KYC (know your customer) is a collection of data-driven process for ensuring that customers are who they claim to be. Most service organizations need to perform some KYC. For those who offer regulated financial services, KYC assumes extra importance. Conventionally the KYC standard procedure has been to update customer info after specified intervals of time, most commonly every 5 years. This practice has roots in public sector banking. However, this is proving to be inefficient and prone to security issues. This is where ‘perpetual’ KYC comes in. Here is a look at various aspects of continuous/ongoing/perpetual KYC.
KYC is not complex. It simply requires diligence. Info collected for KYC checks can include PAN, driver’s license, passport, voter ID, other government-issued Ids, utility bills, photographs, and so on. The information on these documents tends to change. A customer may relocate to a new address or change her job. Passports and licenses tend to expire. Banks and other firms have an obligation to have updated customer info on record. This is to ensure an accurate assessment of customers’ compliance risk. Firms that fail to do this can be fined or otherwise penalized. The UK is home to millions of migrant workers. These expat professionals regularly send international money transfers as remittances to their home countries. Up-to-date KYC info is also a prerequisite for smooth remittance transfers.
Outcomes Of Non Compliance
The Financial Conduct Authority (FCA) is the non-governmental financial regulator in the UK. In June 2020 the FCA fined Commerzbank London to the tune of GBP 37.8 million for failing to comply with AML regulations. The Bank instituted an ‘exceptions process’ allowing existing clients to transact despite the lack of updated KYC info. Anti-money laundering (AML) regulations require robust screening and KYC identity verification measures. These measures ensure that only legitimate applicants are provided financial services. Document verification and biometric authentication makes it much easier for legitimate customers to get access to important services. At the same time it keeps potential criminals and fraudsters at bay.
The shift to ‘perpetual’
Banks and financial institutions in the UK are required to implement KYC and customer due diligence procedures during the account opening process. The first step of the customer onboarding process is to verify identity. These checks are to make it difficult for criminals to commit fraud using false identities. Customer data is commonly stored in multiple databases at a bank. When something changes (such as address or phone number) customers often fail to update their info with the bank. This makes the banks’ data out of date. The poor quality of customer data has serious implications. It leads to gross inaccuracies in a customer’s risk profile.
For decades banks have handled KYC data validation processes manually. There are major shortcomings in the conventional timeline-based KYC update process. This needs to change. Perpetual/continuous KYC processes reduce the cost of updating info, while increasing accuracy. Customer information is updated based on specific trigger events, rather than elapsed time. Triggers can include unusual transaction activity such as large deposits or withdrawals, or any event that indicates outdated information. Triggers for perpetual KYC are determined by each bank’s internal KYC policies.
Changes Since COVID-19
The COVID-19 crisis was accompanied by a spike in online criminal activities. Identity theft and money laundering were among the most reported crimes globally in 2020. There has been a profusion of scams and other illegal activities using fake and stolen identities. This is a big concern for regulatory authorities. Perpetual KYC has become the preferred way for faster and more effective updates to customer information.
Outdated customer info increases the financial crime risk exposure of a bank. Perpetual KYC mitigates this risk. Any transaction abnormality is cause to check a customer’s profile and potentially initiate further investigation. Such abnormalities include large cash deposits or wire transfers. AI-powered automated processes can update records continuously whenever any minor non-material changes occur. Perpetual also makes KYC easier and less intrusive for customers.
According to McKinsey, poor data quality is the single biggest contributor to the poor performance of customer risk-rating models. Incorrect KYC information, missing information on suppliers, and erroneous business descriptions are avoidable risks. Perpetual KYC makes for more effective risk-rating models. Better customer profiling means that legitimate customers can have access to loans, credit, and other banking services quickly and easily, with minimal paperwork.
About the Author:
Hemant G is a contributing writer at Sparkwebs LLC, a Digital and Content Marketing Agency. When he’s not writing, he loves to travel, scuba dive, and watch documentaries.