KYC – Know Your Customer – is about understanding who your customer is and if they are who they claim to be. However, as simple as this sounds, the process and information required to reach that judgement can be complex.

Traditionally, KYC has been an indispensable tool for the credit and lending industry, helping lenders perform risk assessment on a case-by-case basis by analysing the companies’ previous financial history and any assets they own. This level of due diligence is required to mitigate the risk of money-laundering, terrorism financing, identity theft and other financial crimes. In one form or another, KYC is a mandatory process across the world to ensure customers – be that companies or individuals – are who they say they are and that they have legitimate authority over their funds.

In recent years, KYC has moved beyond just establishing a business’ identity to fully encompass several wider risks that need to be considered when entering into business with a company or offering them a loan. So, what are these wider risks and how have they impacted KYC?

How is the KYC landscape changing?

Traditionally, KYC verification has been a slow, manual, and inefficient process which has left room for significant errors, data gaps and quality problems. This has severely hampered the ability of banks and financial institutions to fight financial crime, especially when it comes to money laundering. Last year alone, global anti-money laundering fines rose 53%, as regulators cracked down on financial misconduct. This significant increase in fines is a strong indicator that this type of crime is not slowing down and more needs to be done to prevent it.

Additionally, geo-political risk has evolved dramatically over the last year. With the ongoing Russia-Ukraine war, we’ve seen a slurry of new sanctions introduced by western allies to diminish Russia’s ability to continue its military campaign against Ukraine, which will likely remain in place for some time. Increased sanctions on a global level have resulted in more potential for money laundering schemes and created new challenges for businesses and financial services when implementing KYC processes.

Don’t get caught out

The main obstacle for financial institutions is that many common types of money-laundering schemes are often difficult to detect and can easily stay under the radar, while it’s hard to keep track of industry limitations such as sanctions. Without robust KYC processes or sanctions screening programmes in place, it’s extremely difficult for companies to make sure they’re compliant with international sanctions and aren’t helping to facilitate money laundering.

However, if financial institutions fail to carry out the necessary due diligence around legitimate authority or take into account compliance with international sanctions, they can end up landing themselves in deep water.

While determining legitimate authority over funds and keeping track of international sanctions pose more challenges for financial institutions when carrying out KYC processes, the possible reputational damage and hefty fines are not worth the risk. Numerous financial firms and banks have received huge fines for failing to perform rigorous customer assessments. In 2022, KYC and AML non-compliance penalties soared, resulting in a total of £215,834,156 in fines. Therefore, it's imperative that financial institutions do everything they can to address these issues - for their own sake as well as to help mitigate the risk of financial crime.  

Leveraging data to mitigate risk

In the face of constant change, it’s imperative that financial institutions understand the potential risk that certain companies may pose. To avoid significant financial losses and reputational damage, financial institutions need to be confident that their clients are who they claim to be and that they have legitimate authority over their funds. This is where client data comes in. With an abundance of data out there, financial institutions have everything they need to adapt to changes in KYC at their fingertips, they just have to work out how to use it in the right way and decipher which data will provide them with actionable insights.

Using as much intelligence as possible to inform data-driven solutions is crucial. Not only will it help organisations to evolve their KYC strategy alongside external factors, it will also help to drive down operational costs and free up financial institutions and banks’ resources to focus on preventing criminal activity in the first place.