Knowing your customer (KYC) is a challenging yet essential practice that has become the backbone of today's intercontinental market. There are growing demands for KYC regulation to help protect international corporations and their customers from making bad investments with untrustworthy individuals and businesses. Not only is KYC crucial to protecting companies, but it also helps to uncover shell companies and to prevent the “normalisation of illicit funds”. Therefore, it is vital to assess new business partners accurately, whether they are a corporate entity or the beneficial owners.
However, this is often a challenging, complex, and disorganised process without structure and standardisation. It is a lengthy process that is made more tedious as it involves verifying companies mainly through manual checks and plenty of paperwork.
Read further to learn about the top five challenges that are associated with KYC.
Challenge# 1 Inconsistency of Documents
FinTech, banks and other financial institutions don't have a standard method in which to collect their client's information. It is more common instead for different companies from the same industry to request different sets of data-especially when it comes to companies from multiple jurisdictions. Because of this, identification documents range from a passport, a driver license, or a utility bill.
The lack of consistency in what documents are needed for verifying identity then becomes tedious and time-consuming, especially for those who interact with companies from all over the world and therefore have to submit different sets of documents to multiple institutions from various jurisdictions.
Challenge# 2 Increasing Costs
Costs for KYC compliance are on the rise. As the world becomes flatter and companies become international, therefore reaching clients on a global scale, the number of clients for onboarding continues to grow. This means that companies must dedicate more hours and labour towards the onboarding process.
A survey by Thomson Reuters found that for the year 2017, 1100 financial institutions and corporations worth over $100 billion spent over $150 million on the KYC process-an increase from $142 million in 2016. The survey also found a rise in labour needed to process KYC- from an average of 68 KYC compliance professionals in 2016 to 307 in 2017.
The more funds and labour you must allocate to KYC the more other departments of the business will suffer as resources are taken away from them and allotted to onboarding customers.
Challenge# 3 Loss of Time
In the same survey by Thomson Reuters, participants reported that the time needed to complete the onboarding process increased from 2016-2017 a trend that they expected to continue in 2018 with a further increase of between 12-24%.
This is most likely because most businesses still rely on the back-and-forth method of collecting paperwork directly from the client, which becomes more time consuming as companies expand into newer markets and increase their customer reach. It is a process that is not only prone to error, but it's also time-consuming which may cause customers to get frustrated and therefore end their application midway. Something that is especially common in today’s world of one-click convenience and instant gratification.
Challenge# 4 Companies Not Reporting Crucial Information
Another critical issue that companies face with KYC compliance is the miscommunication of vital company information. Many firms fail to share significant changes in their company structures. Such as, mergers between companies or changes in C level positions, which are the executive level positions in corporations.
This is crucial information that is required by multiple KYC/AML directives, including the FinCEN CDD Rule and the 5AMLD mandate which prioritise the identifying and verifying of all company UBOs (Ultimate Beneficial Ownership).
However, according to Trulioo, many financial institutions "are reliant on gathering UBO information directly from clients through a back and forth of forms until KYC documentation is complete” which creates plenty of room for error. When companies use this method, it is very destructive; it makes it quite easy for organisations to hide ownership structures or conceal their identities by falsifying documentation and for data inaccuracies to occur due to human error.
All of these errors make it more difficult to authenticate the accuracy of the data used in a KYC statement, which means that it will be unintentionally misleading and so more resources will have to be spent to collect the right data and to create an accurate report.
Challenge# 5 Continuous Monitoring Required
Your job does not end when you have established a KYC reports and risk level for each customer. Companies are always changing, which means that their risk level will also change.
This creates the challenge of designing and implementing a process for continued monitoring of the customer's risk level.
Why? Because only ongoing monitoring will ensure that the assessment of the client's risk level always remains accurately reflective of them.
What happens if there isn’t proper monitoring? Firstly, it could lead to misuse of resources by over checking customers that have regressed from high risk to low risk, i.e. putting these customers through extensive checks that are only necessary for high level threats. Or in contrast, not monitoring enough or not using the correct assessments for customers that began at lower levels but have progressed to high risk.
In both cases, if we fail to monitor and identify the customer's risk category accurately, then it will cause problems down the line- such as causing bad investments or in worst-case scenarios aiding in terrorist financing.
So, what makes this process challenging?
· It can be challenging to determine how often to recheck the frequency of risk
· Frontline employees may not have the knowledge or experience required to recognise ‘red flags’
· Management not ensuring that all staff understand what KYC is, its importance, and how they should integrate it within the company’s operations
With more and more companies becoming global entities, it has become more vital that you know whom you are doing business with (KYC). However, this is something that is becoming more challenging as interactions become more digital and less face-to-face.
Despite the challenges of KYC, it is still essential that you employ KYC practices when dealing with new partners or clients because if they operate illegally, it will hurt your business and your clients.
Cedar Rose is a leading firm in credit information, business intelligence, and investigative due diligence. In addition to offering multiple solutions for business to business interactions, our team has over 20 years' experience assisting clients with AML and KYC compliance. If you are entering into a partnership with a new business and need help to verify their identity, we can help. If you are fortunate enough to be on-boarding hundreds of new clients daily, we have the technology to assist with automated KYC via electronic identity verification services. Contact us at +357 52 346630 or email our Client Services Team at email@example.com.