Author: Michael LaFleur
Additional stringent know your customer (KYC) regulation comes into effect in the US in spring 2018.
It will add to existing KYC and anti-money laundering (AML) rules already in place. These require financial institutions to confirm customer identify up-front and to demonstrate due diligence throughout the relationship.
The new rules concern ‘beneficial ownership’. They make it incumbent on the institution to discover ‘ownership’ – defined as direct or indirect ownership of 25 percent or more – of the customer ‘entity’ (such as a company) and who is in ‘control’ of the funds.
The institution has to not only demonstrate up-front discovery of beneficial ownership but also keep this information up to date for the duration of the customer relationship.
This won’t be simple and financial institutions need to prepare. They will need to:
- Understand what the new regulation means for them
- Analyse the impact it will have on their current processes and systems
- Assess the requirements against their current KYC/AML solution – many currently in use won’t be set-up to automatically interrogate beneficial ownership
- Determine how – and how often – beneficial ownership checks need to be run
- Automate compliance through an appropriate technology solution.
According to a Thomson Reuters survey this year, KYC procedures already place a strain on on-boarding processes and client relationships. The survey found that the time it takes to bring a new client on board had increased 22 percent on last year and that 30 percent of corporate respondents said times to on-board are more than two months. This burden will only increase if a means of automating discovery is not implemented.
Avoiding manual overhead
Further regulatory complexity in this area will challenge financial companies. A major sticking point with determining beneficial ownership is that the checks involved are largely manual. This makes them a time-consuming and costly part of a firm’s processes, not to mention vulnerable to errors and missed information.
The frequency with which companies should repeat checks to keep records up to date is not defined. It is likely that the optimal periodicity to ensure a KYC/AML system’s effectiveness won’t become clear until results of the first audits after the legislation comes into effect.
At that point we can expect to see severe penalties for any firms judged to be non-compliant. High fines have resulted in recent years where AML failings have been adjudged.
Forward-thinking financial institutions should augment their existing KYC processes and customer due diligence systems with a technology platform that can help automate execution.
Each company is responsible for its own regulatory compliance, regardless of whether it uses a third party to discover and analyse data for KYC/AML compliance. The clock is ticking; there’s no time to lose in getting ready.