Earlier this year, Swift announced it was expanding its KYC (know your customer) Registry beyond the original correspondent banking community for use by fund distributors and custodians, which have recognized the benefits of the pooled resource.
The development is a natural evolution of the product, which was created through a collaborative approach from the banking industry and launched in December.
The fund distributors and custodians will use the facility in the same way as the banks, by being able to contribute Swift-verified data and documents. These details are then shared with the members of the participating community, removing the need for each organization to do its own detailed checks on the same parties.
Paul Taylor, director of compliance services at Swift, says: “The next stage is platform enhancements. To evolve the registry we also need to look at how we can evolve it in the marketplace. We saw that the solution would be usable in the same way for funds distribution.”
| The Registry has uses beyond the boundaries it was created for|
Barclays was involved from the early days of the process and helped to shape what information would be required.
David Scola, Barclay’s global head of banks, FIG, says: “The KYC Registry has uses and applications beyond the boundaries it was originally created for. Beyond the banks and the expanded network to include the fund distributors, there are also appealing factors for the corporates to adopt it.”
The information that is required from the custodians is similar to what is needed from the banks.
Taylor says: “We saw there was an alignment with the data that was collected for the Registry and what is required from the KYC perspective for funds distribution. There is a commonality between the required details.”
The difference is that, to date, the custodians have not been regulated as closely as the banks have, but there is an awareness in the industry that this might suddenly turn against them.
Mark Gem, Clearstream's chief compliance officer and chair of ISSA's financial crime compliance working group, says: “We have not been subject to the same level of scrutiny as the cash correspondent banks, but the shared vulnerabilities are still there.
“There’s the implication that the rules around client identification in bank-to-bank relationship were not enforced as vigorously historically as now and what we are seeing now is a reaction to heightened scrutiny, not the implementation of new rules.”
In anticipation of the change, the industry has led efforts to create a set of standard terms for operation before the regulator decides to impose its own stricter rules.
Clearstream has had to look at its own processes after the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) ruled it had fallen foul of sanctions by providing treasury banking services to Iran. In January 2014, the company was fined $152 million.
At the time of the ruling, OFAC director Adam Szubin said: “Today’s action should serve as a clear alert to firms operating in the securities industry that they need to be vigilant with respect to dealings with sanctioned parties, and that omnibus and custody accounts require scrutiny to ensure compliance with relevant sanctions laws.”
OFAC acknowledged that Clearstream’s strong response to the problem was a deciding factor in not imposing a larger fine on the company.
|Mark Gem, Clearstream|
The fine and other enforcements in the industry have acted as a wake-up call. Even if the regulators are not strictly keeping an eye on such firms, they will still be held up to scrutiny.
“The industry has become self-policing,” says Clearstream's Gem. “There has been a curious amount of silence around the technical standards that should be applied to securities accounts over the years. It was seen as an opportunity for the industry to set the standards for itself, and hopefully the regulators will see the value in that.”
As well as creating a robust and demonstrable method for the industry to oversee its compliance rules, there is the added efficiency and collaborative benefits the banking community has already experienced.
“The significance of the KYC Registry is an efficiency story,” says Gem. “There is a move from the pull model, where everyone obtains information and documents from their clients, to a push model, where the client pushes the accumulated information to each of its counterparties. The demand is partly driven by efficiency and partly by quality.”
Scola at Barclays adds: “The Registry helps in a small part in the overall requirements for KYC, giving particular assistance around the documents that are needed. The Registry creates a focused view of the utility, providing an accessible tool for completing assessments.”Gem concludes: “The main focus has to be to remove the bureaucracy to be able to devote resources to mitigating financial crime risk.”