Implementing a KYC (Know Your Customer) system is difficult - there are many moving parts, integrations, and regulatory compliance clauses to align to. Now think about that but on a multi-jurisdiction scale where each country has its own set of regulations, compliance rules, risk management institutions, and where the bank operates differently in each country than the HQ. This complex scenario is the reality for many international banking institutions striving to maintain compliance while operating across various jurisdictions.
It can be a challenging task to develop a robust multi-jurisdiction KYC system for your bank. The complexity isn’t isolated from the diverse regulatory frameworks you need to adhere to, it’s rather centered around managing the intricate balance between standardization and customization.
When each country has unique legal and regulatory environments, you need a tailored approach to KYC – that means lots of customization requirements. This need for customization could end up in direct conflict with standard KYC system best practices where efficiency and consistency are paramount to ensure seamless operations and to manage risks well and ensure compliance with local, national, regional, and international law.
Adding to this complexity is the rising cost of financial crime compliance. A recent study by LexisNexis Risk Solutions, conducted by Forrester Consulting, revealed that financial crime compliance costs have increased for 99% of financial institutions, with total costs reaching $61 billion in the U.S. and Canada alone. Such a significant financial burden only underscores the importance of developing a streamlined, yet effective KYC system that is both comprehensive and adaptable to different jurisdictions.
In the future, banks might benefit from using AI and blockchain technologies to enhance the effectiveness of their KYC processes, but integrating these technologies across different countries, each with varying levels of technical infrastructure and regulatory acceptance, adds another layer of complexity.
KYC is an acronym for Know Your Customer, also commonly known as customer due diligence.
KYC Check is the mandatory process of identifying and verifying the client’s identification, a KYC check is done when onboarding a client or routinely after the account is opened to validate the client’s information. Banks have the legal obligation to verify their clients and check if they are genuinely who they claim to be. If the client fails to provide enough information during the identification process, banks can always refuse or end the collaboration with them.
The KYC process is integral to client onboarding, and a crucial step for detecting and preventing money laundering, terrorism funding, and other illicit financial activities.
There are several verification steps in the KYC process, such as: ID card checks, facial recognition, document verification for address proof, and biometric verification.
Adhering to KYC and anti-money laundering (AML) regulations is a mandatory aspect of banking operations to minimize fraudulent and illegal activities. The responsibility for ensuring KYC compliance lies with the banks themselves.
Non-compliance can result in substantial fines. Over the past twelve years (2008-2022), banks in the United States, Europe, the Middle East, and the Asia Pacific region have faced accumulated fines totaling USD 55 billion due to lapses in AML, KYC, and sanctions compliance. This does not take into account the unquantified, yet significant, damage to their reputations.
Key topics we will cover in this article:
Know Your Customer (KYC) systems are a fundamental requirement in the world of international banking. As a bank representative, you are bound by state institutions and jurisdictional regulations (such as AML) to sift through millions of daily transactions and verify if the legitimacy of their senders and recipients to make sure that every cent flowing through your bank is clean and legitimate. However, when we scale this up to a multi-country operation, the complexity becomes more than a challenge, but an intricate web of legal, cultural, and operational factors.
Each country has its own set of laws and regulations governing KYC. For Instance, the European Union’s Anti-Money Laundering Directives offer a different perspective compared to the USA’s PATRIOT Act or Singapore’s stringent KYC regulations. Understanding these diverse legal frameworks is crucial for any banking institution operating on an international scale.
In Europe, the implementation of the fourth Anti-Money Laundering Directive (AMLD5) marked a significant step in equipping financial entities with the tools to mitigate risks associated with money laundering and terrorism financing.
Subsequently, the sixth AML directive (AMLD6), introduced more rigorous challenges for financial institutions. These include:
Moreover, the Financial Action Task Force (FATF) plays a crucial role in setting global standards to combat money laundering and terrorist financing. Its recommendations provide a comprehensive framework for countries, including the UK, which has its own Anti-Money Laundering Act, to develop effective legal, regulatory, and operational measures.
The KYC (Know Your Customer) policy, mandatory for banks and financial institutions, originated from the 2001 Title III of the Patriot Act. It was designed as a toolset to prevent terrorist activities and has now become integral in complying with international regulations against money laundering and terrorist financing. The implementation of reinforced KYC procedures is essential at the onset of any new business relationship during customer onboarding. Additionally, your technical team and banking technology consulting partner must have a strong understanding when developing a custom banking solution, such as a KYC system.
Typically, banks’ KYC frameworks encompass the following four key components:
These procedures often involve verifying a customer’s identity using national ID documents, supported by document readers and advanced document verification software.
Beyond the legal aspects, cultural and operational differences play a significant role. What works in one country might not be effective in another due to varying internal regulations, customer behaviors, banking practices, and risk profiles.
In the pursuit of developing an effective multi-country KYC (Know Your Customer) system, there are several components that banking institutions must consider.
When embarking on the journey of developing and implementing a multi-jurisdiction KYC system in the banking industry, you must follow a set of refined best practices.
While we’ve outlined a list of general best practices for building and implementing your KYC system, partnering with an experienced custom banking software development partner can greatly enhance the success of your project.
Beyond the practices mentioned earlier, there are additional, more specific considerations tailored to your unique requirements. These can be explored in collaboration with your technical staff or your banking technology consulting partner to ensure your project aligns with the extensive regulations surrounding this area.
Implementing a KYC system across multiple countries can have its challenges. From diverse data privacy laws to integrating technology in different banking environments, the hurdles can be significant.
However, with the right strategies, these challenges can be transformed into opportunities for growth and innovation.
To reduce the workload of employees and increase the productivity of bank’s operations in relation to regulatory compliance, introducing an eKYC solution can be beneficial for the longer term.
The digital identity verification is the process in which a bank can transition from traditional, paper-based KYC to a digital approach, enabling the verification of genuine identity documents and authenticating individuals through biometric technologies like facial and fingerprint scans.
The advantage of digitizing the KYC process is that it reduces workload and improves the end-customer experience, however the downside can be a reluctance from the end-customer to expose their personal data.
With the rise of discussions about governments being interested in issuing smart ID’s (with chips) and employing certified digital identities combined with facial recognition for online identity verification, this digital evolution enables seamless customer onboarding through mobile platforms, with the growing feasibility and accuracy of eKYC being enhanced by advances in Artificial Intelligence (AI).
Initially as an unexpected tool for the banking sector, facial recognition technology is rapidly gaining traction for KYC onboarding and it’s no surprise that it happened. The push towards digital channels, amplified by the COVID-19 pandemic, has seen a significant shift in customer and bank behaviors. For example, in the United States, 64% of primary checking account openings in Q2 2020 were conducted online, a trend that continued post-pandemic.
eKYC systems should be integrated for operational excellence, meaning that banks should adopt eKYC to automate the collection and integration of customer data into CRM systems, facilitating a more efficient onboarding process, improved due diligence, risk assessments, PEP screenings and top-notch customer experience.
eKYC, or Electronic Know Your Customer, is a transformative approach that was already introduced in India for electronically verifying customer identities and addresses, primarily through Aadhaar authentication, India's national biometric eID scheme. The widespread adoption of eKYC in India is attributed to the fact that as of January 2023, an overwhelming 99.9% of India's adult population was enrolled in the Aadhaar program, totaling 1.3 billion residents.
While eKYC has become the norm in India, there are ongoing discussions in the EU and US about introducing regulations that would oblige banks to introduce electronic Know Your Customer (eKYC) solutions as the standard for daily onboardings and operations. However, I believe that banks should consider implementing eKYC solutions as the norm for client onboarding as it simplifies and automates time-consuming tasks. For instance, a common practice in various European countries, such as Poland, involves downloading necessary documents before visiting the bank. This enables clients to leave signed papers at the bank, leading to account activation within minutes. Without prior preparation, however, clients may face a wait time of up to 30 minutes to open a checking account.
Banks shouldn’t wait for regulations to dictate their business strategies. Instead, they should identify which procedures can be simplified for customers to complete at home. Biometric authentication and eKYC are prime examples of technologies that can significantly reduce workload and empower customers to open bank accounts from the comfort of their homes.
eKYC, or Electronic Know Your Customer, is a transformative approach that was already introduced in India for electronically verifying customer identities and addresses, primarily through Aadhaar authentication, India's national biometric eID scheme. The widespread adoption of eKYC in India is attributed to the fact that as of January 2023, an overwhelming 99.9% of India's adult population was enrolled in the Aadhaar program, totaling 1.3 billion residents.
While eKYC has become the norm in India, there are ongoing discussions in the EU and US about introducing regulations that would oblige banks to introduce electronic Know Your Customer (eKYC) solutions as the standard for daily onboardings and operations. However, I believe that banks should consider implementing eKYC solutions as the norm for client onboarding as it simplifies and automates time-consuming tasks. For instance, a common practice in various European countries, such as Poland, involves downloading necessary documents before visiting the bank. This enables clients to leave signed papers at the bank, leading to account activation within minutes. Without prior preparation, however, clients may face a wait time of up to 30 minutes to open a checking account.
The adoption of Electronic Know-Your-Customer systems not only reduces friction but also significantly alleviates frustration for both customers and bank employees.
Banks are investing in digital onboarding methods like video KYC and biometric verification to meet customer expectations and keep the pace with regulations. The question of whether to build a KYC is no longer optional—current regulations make KYC compliance a non-negotiable for any bank. However building an eKYC can be a complex and challenging custom banking solution development project and it might require an experienced technology partner that can guide you through the development and implementation of the solution.
Here's an overview of the key aspects involved in developing eKYC solutions:
BNP Paribas, a prominent international banking group based in France, known for being one of the largest and most influential financial institutions in the world, was faced with the task of ensuring that their operations were in strict adherence to a multi-tiered compliance landscape, BNP Paribas sought to enhance its workflows and data processing systems to be fully compliant with Polish, European, and broader corporate laws, along with AML and anti-terrorism financing policies.
The bank aimed to build and integrate tailor-made workflows and data processing systems that would align with the bank's customer interaction points and back-office operations, upholding the highest standards of regulatory compliance.
The bank developed a KYC system with a sophisticated workflow engine capable of assessing customer risk levels and directing KYC surveys through a meticulous process of validation and assessment by various bank departments. This system comprises a Survey Module, Screening Module, Segmentation & Scoring, and Workflow Module, working in unison to ensure comprehensive due diligence.
The implementation of this KYC system by ITMAGINATION has led to impressive results, with the bank assessing 100,000 new surveys per month, integrating 5,000,000 results from previous systems, serving 693 branches, and facilitating the work of 2,000 business users. Furthermore, the KYC system is seamlessly integrated with three front-end systems utilized by customer advisers, enhancing the efficiency and effectiveness of customer service.
BNP Paribas' journey underscores the importance of creating scalable, integrated systems that can handle large volumes of data and provide rigorous compliance checks without compromising customer service.
Citi, a multi-national bank operating in over 100 countries, faced the challenge of applying consistent KYC practices across diverse jurisdictions.
The aim was to create a uniform KYC process applicable firm-wide, adhering to both local and international compliance standards.
Citi implemented the OneKYC Program, which unified the KYC process under a single policy, client risk scoring model, and repository (CitiKYC).
This approach strengthened Citi’s AML program, ensuring better compliance and risk management across all client interactions.
Standardization and centralization were key to managing the complexities of global compliance requirements.
RBI, a leading bank in Austria and Central and Eastern Europe, was encountering significant challenges in its customer onboarding process. The bank, dealing with a vast array of financial counterparties globally, recognized the impracticality of manually collecting customer information.
The primary objective was to streamline and enhance the customer onboarding process, ensuring it was efficient, compliant, and could handle a diverse international clientele.
RBI chose to integrate Bankers Almanac Counterparty KYC into their workflow. This solution offered comprehensive banking intelligence for over 200,000 entities and a user-friendly interface for efficient onboarding.
The integration led to a more streamlined collection of financial counterparty KYC data and due diligence documentation. RBI experienced improved operational efficiency and a proactive approach to counterparty KYC risk assessment.
The key takeaway for RBI was the importance of a centralized, digital approach in handling complex, international KYC processes.
Banco BPM, Italy's third-largest retail and commercial bank, was facing time constraints in compiling KYC reports for its extensive network of financial counterparties, including those in higher-risk countries.
The goal was to automate the report-building process, allowing KYC analysts to focus on assessing risk rather than compiling data.
The bank implemented a fully digitalized KYC system. This solution enabled the entire financial counterparty risk assessment process to be conducted through dedicated software.
Analysts at Banco BPM reported a time saving of around ten hours per risk assessment, significantly streamlining the KYC process.
Automating data compilation was a game-changer, allowing analysts to dedicate more time to critical assessment tasks.
HSBC, one of the largest banking and financial services organizations in the world, needed a KYC solution that could handle its international scale and diverse jurisdictional challenges.
The objective was to ensure global KYC compliance and efficient handling of both standard and complex KYC requests.
HSBC utilized Swift’s KYC Registry and Compliance Analytics. This integration automated standard KYC processes and provided detailed insights for more complex queries.
The use of these tools led to a significant acceleration in due diligence processes, reduced operational burdens, and enhanced data accuracy.
Implementing an API with the KYC Registry for automatic data retrieval was a crucial step in improving process efficiency.
J.P. Morgan, a major player in the international financial landscape, receives a high volume of KYC requests due to its sophisticated client base.
The goal was to streamline the KYC process, improving operational efficiency and client experiences.
The bank adopted Swift’s KYC Registry, centralizing the management of KYC data. This platform standardized data and document sharing among banks.
J.P. Morgan achieved greater operational efficiency and a more standardized approach to KYC data exchange.
Publishing standardized KYC data promoted transparency and efficiency, which are critical in the AML compliance landscape.
From AI/ ML integrations, Microsoft Azure implementations and AWS-based solutions, there are multiple ways in which the landscape of Know Your Customer solutions in banking can evolve. Just like the banking sector, the digital solutions for banks shouldn’t be static. Banking is a field marked by innovation, driven by technological advancements, regulatory shifts and changing customer expectations.
At the heart of a successful KYC custom solution development stands principles like compliance, innovation, and maintaining a customer-first approach.
As the banking industry modernizes, so must the approaches to KYC.
Banks are encouraged to:
If you are going through or planning a KYC implementation, feel free to contact us for a free consultation and see if we can help you like we helped BNP Paribas build a multi-jurisdictional custom KYC system.
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