mix over time, so KYC processes have become increasingly onerous.
At the same time, criminal enterprises are more sophisticated in their ability to mask the corporate structures and banking operations that fund their illegal activity. That means the number of analysts and dedicated KYC resources in larger firms and banks have grown substantially, which has driven up costs.
How can banks understand the broader risk and capitalize on the amount of data that firms need to understand when it comes to KYC? Weve arrived at an inflection point for automated KYC processes for a number of reasons.
Financial institutions cant just add more people, especially with some of the hiring challenges that industries across the board are dealing with. Using automation, they can perform KYC refreshes more efficiently to better mitigate risk.
If there are no changes to a customers KYC profile or their behavior patterns, time is wasted by teams confirming this during a review period. Meanwhile, a customer with substantial changes might not be refreshed for some time, increasing the potential risk to the bank. By moving to a perpetual approach via automated checks and balances, the system monitors internal and external data to proactively determine when a material change requires an analyst review.
Historically, KYC processes have looked at expected versus actual client activity. For example, a customer would say theyre opening an account for international bill payment and they would list which countries and how many transactions they expect to do over time. KYC analysts then look at yearly transactions to see if there are deviations from what the customer stated during onboarding.
Instead of evaluating on a one, three or five-year incremental scale, automation technology can constantly update customer information to monitor client behavior and better understand overall risk as information changes. Automation can also enrich transaction data with external data sources to better understand counterparties, including the types of businesses, where theyre based and any risks associated with their ultimate beneficial ownership structure or previous money movement patterns. This leads to earlier detection of risky behavioral changes.
Automation capabilities allow systems to drive processes without putting the entire onus on an analyst or a customer. Being able to detect a change proactively and allow a customer to verify reduces the burden on the customer while also keeping the KYC record up to date.
Current automated information also allows financial institutions to improve downstream processes when proactively providing new or updated product and service offers. If a bank can use automated touchpoints and information to better understand the customers banking behavior and personalized needs, they have a better chance of retaining those customers over time. Automation creates a better user experience for customers while also staying regulatory compliant and averting risk.
Capturing and validating the authenticity of customers identities is more important than ever. Financial institutions need to understand who new individual customers or companies are, where theyre located and what type of business they intend to engage in to combat illicit activities like money laundering, terrorist financing, financial fraud and more. Automation can simplify KYC processes to give financial institutions a competitive advantage.
Carl Ottman is head of KYC solutions at Quantexa.
Excerpt from:
Why automating KYC is more critical than ever - BAI Banking Strategies
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