KYC onerous obligation or corporate advantage
Know-Your-Customer (KYC), as part of the general duty of care, is a buzz-word of the modern world that is gaining in importance. How can KYC can be organised so that the regulation becomes an advantage?
KYC is mainly used in the course of customer acceptance processes – the so-called onboarding. It describes all the necessary steps used to identify the customer and assess the risk they pose.
Many companies are required by law to know who they are doing business with. This includes not only the clear identification of the respective private or business customer, the company’s own suppliers or investors, but also the validation of the information provided to the company. In addition, the documents, data and information of business partners must be checked and updated at appropriate intervals. If a company does not comply with the legal requirements, it must expect enormous financial damage due to incurred penalties and a loss of image.
At first glance, KYC-related processes appear to be costly and unwieldy, especially in the context of legal compliance. Nevertheless, the principle shaped by the fifth EU Money Laundering Directive makes a significant contribution to combating money laundering and terrorist financing. At the same time, it ensures compliance with applicable sanctions, such as those concerning North Korea or Iran.
KYC becomes a must-have
For financial institutions, insurance companies, lawyers and tax consultants, KYC has been an integral part of everyday business for years. It has become a common business practice. In many industries, KYC is now a standard method of risk management. This is because adherence to the KYC principle primarily leads to the prevention of companies becoming involved in dubious or illegal transactions. This minimises risks and increases the confidence of customers and business partners in the company’s own operations. With the advance of digitalisation and the move to Internet-based registration systems, new forms of KYC have become an absolute must-have in the business landscape.
Averting harm
Implementing robust, AML-compliant onboarding systems is recommended for businesses in several ways. After all, involvement in money laundering activities, fraud, corruption, terrorist financing or other white-collar crime leads to several consequences:
1. financial losses as a result of fraud
2. heavy fines to the legislature for breach of due diligence
3. permanent damage to the company’s image and loss of public confidence in the company.
In addition, the guidelines are constantly being tightened in the various countries. Internationally active companies must pay very close attention to compliance with all regulatory requirements in the respective countries in their onboarding systems and be able to react to individual changes as quickly as possible. However, the monitoring and maintenance of multinational onboarding systems often develop a complexity that far exceeds the companies’ capacities.
Too long, too complicated
In practice, onboarding is still handled by many companies in a mixture of technology and manual work. Checklists are kept manually, documents are handed to business partners in paper form to be filled out. Employees are responsible for reviewing and evaluating the information. Multiple media breaks in the process are simply accepted. In addition, inaccurate automated processes often require manual rework. As a result, onboarding for new customers or suppliers takes a very long time, consumes many man-hours and is so complex that even within the company the processes are no longer or not fully understood.
Increased time investment increases costs
Within the company, the increased time required to check every single new customer also leads to increased personnel costs. At the same time, a large proportion of marketing expenditure goes to waste because a large proportion of potential customers simply fail due to the complexity of onboarding. These onboarding processes have mostly grown historically and are rarely overhauled. As a result, they consist of rather user-unfriendly processes that lead to erroneous results and high drop-out rates. Even complexity- and time-tolerant customers have to be prepared for long waiting times, which consequently generate high customer dissatisfaction.
The solution: Smart automation
KYC checks are an extensive undertaking. After all, if a company wants to properly fulfill its due diligence, it must evaluate all sources of information (worldwide) that are available. Between private KYC, corporate, press databases, and government resources such as the Companies Registry, edicts databases, and trade registries, millions of records must be sifted through and analysed. This is only economically feasible with an automated IT solution.
The challenge of digital onboarding
While it’s not uncommon for companies to digitise their onboarding processes, a significant number still perform the data entry manually. When a company does decide to automate these processes, the development of its own digital onboarding system usually follows one of two approaches:
The onboarding system itself is assembled from multiple vendors, with one vendor responsible for only a small number of the process steps at a time. As a result, each individual service must be implemented and reconciled with the others. This solution gets shaky if any of the individual services are changed or updated, as it is impossible to predict how the change will interact with the rest of the onboarding system.
The company delegates the development of the onboarding system to an external party that develo ps an overall solution. The resulting solution is appropriately stable, as it does not depend on multiple vendors. However, it does not make the company less vulnerable to regulatory changes that affect the technical solution of one or more steps of onboarding.
The modern way: the SaaS-based onboarding framework
A modern onboarding system must be able to meet all of the company’s requirements. At the same time, it must be configured to meet all regulatory requirements. Last but not least, it should be designed to be user-friendly and guide customers through the process intuitively and quickly. Modern onboarding systems are designed as a seamless overall solution and enable the process to flow smoothly. They are delivered as Software-as-a-Service (SaaS) services and reduce both internal IT effort and total cost of ownership to a minimum. The solution of the Austrian SignD Identity GmbH stands out due to its framework approach, which allows to exchange components that do not fit ideally for better solutions and to react flexibly to changes within the legal framework.
