In our recent webinar “KYC: Challenges and Best Practices for 2024“, we brought together industry experts to discuss the evolving landscape of Know Your Customer (KYC) processes. The following Q&A session delves into the audience’s queries, providing valuable insights and practical solutions shared by the panellists.
Q: With budget constraints, how do I get the best output to ensure sound KYC processes?
A: To address this matter transparently, it’s crucial to emphasise that cutting corners or resorting to tick-box exercises is no longer acceptable for compliance. The regulatory landscape demands a thorough examination of your KYC processes to ensure they are truly fit for purpose.
Budget constraints cannot serve as a valid excuse for neglecting your KYC obligations. Regulators will not be lenient if your processes are not up to par, whether due annually or biannually, depending on your risk profiles. Failure to address this adequately could lead to fines and penalties, potentially invoking Section 166.
The FCA is intensifying its scrutiny of firms, a trend that has notably escalated over the past year and is expected to continue. Continuous monitoring is imperative, and if your firm is not engaging in this practice, it’s high time to reassess your processes.
Board members must be actively involved and informed, as they carry a significant share of responsibility. Senior leadership awareness is equally crucial. Incorporating KYC discussions into agendas, establishing risk committees, and holding standing risk meetings are essential components of a proactive approach.
Conducting a recent gap analysis is vital, yet many firms may not have undertaken this task. Some firms reach out to us for periodic assessments of their KYC processes, a valuable one-off advisory service particularly beneficial for smaller firms facing budget constraints.
It’s imperative to view KYC compliance not as a mere checkbox exercise but as an ongoing, dynamic commitment. This is not a transient issue that will fade away; instead, it requires consistent attention and focus. Therefore, it is crucial to approach this matter with diligence and strategic planning, ensuring that your efforts are directed towards genuine, sustained compliance.
Q: Building on that, how often and by what method is KYC feedback checked—per transaction or based on the firm’s internal policies (e.g., every two or five years)? Clarifying this is crucial, as consistently urging firms to “revisit” can be unclear, especially in explaining its impact on individual clients.
A: It’s imperative to scrutinise both your customer base and risk profile. The frequency of enhanced due diligence and ongoing monitoring should align with the risk associated with each customer. While weekly monitoring may not be applicable for every organisation, high-risk entities may necessitate more frequent checks, possibly on a monthly basis.
The dynamics of risk can change rapidly, there are instances where someone went from being verified to high risk within a week. For those deemed low risk, biannual assessments may suffice, possibly aligned with every transaction. However, it’s crucial to evaluate the nature of each transaction—is it routine or irregular? Is it consistent with past client behaviour, or does it raise any red flags?
These questions are diverse and must be tailored to each firm’s specific circumstances. It’s a case-by-case consideration based on the firm’s risk profile and customer base. Engaging your board in discussions about creating a monitoring plan is beneficial. There’s no one-size-fits-all approach. Specific recommendations need to be customised for each individual firm as it’s about adapting strategies to the unique characteristics and risk landscape of your firm, rather than relying on a universal solution.
Q: How do I know that the software I’m using is producing accurate results?
A: There are several steps that can be taken to instil confidence in the accuracy of software tools. One fundamental approach is to gain a clear understanding of the tool’s capabilities and operational methods. Before adopting any software, one should critically assess whether it aligns with the intended purpose. The vendor or manufacturer should be capable of articulating, in simple terms, how the tool achieves its claimed functionality.
This involves delving into specifics, such as whether the software draws information from government or commercial databases, and if so, which ones, along with the associated access permissions. Questions regarding data accuracy and refresh frequency are also vital, as the timeliness of information is crucial for its relevance.
Furthermore, considerations should extend to the software’s ability to accommodate diverse monitoring requirements for different client cohorts. It’s improbable that a one-size-fits-all monitoring approach exists for clients, necessitating a flexible software solution.
Avoiding unnecessary costs is equally important. It’s not uncommon for firms to invest in software with capabilities far beyond their usage needs. Hence, functionalities that won’t be utilised should be toggleable, allowing users to tailor the tool to their specific requirements and avoid unnecessary expenses.
Lastly, the software’s efficacy should be subject to a common-sense evaluation. Can it replicate manual processes accurately and at the required standard? While software tools can be valuable, their effectiveness lies in their ability to outperform manual efforts. If the software doesn’t offer improved speed and accuracy, it raises questions about its value.
It’s crucial to strike a balance between embracing software tools for their efficiency and ensuring they genuinely meet the user’s needs. If a vendor or supplier struggles to explain the software’s functionalities, it could be an early warning sign of potential issues, prompting a closer examination before committing to its adoption.
Q: Is it more cost-effective to get a fine, or spend the money on preventive measures?
A: Working on the side of the angels, as the phrase goes, is not just a moral imperative; it’s also increasingly cost-effective. Getting compliance wrong can be financially devastating, leading to fines, penalties, and potentially even legal consequences, including the prospect of jail time. However, the repercussions don’t end there.
Once a compliance breach occurs, the organisation comes under heightened scrutiny. International examples in the banking sector reveal instances where what may seem like multiple separate offences, are in reality a failure to rectify and thoroughly address the initial shortcomings. Authorities revisited to find lingering weaknesses, exacerbating the situation as the organisation had been warned and should have implemented corrective measures.
It’s a misconception to think that absorbing a one-off fine is a viable strategy. Reputational damage with regulators, investors, and customers can be severe. Banks, for instance, might find their reputation significantly tarnished, potentially deterring investors and customers alike.
Under the senior managers regime, personal responsibility is a critical element. Money Laundering Reporting Officers, and those in similar roles, now bear personal accountability. Taking risks and getting compliance wrong could have profound personal consequences, making it imperative for individuals in these roles to prioritise accuracy and thoroughness.
The argument that taking a financial hit is an acceptable cost of doing business is no longer sustainable. Regulators are moving towards a more draconian approach, and punitive actions are likely to become even more stringent. The message is clear: invest in getting it right. The cost of compliance is not just a financial burden but an inherent part of being in business. If a business cannot afford to meet these compliance standards, it may need to reconsider its place in the industry.
Next Steps for Firms
The webinar addressed critical concerns for firms in implementing effective KYC processes, particularly in the context of Anti-Money Laundering (AML) regulations. The speakers emphasised the importance of avoiding a “tick box” approach and highlighted the need for continuous monitoring tailored to the firm’s risk profile. Underscored is the significance of investing in reliable technology, ensuring accurate results, and the proactive involvement of senior management and boards.
- Comprehensive Risk Assessment: Conduct a thorough risk assessment to understand the specific risks associated with your customer base and transactions.
- Tailored Monitoring: Develop a monitoring strategy that aligns with your risk profile, ensuring that high-risk clients receive more frequent scrutiny.
- Investment in Technology: Assess and invest in technology that aligns with your KYC requirements. Ensure the chosen software is capable of meeting your specific needs and can deliver accurate and up-to-date results.
- Regular Updates and Training: Keep KYC policies, procedures, and staff training up to date. Regularly reassess and adjust these elements to accommodate evolving risks and regulatory changes.
- Proactive Communication: Foster a culture of proactive communication across departments, ensuring that information is shared, and intelligence is utilised effectively.
- Board and Senior Management Involvement: Ensure that boards and senior management are actively engaged in discussions around KYC processes, risk management, and compliance initiatives. This involvement is crucial for creating a compliance-conscious culture.
- Seeking External Expertise: Consider engaging external experts, such as compliance consultants, for periodic reviews, gap analyses, and to ensure that your processes align with the latest regulatory expectations.
By adopting these next steps, firms can enhance their KYC processes, mitigate regulatory risks, and safeguard their reputation in an ever-evolving financial landscape.
How Complyport Can Help
At Complyport, we offer a complete KYC/B Compliance Managed outsourcing service to support customer onboarding processes.
Our experienced team can provide assistance with ongoing maintenance/refresh reviews, KYC/B CDD activity and remediation efforts as part of your company’s Anti-Money Laundering compliance (AML) program.
Benefits:
- Outsourcing repetitive and not profitable manual processes, allowing you to focus on higher-value activities
- Reduce the time and resources to onboard customers thus improving efficiency
- Robust, trusted process built and monitored by experts in KYC/CDD/EDD
- Flexibility to adjust the size of the team to match your needs as you grow and evolve
- Decrease KYC/B money laundering risks by reducing errors in customer onboarding with a dedicated team focused on quality and timely delivery of service
- Managing 3rd party risk
The outsourcing of AML KYC/B solutions is a cost-effective and efficient way of managing AML Compliance. Complyport will help you control your KYC operations and meet your specific and at times onerous regulatory obligations. Contact Sukh Vairea at: sukh.vairea@complyport.co.uk to book a free consultation.
About Compyport
Complyport is a market-leading consulting firm supporting the UK financial services industry for over 22 years. We specialise in providing Governance, Risk and Compliance services to support the regulated financial services industry to raise standards and thrive.
Complyport can assist with the preparation of a GAP analysis and impact assessment on the investment firm’s capital adequacy and risk management framework of the Company under the regulatory framework.
We specialise in supporting the UK financial services industry with compliance guidance, advice and best practice.
- Financial Crime support and Forensics
- Compliance managed services and resourcing compliance personnel
- Skilled Person Reviews and Regulatory Investigation
- Prudential support, IFPR, ICARA and financial resilience advice
- Consumer Duty implementation advice
- Operational resilience & Cybersecurity advice
- Financial Promotions guidance, support, and management software solutions
- CASS advice and protections of client assets
- Comprehensive compliance work-flow management software
Contact Sukh Vairea at: sukh.vairea@complyport.co.uk to book a free consultation.
