As a result of the increasing regulatory demands for more stringent monitoring of Anti-Money Laundering (AML) protection, all financial institutions face a progressive increase in management costs. In addition, there is an enhanced risk of reputational damage, potential fines and compensation payments.
In order to avoid sizeable future fines, large financial institutions have appointed many new employees to:
- Perform KYC remediation processes on the existing customer portfolio (i.e. cleaning and updating relevant data to ensure compliance with the latest regulations).
- Ensure that the customer portfolio continues to comply with the latest regulations through Periodic Reviews (PR) and Event-Driven Reviews (EDR*), based on internal and external event triggers, and to ensure that best practices are adhered to when onboarding new customers (NCTO**).
* EDR: Event-driven reviews (based on an event trigger)
**NCTO (New client take on).
When deciding whether or not to onboard customers, every organisation bears responsibility for the choice that they make. It is important that, for each customer, a risk assessment is made of potential money laundering and/or terrorist financing. The risk assessment must be evidence-based. In addition, from a social point of view plus in respect of the legislator and the regulatory body, the institution is responsible and required to do everything possible (‘best efforts’ obligation) to protect the integrity of the financial system.
Everything starts with meticulous research/customer contact at the commercial heart of the organisation (the first line of defence). The main challenge for this first line of defence in meeting the requirements of the legislator and regulatory bodies, is the fact that, in addition to their commercial duties, commercial employees must also become KYC analysists/experts.
In almost all cases, this has a direct impact on the commercial activities and therefore places pressure on the cost/income ratio. Many financial institutions therefore deploy teams responsible for the more in-depth and comprehensive customer analyses as part of the KYC/CDD processes. These support teams are part of the first line of defence and are responsible for optimising customer profiles, validating all documents provided, client filtering (such as checking for bad press), the presence of ‘Politically Exposed Persons’ (PEP) on the board or as the Ultimate Beneficial Owner (UBO), checking the ‘source of wealth’ and the ‘source of funds’. The teams are also responsible for initiating investigations in the event of ‘high-risk’ findings.
An expensive and time-consuming step in the process, that requires real specialists.