Know Your Customer, or KYC is a set of processes used by banks and other financial institutions to gather and validate information provided by their various customers. Some of these measures include identifying and verifying customers’ identities and addresses, identifying beneficial owners (i.e., those who ultimately ‘own’ or control a customer) and sanctions screening.
KYC is important because it helps institutions to establish the identities of their customers, thereby reducing the occurrence of fraud, identity theft, money laundering and terrorist financing. Robust KYC processes help to obtain adequate information to identify, assess and mitigate the risk associated with customers. These processes further aid in the control of unauthorized access to customer accounts, leading to more secure and effective systems in these institutions.
KYC is mandatory as a result of regulatory requirements and international best practices drafted by global anti-money laundering watchdog, the Financial Action Task Force. In Ghana, the Anti-Money Laundering compliance landscape has evolved over the past few years, with key updates to the Anti-Money Laundering and Combating the Financing of Terrorism Guidelines and the Anti-Money Laundering Act. These increasing layers of regulation are to strengthen the financial system against money laundering, terrorist financing and other financial crimes.
The main drawback however, with KYC workflow management is the manual element which creates the potential for lapses and errors. A case in point is the verification of customer residences which is an integral component of KYC procedures. It traditionally involves home visitations by officers of the financial institution or third party verification officials, which is a time-consuming, laborious and expensive process. Such limitations may lead to frustrating delays for customers, forcing them to abandon the account opening process.
Thus, solutions are being developed to improve AML/KYC enforcement and compliance, including the creation and utilization of AML/KYC workflow management software, commonly referred to as ‘RegTech’ (Regulatory Technology) by the UK’s Financial Services Authority (FSA). These solutions utilize block chain technology, Application Programming Interface integrations, big data, cloud computing, robotics, artificial intelligence and machine learning to enhance regulatory processes.
Within the first facet of KYC which is identity verification, the 2018 FIC/BOG AML/CFT Guideline requires Financial Institutions to validate the identities of their clients using independently sourced data. This has given rise to web-based applications which offer real-time online ID verification, thus expediting transaction turn-around time. Where letters were previously written to issuing authorities of identity documents to confirm their authenticity, such applications facilitate confirmation within the click of a button.
Financial Institutions manage sanctions risk at the onboarding stage through sanctions screening, to perform Know Your Customer (KYC) checks and to augment on-going Customer Due Diligence (CDD) measures. It comprises running historical checks to establish whether the customer has been involved in previous criminal activity, has sanctions placed against them or is a Politically Exposed Person (PEP). Managing this risk has become increasingly complex due to the multiplicity of sanctions lists which are constantly changing. Vendors have developed and deployed fully automated screening solutions that integrate a bank’s core banking software with dynamic real-time databases of individuals and entities that pose financial crime risk. These integrations automatically flag any new customers if their names are listed within any of these databases.
The use of technology is certainly a smart and economical way to identify and minimize potential risks which could affect the reputation and integrity of an institution. It also improves overall productivity of activities involving rote repetition and adherence to rules. However, automation of KYC compliance is unlikely to fully replace human expertise in the short-term. Even with advanced automation of data collection and analysis, human experts are still needed to apply their experience and judgment to handle complex investigations and cases that fall out of automated straight-through-processing. By utilising both cutting edge automation and industry expertise, financial institutions can achieve the best of both worlds.
About the Authors:
Michael works as a Compliance Officer at Guaranty Trust Bank (Ghana) Limited. He is a KYC expert with several years of experience under his belt. He holds a Bachelor of Commerce degree from the University of Cape Coast and an MSc in Development Finance from Kwame Nkrumah University of Science and Technology.
Melvina is a Chartered Banker with years of experience in the compliance space. She holds a BSc degree in Business Administration and MSc in Development Finance, both from the University of Ghana Business School.
Disclaimer: The views expressed in this article are exclusive to the authors and do not represent those of their respective institutions.