$609 million -this is how much companies in the Asia-Pacific region were fined for not complying with KYC, AML and sanctions from 2008 to 2018. As regulators in the APAC region increase their focus on fighting financial crime, the importance of Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance has risen. India, Hong Kong, Singapore, the Philippines and Australia- everyone is cleaning up their act.
However, meeting KYC and AML regulations is not free from challenges. It affects the efficiency of asset managers, slows down onboarding processes and frustrates customers.
Challenges for the Industry
As regulations become stricter, the burden of meeting compliance will only increase for companies. Some of the major challenges for them are:
• Slow Onboarding Processes
Validating all the customer’s details lengthens the onboarding process. This can keep asset managers from meeting their goals and causes delays in launching mandates. It also increases the risk of customers shifting to competitors.
• Never Ending Compliance
Meeting KYC and AML regulations are not limited to customer onboarding. Companies must also ensure that the information they have about their customers is up to date. Thus, it is a continuous process. For large organizations with thousands of customers, this can be a major undertaking.
• Non-Standardized KYC and AML Procedures
Organizations always interpret regulations according to what suits them the most. This risk-based approach can cause issues when operating across jurisdictions. Today when the world is becoming smaller and even independent entrepreneurs offer their products and services internationally, the non-standardized KYC and AML procedures can be very challenging to overcome.
• High Costs
All firms, big and small must comply with KYC and AML norms. For international firms, it isn’t enough to comply with local norms; they must comply with global regulations as well. This increases the cost of compliance. International financial institutions spend between $900 million and $1.3 billion annually on financial compliance.
At the other end of the spectrum, small firms need to comply only with domestic regulations but to do so they may need to set up a compliance department. This has a significant impact on their expenses as well. There are also a number of indirect and opportunity costs to be considered.
• Non-Digitized Documentation
Even today, most of the documents used for verification are hard copies that have not yet been digitized. This makes verifying the contents of these documents difficult. There are a number of innovative solutions such as video verification that have been developed to overcome this but not all companies have the resources to adopt them. It also makes it difficult to keep track of information expiry.
• Manual Workflow
Most of the industry is dependent on manual effort to collect and verify the information for KYC and AML compliance. A paper-based audit is time-consuming and has a high risk of human error. An inadvertent slip may affect compliance and put the customer’s information at risk. The manual workflow also limits the amount of information that can be processed at a time and thus could be a problem for companies scaling up.
Challenges for Customers
While the actual work of collecting and verifying information is not performed by the customers, they still face a variety of challenges.
• Repetitive Documentation Requests
Every financial institution interprets KYC and AML regulations in their own way. This means that customers have to submit different types of additional documentation every time they need a new service. The inconsistencies of documentation requests along with the disparate remediation cycles can frustrate clients for no fault of theirs.
• Concern About Data Protection
With incidences of identity fraud becoming more common, customers are also concerned about securing their data. They don’t want to give just about anyone access to their information and when they do share it, they need to be reassured that it is being protected.
Finding a Solution
Despite the challenges, meeting KYC and AML regulations is not negotiable. Outsourcing the task can be beneficial for everyone. Let an agency that specializes in identity verification and data quality collect, verify and maintain customer information.
By doing this, employee time is saved and can be directed towards other value-add tasks while the company can still be fully compliant with relevant KYC and AML regulations. It increases employee efficiency and reduces costs. From the client’s perspective, it increases confidence in data security.
Identity verification agencies can also improve data quality to support KYC initiatives. For example, if they were to find an inconsistency between the address submitted by a customer and the pin code, they could easily correct the same. This ensures data stays current, complies with regulations, and can be used for successful marketing and sales efforts.
It’s worth taking a second look at centralized KYC and AML regulations and processes. Today, the same customer may be using services from multiple companies. This means that he/she would have had to submit documents for validation to each company.
Each company would have had to independently verify the documents before onboarding the customer. The process is slow and unnecessarily repetitive. Centralizing regulations and letting an agency handle the verification simplifies the process to a great extent. Customers will have to submit their documents only once.
The agency can create a client record that can then be shared with different companies as and when needed. It saves time and lowers costs exponentially. It also improves the customer’s experience by making the onboarding process much faster. For this to be successful, the financial institution and asset manager community, as well as compliance regulators, must support it.
As the APAC region stresses on KYC and AML regulation compliance, if things were to stay as they are, the burden on asset managers would only continue to increase. It is high time to look at adopting smarter solutions like outsourcing verification tasks and standardizing regulations. Done right, this can benefit the industry and its consumers.