There are 2 types of AML providers in the "know your customer" (KYC) and "customer due diligence" (CDD) space.
- Those that solve the problem, partially
- Those that solve the problem, fully
Both have their pros and cons depending on your internal process, however when you go with a provider who only solves the problem partially, the customer due diligence “mop-up” falls back on your staff.
This leads to a significant administrative and operational cost, contributing to the rapidly escalating cost of compliance in financial institutions.
Let’s take a look at how both options affect the finance sector in the following scenarios.
Scenario 1: Electronic Identity Verification of an Individual
Picture this: an electronic identity verification check (EIV) on an individual’s driver's licence fails because a residential address or date of birth doesn’t match.
Unfortunately, this is not an uncommon occurrence with certain EIV providers.
So what happens when an EIV tool fails? Here’s the breakdown.
- Firstly, your customer who thought they were going to instantly open an account can't.
- The failed ID check sits in a queue for someone in the compliance team to review. That someone is usually not measured on revenue generation, meaning they are not motivated to review this quickly. The review could take a day; it could take 5 days; it could take longer.
- The reviewer then has to contact the customer to tell the customer they need to go come into the office.
- The customer then has to walk into a bank branch, or make an appointment with a non-bank lender, line up with their ID and proof of address (such as a utility bill) and start the process all over again. This ties up further resources in the branch where staff are required to devote time to ID administration, instead of selling credit cards and mortgages.
Not only does this make the process painful for the customer, the firm is now managing an administrative task they really don’t need to.
Scenario 2: Entity Structure Analysis in Business Banking
A small business which is owned by a family trust, attempts to open a transactional account.
However, the bank is working with an AML vendor that cannot drill down through an entity structure to the point where the ultimate beneficial owner (UBO) is a natural person.
Many vendors will tell you that they can identify UBOs. However, once they start digging into business ownership structures and hit a trust, they usually reach a dead end. Their technology is not capable of drilling down any further and determining who the natural person(s) are behind the business.
This is a critical requirement for the completion of KYC in a bank.
If you do not know who the natural person is behind a company, then you do not “know your customer”.
If you do not know who the natural person(s) are behind a company, then you do not actually “know your customer”. If you don’t know your customer, then you can’t be compliant as a bank. If you’re working with an AML vendor who can’t solve that for you, you should re-evaluate your options.
So, what happens next?
The KYC analyst responsible for the case at the bank is unable to complete the task, meaning they must go back to the front line staff, such as a business banking relationship manager. This person then has to tell the customer they need to get the trust deed certified and bring a copy into the branch - physically.
This creates more busy work. More non-revenue generating conversations. More administration. More pain and delays for the customer and ultimately, more operational costs and delayed revenue generation for the bank.
Eventually, after an undetermined amount of time, the trust deed is received and the KYC analyst can now review the document and kick off the ID process for the UBO(s).
The relationship manager lives in hope that there aren’t additional parties to the trust they aren’t aware of that meet the definition of a UBO. If there is, they will also need to have their ID verified.
Hopefully, they can do it electronically.
Hopefully, they don’t live too far from the nearest branch.
The cost to the bank
By using a provider that cannot completely solve the problem, the bank has incurred additional operating costs from all the internal work and all of the time spent explaining the process to the customer.
This is not to mention all of the customers who just give up.
So, what can you do to stop this from happening?
Make sure your vendor due diligence explicitly verifies whether or not the provider solves the problem completely or partially. If you are using vendors that only partially solve the problem, be fully aware who is carrying the mop.