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The solution to banking client due diligence: Streamlined AML and perpetual KYC

All too often, FIs continue with ineffective traditional methods based on a lack of technology, process and approach that could enable them to instead to rely on a trigger-based approach to client reviews.

Greg Watson
April 14, 2021

For most financial institutions (FIs), the compliance systems used to onboard and maintain clients are increasingly outdated.  The starkest evidence of this is seen at the sharp end of the spectrum: the complex and intricate world of commercial, corporate and institutional banking entities.

Many FIs still use the traditional periodic Know Your Client (KYC) approach of client reviews to manage their financial crime risk, utilising a cycle based on pre-set risk classification criteria.  

Interestingly, this approach to periodic KYC is usually not one prescribed by local regulators. All too often, FIs continue with ineffective traditional methods based on a lack of technology, process and approach that could enable them to instead to rely on a trigger-based approach to client reviews.

Why is conducting KYC checks on a periodic basis such an issue?  

The answer is multifaceted and complex.

1. Poor client experience

Periodic reviews affect all clients and in particular complex ones who are multi-banked.

For instance, a global corporation could be serviced by numerous banks catering to various financial aspects of its business. Assuming that, like many corporates, this process is managed at Head Office level, and appreciating they may have 150 client entities around the world, of which 20% are classified as high risk, then 30 of them will require a KYC refresh on an annual basis.

Even if just five banks are involved per period, operational responses are necessary at least five times per year. This does not yet factor in the 120 medium and low risk KYC refreshes as they become due, nor does it begin to address how such an undertaking is organised.

The net result for the corporate client’s head office is a dizzying and unwelcome carousel ride of responding to information requests from banks and coordinating these solutions across all 150 client entities around the world while running its core business.

2. Inevitable operational inefficiencies

The flow of KYC reviews is simultaneously frenetic and constant. This is further compounded by the highly manual and laborious nature of this activity.

Some organisations have been observed conducting more than 100 000 of these arduous reviews in a single calendar/financial year. With five to as many as 20 human work hours being spent on each file, even the most cursory audit will find it uneconomical and unproductive.

3. Hampered business growth

Diverting finite resources to multiple KYC checks can represent direct lost opportunities to pursue other value-add activities, such as revenue enablement through building client bases and improving product offerings. Corporate entities are bound to ensure regulatory compliance in their dealings. It’s non-negotiable. However, the periodic processes currently being applied are inefficient and unsustainable.

4. Too much work for minimal return

The unwieldy volumes of data being processed on a continuous and relentless basis can invite error or inconsistency in the quality control of important KYC reviews within organisations. It is telling that the material findings of these checks often constitute less than 2% of the KYC checks processed. This output is disproportionate to the outcomes.

The future of AML compliance and KYC reviews

The way forward in most cases is to implement a trigger-based approach to KYC. In a sufficiently robust AML framework, which is linked to all the relevant and necessary data on clients and their transactions, and powered by a policy-based ruleset, the next step is to automate the system to create review alerts.

What this means is that any client or transaction behaviours that fall outside the parameters of the ruleset should set off a trigger and be automatically processed for review.

By implementing a trigger-based approach, financial institutions can effectively eliminate periodic reviews allowing them to focus resources on the instances that present as high-risk on an ongoing basis.

Stitching the solution together

Of course, instituting this approach is historically easier said than done. Most organisations no doubt already have the required framework of technological assets to implement this streamlined trigger-based approach. The problem lies in the synchronisation and integration- or stitching together- of the various information streams into targeted solutions.

Viewed step by step, the data sources already exist. What is required is a single solution which applies a policy-based ruleset to analysing and interpreting the data. This solution detects and acts upon those anomalies which require review intervention.

Introducing the Napier Client Activity Review module

In response to the challenges Napier has designed the Client Activity Review (CAR) module.

This unique tech product acts as a horizontal layer, straddling the existing Customer Lifecycle Management (CLM), KYC screening and transaction monitoring systems.

It aggregates data from any and/or all sources and measures the extracted data against the policy-based rule set. AI is used to filter results and achieve intelligent pattern recognition.

The key to Napier CAR is that it is technology agnostic. It finds and applies the most appropriate solution to each unique problem. It can therefore be deployed on premises or in the cloud and can seamlessly integrate with existing tech assets to accurately implement perpetual KYC timeously and economically.

Facing the challenges of existing periodic KYC review practices

As exciting as the possibilities are for companies which implement Napier CAR tech, it must be clarified that there is no single-dose vaccine for streamlined KYC.

While technology is available, the internal compliance departments of FIs and- in some cases- regional regulatory bodies need to be enticed away from traditional, large scale periodic KYC, and towards targeted, trigger-driven AML.

Embracing the opportunity for perpetual KYC

The key is to pilot and test Napier CAR tech in the financial environment- perhaps with a low-risk control group in parallel- to demonstrate the effectiveness of the module in detecting, exposing, and responding to financial crime risk.

Napier is confident that implementing the Client Activity Review module will improve customer experience, reduce the costs incurred from considerable time and effort and free up resources which can be redirected to acquiring new business. Streamlined KYC will over time gain the confidence of internal compliance departments and the trust of financial regulatory bodies worldwide.

AML compliance and perpetual KYC in the future

While a lot of work awaits, there is an encouraging groundswell of interest in this forward-looking model of KYC. The Napier Client Activity Review module is the future of both KYC compliance and the fight against financial crime.  Napier is sowing the future now. Our clients will reap the rewards for years to come.

Discover Client Activity Review

To learn more about how Napier can help move your organisation to perpetual KYC, download our latest eBook, Client Activity Review: The Missing Link between KYC and AML.

Greg has over 20 years’ experience in operational management, transformation and client lifecycle management gained at Tier 1 banks including HSBC, and Fintechs such as Fenergo. He has been at the coalface of inefficient periodic review systems and the challenge involved in revamping them. This gives him a unique insight into how to approach and implement the necessary improvements.