Client onboarding: KYC and AML considerations

November 2022  |  FEATURE | FRAUD & CORRUPTION

Financier Worldwide Magazine

November 2022 Issue

Integrating a new customer into established business structures – a process known as client onboarding – can be a challenging endeavour for any financial institution (FI) – a task often made more difficult due to today’s complex and volatile, post-pandemic corporate minefield.

Certainly, it can come as little surprise that financial crimes such as money laundering and identity theft are prevalent across the financial services sector. Indeed, such is its pervasiveness that the adoption of anti-money laundering (AML) regulations and know your customer (KYC) processes is now imperative.

However, when it comes to complying with complex and labour-intensive KYC and AML requirements, FIs have largely been fighting a losing battle thus far, with abandonment rates for new account openings stubbornly high. Meanwhile, compliance lapses have cost FIs billions in fines and penalties, with regulatory authorities issuing AML fines of over $1.9bn to FIs in 2021 alone.

Yet, while KYC and AML go hand in hand, according to Advisory HQ, they should be viewed as two distinct areas of an FI’s security. Firstly, an AML policy covers safeguards to help prevent money laundering and terrorist financing, with one of those safeguards being to ensure the identity of the person completing financial transactions. Secondly, KYC refers to verifying that the information provided about an organisation is legitimate, and evaluating the risks of doing business with them.

“Whether starting a new business or rethinking processes in an existing one, dealing with KYC and AML compliance can seem daunting,” acknowledges First AML in its 2021 ‘Implementing AML in your onboarding process’ report. “Compliance officers, audits, customer due diligence, copies of passports and risk assessments – they can be a lot to get your head around.

“Most requirements focus on customer due diligence and risk assessment, so that is a good place to start,” continues the report. “By building KYC and AML into your customer onboarding procedures, an FI can make it easier to meet requirements without a lot of additional work. Rather than thinking of compliance as an added burden, it becomes a standard part of the process.”

The KYC/AML lifecycle

Once a potential client is on the radar, an FI needs to carry out a KYC/AML risk assessment that can effectively identify the prospect’s point of origin and the source of its funds, while, at the same time, adhering to often complex regulatory frameworks.

According to Advisory HQ, the AML/KYC client onboarding lifecycle involves five phases, as listed below.

First, a customer identification programme (CIP). The first phase of the AML review process is the CIP, which involves collecting and verifying the new customer’s information and the forms of proof of identity that they provided along with the KYC form.

Second, customer due diligence (CDD). As mandated by the Financial Crimes Enforcement Network (FinCEN), all FIs are required to have a written and well-documented CIP incorporated into their AML compliance programme.

Third, enhanced due diligence (EDD). In cases where a client is deemed to pose a higher than acceptable risk, the case is escalated to the chief AML officer or a designee in a process known as EDD. When performing EDD, FIs should follow industry best practices and any new regulatory requirements.

Fourth, account opening. Only after CDD and EDD has been approved should an account be opened in accordance with financial regulations and requirements. However, if after completing the process of KYC and AML evaluation of the customer the application poses too much of a risk, then the next process is for the chief AML compliance leader to reject the application.

Finally, annual review. Depending on the risk classification of a client, FIs should conduct (ideally annually) a review of the client’s transactional activities if the KYC and AML process flow is to be properly adhered to. For high-risk clients, the average process is to conduct a review once a year or twice a year and for low to mid-level risk clients, every one to three years.

“While there are several steps to ensure compliance with KYC and AML rules and ongoing monitoring, the process is designed to protect those in the financial industry and help prevent money laundering and terrorist funding activities,” adds Advisory HQ.

The onboarding revolution

An effective client onboarding function plays a vital role in creating strong first impressions with new clients and cementing existing relationships. At the same time, emerging technologies are revolutionising how FIs conduct client onboarding procedures across their organisations.

Certainly, the pandemic played a significant role in accelerating FIs’ digital transformation and adoption of new technologies, with its effects on the global economy likely to be long term. Thus, in order to survive in a new digital-first economy, FIs will need to revolutionise and adapt their business operating models to the new normal.

In addition, FIs would do well to remember that KYC and AML client onboarding is not simply another compliance box to tick, but a golden opportunity to build a competitive, differentiated customer experience with the potential to exceed all market expectations.

© Financier Worldwide

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Fraser Tennant