The benefits of incorporating automation into KYC compliance

By Wayne Johnson | 10 April 2017

As financial services firms consider the impact the draft and under consultation Money Laundering Regulations 2017 will have for their companies, their focus is on ensuring they can plot a course to compliance amongst the host of new regulations. Financial services firms are more adept than other industries such as professional and legal services firms from having years of experience of working under the regime of extensive regulation, and as a result of this, and the timeframes they have had to consider and implement the relevant compliance procedures since AML4 was mooted two years ago, I expect they will be relatively sanguine in their approach to MLR 2017.

That is not to say of course, that more could not still be done. Only last month we read in the newspapers of the Russian “Global Laundromat” that has implicated more than half a dozen UK and international banks based in the UK. Should future investigations illustrate that there has been complicity or neglect of their Anti Money Laundering policies, it would likely come as no surprise to see the FCA step in with some hefty sanctions.

Here in the UK, money laundering remains as much an issue as in other country, and it would be remiss of us to suggest that Money Laundering and Counter Terrorism Financing only occurs in far away or less developed jurisdictions. Despite having a highly regulated and developed financial services sector, the stability of the system and the high volume of transactions passing through the UK each day continue to make it a an attractive proposition to money launderers. That’s why these new draft regulations must be considered seriously and implemented with gusto.

The moral here is that globalisation continues to make the world a smaller and smaller pace. Transactions happen at the speed of light involving banks thousands of miles apart and in different timezones. Computers make many of the decision that affect our economies, and we can open bank accounts without ever visiting a branch. It is indeed a very different world to twenty years ago.

The technology that allows all this to happen however, is the same reason money laundering and terrorism financing is able to occur. It’s for that reason that as technology progresses, it must be put to use combatting the possible routes of entry for dirty money into the system.

As the regulations concerning AML/CTF have been developed over the last decade or so, and banks and the financial industry have taken a far more serious outlook towards the proposition of identifying potential money launderers and terrorists, technology has stepped in to take up much of the heavy lifting.

This has not been an overnight process however, and even now banks and financial services firms are using substantial amounts of manpower in their efforts to curtail the attempts of money launderers. It was only last year that JP Morgan announced that they would be adding a substantial volume of employees to ensure compliance policies were followed and documented.

While potentially viewed as excessive, the JP Morgan example neatly encapsulates the thinking that the industry has in place to date - employing more back office employees to sift through records. While it is encouraging to see the industry react to enhanced AML/CTF regulations with increased vigilance through additional manpower, the approach is likely to be unsustainable longer term. Manual process are virtually impossible to scale, resulting in a dampener on growth.

Along with competition, regulation is the largest barrier to growth for banks in 2017. Should banks be able to overcome the not insignificant challenges faced by regulations including MLR 2017, then they will be well placed to focus on their competitors.

With technology continuing to progress in every facet of life, it is now also possible to apply automation to AML/CTF compliance procedures, particularly in the field of Customer Due Diligence and onboarding. Currently, as we see in the JP Morgan example, this work is completed predominantly through manual process, which creates potential for human error and increased onboarding times. Indeed, a survey from Thomson Reuters noted that the average length of time it takes for a customer to be onboarded is 26 days, with customers being contacted on average 4 to 5 times by banks requesting documentation.

The increased capability of technology also has the net result that businesses using banking facilities have far greater expectations of their providers when looking to use their services. While they may be aware of the need for Customer Due Diligence to be completed, they have much higher expectations with regards to customer experience. Recognising that technology is available to help banks, banking customers in 2017 do not feel it reasonable to have to wait over a month and be contacted on multiple occasions for personal documentation. Banks can further make use of digitisation as they seek to increase the sophistication and agility of their onboarding services in order to align clients against business need, strategy and service offering.

Digitisation therefore, can bring multiple benefits for banks on a number of different levels. As well as satisfying customer demand for sleek and agile onboarding that does not involve multiple touch points, by redesigning KYC processes to incorporate digitisation and automation, Customer Due Diligence can be effected at scale and pace, with policies run by software. The same software can further provide a consistent, repeatable, provable and auditable system of risk based controls.

Technology impacts our lives in ways that we never thought possible until only recently. With advancements made in tech and digitisation, customer expectation has grown in tandem. Moreover, compliance regulations as articulated in MLR 2017 do not allow for the prospect of error or deviation. In order for the financial services industry to satisfy the dual needs of the regulators and their customers, is now the time for them to consider the power of digital automation?

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