Organizations face a balancing act every day when it comes to risk management. There is the risk of onboarding someone who is going to use your company to launder money, but you can't let caution stop you transacting. So, how can financial institutions reduce risk at the customer onboarding stage?
There are enormous risks associated with providing products to the wrong people. An organization that isn't very careful could lose money either through fines or reputational damage by onboarding "bad actors". The risk that products will be used by criminals to launder money is present every day and needs to be managed in an everyday way. This is where automation steps in. It helps manage the anti-money laundering due diligence process and reduce risks for regulated organizations.
This blog explores how businesses can mitigate risk when onboarding new customer by reducing human error, improving handling capability and accessing reliable data.
The sums involved in money laundering are eye-watering. The estimated cost of money laundering to businesses in the UK for instance is more than £100 billion a year. And that's just the tip of the iceberg – the full cost and impact of money laundering on the global economy is truly unknown, but it’s pervasive and far-reaching.
The risk of an organization becoming part of a money laundering machine is significant, not only because it enables organized crime but because it damages economic infrastructures as a whole. Money laundering spawns corruption, underground or off-grid markets, illegal transactions, and it reduces the amount of tax contributed by businesses and individuals to society.
Yes, governments across the world have taken steps to improve and strengthen anti-money laundering laws, but are these changes able to keep up with the complexity of new financial instruments and the pace at which criminals adapt?
While it seems unlikely money laundering will ever be eradicated, with increased regulation and cooperation both nationally and internationally, organizations can reduce its impact. And one of the most important ways to make this impact felt is through robust customer onboarding.
To perform KYC or know your customer processes, regulated companies must collect information about a customer to verify they are who they say they are.
Customer due diligence (CDD), including identification, verification, and background checks are performed when a customer is applying for a new product or service, but the process is also repeated periodically or in some instances on a continual basis through a process known as perpetual KYC.
The data collected during a KYC process will include names, addresses, ID numbers, it might also include a financial history, sources of funds, and other information that's relevant to validating the customer should be given access to a product or service. Organizations use the information gathered during due diligence to determine what level of risk the customer poses. And an organization’s appetite for risk will vary depending on what service is being offered, where they operate, and the sums at stake.
Once the KYC process is complete, the organization should have enough information about their new customer to make an accurate risk assessment and decide whether to onboard them or not. By going through this series of KYC checks the firm should also be complying with anti-money laundering (AML) regulation. How exactly the process operates, which checks are performed, how the data is gathered, and the final decisions made are down to each individual organization to determine.
All regulated businesses will have a risk policy and they will put controls in place to ensure that policy is consistently applied. However, it's easy to run into complexities when onboarding customers. Individuals can be nuanced enough, let alone corporate structures.
Trying to manage onboarding processes manually can dial up the risk factor. Operating KYC manually opens the way for data to be missed or entered incorrectly or for compliance controls to be ignored or incorrectly applied.
Another risk factor is that the data needed for CDD can be scarce, inaccurate, or missing altogether. Depending on which region the customer is being onboarded can affect the kinds of data available. There’s always the prospect that a "bad actor" will share false information in an attempt to hide their true identity. There's also the prospect that a "good customer" might enter information incorrectly, misunderstanding what's needed or simply mistyping information. Verifying and validating data across multiple data sources is one way of mitigating these risks.
Different data sources or data providers can be brought together through a series of automated checks that creates a fuller picture of risk, which also results information being available in one place. Then, if need be, a compliance or KYC analyst can review the profile, ask for more information, and make a final risk-based decision about onboarding.
KYC is a critical part of customer onboarding and automation can bring benefits to organizations and their customers.
Moody’s Analytics Know Your Customer (KYC) is transforming risk and compliance, creating a world where risk is understood so decisions can be made with confidence.
Our customers build their own compliance ecosystem using our workflow orchestration platform, leading datasets, analytical insights, and integrations with global providers to create flexible solutions to onboard customers at scale.
Harnessing our innovative technology and industry expertise, Moody’s Analytics automates accurate screening and swift onboarding of customers and third-parties. We continue our support throughout the customer lifecycle by enabling perpetual monitoring of risk across global business networks in near real-time.
Get in touch to talk about your onboarding program – we would love to hear from you.