Risk vs reward: the challenges of automating the anti-money laundering KYC process

Risk vs reward: the challenges of automating the anti-money laundering KYC process

By Justin Hayes, product manager, Linedata

Financial institutions are increasingly automating their back office workflows and operations, however Know Your Customer (KYC) and Anti-Money Laundering (AML) processes remain as manually intensive and time consuming as ever. There is a stumbling block towards automation, which is having a significant impact on cost and risks. A shift is needed to keep up with increasing regulatory requirements and stay ahead in the race against financial fraud.

KYC and AML processes place a significant cost and administrative burden on financial institutions because of the manually intensive, time consuming nature of data gathering and analysis, and the level of oversight required.

The challenge lies in making sure that the investor is not only categorised correctly but that the right documentation is being looked at and validated.

The consequences of KYC/AML violations are resulting in increasingly more stiff regulatory fines for non-compliance. However, with money laundering rising up the regulator’s agenda and gaining in public scrutiny, it is reputational damage which arguably poses an even greater threat.

Financial institutions have to keep up with the constantly evolving nature of money laundering tactics, and increasing sophistication of money launderers across global jurisdictions. New policies are continually being put in place to ensure that money launderers face a hostile environment, with no less than five EU money laundering directives made between 1991 and 2017. This is only set to continue as updates on AML evolve to keep up with the changing nature of financial fraud.

The EU’s Fourth Anti-Money Laundering Directive came into force in June 2017, building on the already stringent AML regime, with significant changes to procedures and obligations putting additional responsibilities on financial institutions. Under the new directive, firms are required to undertake a full risk assessment of the investor, taking into account various factors including geographical location. Additionally, the latest rules introduce a central register for beneficial owners, which firms must check against to assess the ownership of corporations in their member state.

In the absence of automation, these KYC/AML process will remain time consuming and therefore costly.

However, the future of automating KYC/AML requirements could lie in distributed ledger (DLT) and blockchain technologies.

Blockchain, which is an entirely digital process, presents a possible way to address compliance in an automated manner by allowing investors to access a unique “security key” after they pass a set of initial anti-money laundering checks.

This security key could then be used by the investor to invest in other products in a secure manner. At the moment this is still just a possibility, as there is not yet broad acceptance from the financial community of a blockchain security key as a solution to KYC/AML compliance.

In an increasingly competitive environment for fund onboarding, financial institutions are missing out on the rewards associated with automation. Blockchain technology could provide a solution, but only when the fund industry buys into the idea that reward outstrips risk and pushes digital development forward.