Banks join forces to confront due-diligence challenge

By:
Paul Golden
Published on:

With various regulatory initiatives demanding that financial institutions gather and disclose information relating to customers, a number of firms have responded to what they see as a market opportunity to develop customer-identity screening services, with a single, industry-wide utility seen, by some, as the end-goal.

Know your customer (KYC); anti-money laundering (AML); customer due diligence (CDD). A blizzard of acronyms that all mean one thing – if you don’t know who your customer is, you leave yourself exposed to potentially serious consequences.

Add in the need to address the recommendations of the Basel Committee on Banking Supervision on how to manage risks related to combating the financing of terrorism (CFT) and you get a sense of the scale of the compliance challenge for banks involved in services from cash management, fixed-income to foreign exchange.


I do not see a common KYC standard emerging within the next few years

Enrico Camerinelli

A report published earlier this year by PwC observed that compliance with AML, KYC and sanctions regulatory requirements dominated the financial services landscape in 2013 and that regulators are still identifying failings in firms’ compliance with these requirements.

This situation has prompted a combination of established and start-up firms to develop utility services they say will improve the quality of customer data as well as making it easier to access.

Hugh Morris, Genpact vice-president of banking, financial services and insurance, Europe, refers to reports of banks both refusing new customers and terminating relationships with existing customers because of CDD concerns and suggests investment banks will save at least 30% by not having to gather customer information individually.

"Savings will increase further as the service extends to commercial banking business," he says.

Banks are reducing the number of relationships to mitigate risk, but also to save time and effort in performing CDD, adds Bart Claeys, head of KYC compliance services at Swift.

"We see growing recognition by the industry that regulatory compliance offers no competitive advantage, accompanied by increasing appetite for collaboration to solve common challenges," he says. "Utilities could be a way of addressing this, with transaction screening another area that could lend itself to the utility model."

High standard

Marcel Krist, CEO at KYC Exchange Net, says the compliance departments of banks expect their client-onboarding team to manage the KYC/AML/CFT process to a high standard.

"This takes time and incurs significant cost," he says. "If a bank does not increase its headcount in the respective department, the department size will automatically limit the number of client KYCs which can be completed.

"The cost element is then compared to the potential revenue from a client and if the revenue does not justify the cost, the client relationship is terminated."

According to Krist, data collection takes an average of six-to-eight hours per client, while three-to-four hours are required to respond to each KYC data request.

A single, industry-wide utility would be preferable, but the absence of uniform KYC rules creates an opportunity for multiple providers across different geographies. That is the view of Aite Group senior analyst Enrico Camerinelli.

" It is encouraging that banks are acting on the concept of collaboration, and having a common repository for KYC is definitely one way for them to prove that they are committed to working together," he says. "However, I do not see a common KYC standard emerging within the next few years."

In the area of corporate banking, an activity that Camerinelli describes as being close to KYC and therefore suitable for similar treatment is risk-profiling of companies.

Depending on their geographic location and the types
of asset classes involved, [utilities] will find it difficult
to acquire some of the information required

PJ Di Giammarino

"In this case, an effective utility service would integrate analysis of the financial data of a company with how it operates in its supply chain to give a more comprehensive picture of how the company functions," he says.

"This would be particularly useful for multinational banks that don’t have an extensive branch network to make credit risk assessments at local level."

PJ Di Giammarino, CEO of regulatory think-tank JWG, is wary of even using the term 'utility’ since other utilities – for example, electricity companies – are well-established organizations that operate to broadly common standards that took decades to develop.

"We are not at this point with customer information," he explains. "There are no detailed standards that set out exactly what banks need to know about their customers and how that information should be formatted and checked, so every financial institution has had to come up with its own set of procedures."

Di Giammarino concludes that utilities will have to agree on how they interact with customers.

"Depending on their geographic location and the types of asset classes involved, they will find it difficult to acquire some of the information required," he says.

"This might in some jurisdictions necessitate a visit to the local registrar of companies, for example, whereas in the UK similar information might be available online from Companies House for a nominal fee."