Effective KYC processes sit at the core of any successful compliance program, and the demands of these processes are continuously intensifying.
Financial crime, particularly money laundering, is becoming increasingly problematic in our digitally connected, tech-led world. According to PwC’s 2022 Global Economic Crime and Fraud Survey, 46% of surveyed organizations reported experiencing fraud, corruption, or other economic crimes in the last 24 months, with 70% reporting that the most disruptive incident came from external threat actors.
Preventing fraud, corruption, and external attacks is a complicated challenge for banks and financial institutions, made all the more complicated by the volatile and constantly evolving risk landscape of the modern day. With institutions moving quickly to stay ahead of changing technologies and behaviors, threat actors keep finding ways to exploit the cracks in their fraud defenses.
The primary safeguard against fraudulent activity for banks and financial institutions is a ubiquitous process called ‘Know Your Customer’—and it’s very effective when done properly.
What is 'Know Your Customer'?
‘Know Your Customer’ (KYC) is a set of standards designed to protect banks and other financial institutions from fraud, corruption, money laundering, terrorist financing, and other economic crimes. In essence, KYC helps businesses to assess the level of risk that an individual or business poses to them, and should flag any previous involvement with financial crime.
KYC involves a series of steps that help institutions:
- Establish customer identity.
- Understand customers’ activities.
- Determine whether the source of funds is lawful.
- Assess money laundering risks associated with customers.
Effective KYC processes sit at the core of any successful compliance program, and the demands of these processes are continuously intensifying. With anti-money laundering (AML) and KYC compliance growing in importance amidst more stringent regulatory requirements such as the EU’s 6AMLD, banks and financial institutions are having to allocate more resources and time to ensuring compliance with KYC requirements.
The problem with KYC is that it’s often viewed as a ‘one and done’ process. In other words, organizations will run the process once during the onboarding stage of a new customer to verify their identity, and then only re-run it periodically, perhaps once every few years.
This is a terrible approach for firms operating in regulated sectors such as finance because a customer’s profile can dramatically change over a relatively short period of time. By only running KYC checks periodically, you’re potentially missing out on critical information that might develop later down the line, information that could be used for threat intelligence, ongoing monitoring, and reacting to emerging situations.
This is where perpetual KYC (pKYC) comes in. pKYC is like KYC but rather than checks only being carried out occasionally, they’re carried out continuously—or, rather, perpetually—to provide a real-time view of the state of your customers. The pKYC process is far more dynamic, and customer information is consistently cross-referenced with resources such as external databases and sanctions.
Some of the benefits of perpetual KYC include:
- End-to-end automation of KYC steps.
- A reduced need for human management.
- Improved accuracy and quality due to lower human error.
- Reduced need for human intervention, freeing up analyst time.
Through automation and continuous monitoring, perpetual KYC provides peace of mind by raising an alert if an activity does not fall in line with what is expected.
KYC and transaction monitoring
Transaction monitoring has been a mainstay process within banks and financial institutions for decades.
The transaction monitoring process typically utilizes information from KYC data to build a picture of client risk, which can then be used to strengthen the ongoing monitoring of customer accounts. For example, transaction monitoring can help firms define rules and scenarios to identify certain account activities and use these rules and scenarios to generate alerts when account activities fall outside of expected norms.
Because of how closely aligned KYC and transaction monitoring are, it’s especially important for firms who are using modern KYC and transaction monitoring tooling to move away from data siloes and ensure that their KYC and transaction monitoring data are fully integrated. Doing so makes it possible for AI-powered KYC tools to reach their full potential and enable accurate, automated monitoring.
After all, verification—where data is collected during initial KYC to make sure that a customer is who they claim to be—differs from authentication, where verified data is validated and customers are green-lit to access payment services.
Deploying the right KYC tool
Financial institutions have significant KYC and transaction monitoring obligations. However, the large volume of transactional activity managed by even the smallest of firms can mean that it’s near impossible to meet today’s baseline compliance standards using human-led processes alone. This is a truth that most firms are beginning to realize as the ongoing digital transformation continues to increase the adoption of financial services among consumers.
At the same time, firms must also protect themselves from financial crime and the challenges posed by external threat actors. With the right KYC and transaction monitoring tool, firms can benefit from perpetual KYC and monitor their customers based on defined rules. If a rule is breached by a customer, the alarm will automatically be raised and enable compliance teams to step in and take control.
Sentinels makes KYC and transaction monitoring a quick, simple, painless, and more accurate process by providing firms with 24/7 automated coverage. Backed by state-of-the-art artificial intelligence and machine learning, our tool streamlines compliance workflows to allow efficient and confident decision-making.
If you’re interested in how a tool like this could support your compliance team, request a free demo of our transaction monitoring solution today.