Overcoming customer due diligence challenges in financial institutions

Financial institutions across the globe are under increased regulatory scrutiny to comply with anti-money laundering and counter terrorist financing policies and procedures. In the past decade, they have witnessed significant enforcement actions and penalties for non-compliance with respect to money laundering and terrorist financing. Hence, regulations are being introduced and/or amended across regions to fight geopolitical risks as well as fraud, corruption and financial crime.

From an organizational perspective, financial institutions will need to find a balance between establishing anti-money laundering and counter terrorist financing frameworks, and providing exceptional service to customers. However, they are still struggling to effectively comply with existing regulations and achieve optimal cost benefits. Further, these issues are magnified with varying risk appetites, culture and legislations that tends to differ from one region to the other.

Customer due diligence requirements have increased with the implementation of Foreign Accounts Tax Compliance Act (FATCA) and Common Reporting Standards (CRS) along with the current EU Directives. These also include enhanced due diligence for politically exposed persons and disclosure of beneficial ownership, amplifying the level of compliance standards. However, challenges in areas such as identification of beneficial owners, establishing source of wealth, identification of a politically exposed person and their close associates would still need to be overcome.

In addition, operational challenges when complying with customer due diligence requirements include the following.

  • Customer on-boarding can be a fairly long process due to multiple touch points
  • Processes are manual and tend to be document intensive
  • Multiple regulatory requirements can result in a varying amount of documentation
  • Duplication in the customer due diligence process across countries
  • Insufficient availability and gaps in quality of data
  • Absence of a centralized Know Your Customer (KYC) database
  • Increasing KYC cost compared to return on investments
  • Difficulty in maintaining existing IT infrastructure

The challenges related to customer due diligence are growing on a daily basis, and adding resources or outsourcing may not be able to resolve the problem. However, streamlining KYC processes with a strategic approach could avoid duplication of work, repeated information requests (from the same customers) and ensure seamless operations between multiple departments. Financial institutions should identify proactive and innovate ways to perform customer due diligence and minimize data dependencies by using government approved identity documents and publically available information.

The role of technology will be of an enabler and demand the requisite investments. Here, digital transformation would be a core aspect as it is steadily becoming a strategic approach to resolve customer due diligence challenges. Financial institutions will need to accelerate digital transformation initiatives, leverage innovative technologies such as robotics and automation for optimal efficiency and achieve cost rationalization. In fact, regulators in regions such as Singapore, Hong Kong, India are actively participating in “Reg Tech initiatives” to use technology as a tool in the fight against money laundering and terrorist financing. The use of emerging technologies can also help financial institutions stay abreast with the regulatory changes and convert opportunities. These include:

  • Automating document centric processes to reduce manual data entry activities
  • Using optical charter recognition to convert scanned documents and images into text
  • Using e-KYC for identity verification
  • Setting up mobile and web based applications to collect customer information
  • Building data repositories to create a central KYC registry
  • Performing link analysis to  unwrap connections between entities and beneficial owners
  • Establishing content based identity matching and linguistic search techniques to screen and data analysis

Customer due diligence is undergoing a sea change and needs to be supported by a robust IT infrastructure, ethical culture and compliance frameworks. The process is an important pillar in an anti-money laundering program and holds substantial organizational importance in terms of governance, controls, training and approach.

The above article first appeared in Fintelekt’s AML Quarterly Newsletter and has been co-authored by Kamalesh Rangan, Director, Forensic & Integrity Services.

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