During the middle of last year, Commerzbank AG (London Branch) was slapped with a
£37.8 million fine from the FCA for failing to put adequate anti-money laundering systems and controls in place.
Commerzbank was aware of the weaknesses in its operations and had failed to take reasonable and effective steps to fix them despite the FCA raising concerns in 2012, 2015 and 2017.
It's a staggering sum that should raise a few eyebrows and it’s all part of the continued crackdown on financial fraud and money laundering set out by the Government in its
Economic Crime Plan from 2019-2022.
Effectively it states that we must build greater resilience to economic crime by enhancing the management of economic crime risk and the risk-based approach to supervision.
This runs alongside the financial industry’s need to conduct thorough KYB checks when onboarding new customers and now means that sporadic or reactive ‘in life checks’ are no longer fit for purpose.
And it won’t be long before leaving things to the last minute will carry a penalty way beyond the high costs of remediation.
The problems with traditional KYB process
Traditional KYB checks are designed to ensure banks or other financial institutions don’t work with fraudulent or unfit companies or persons.
The checks are a requirement by regulators and whole divisions of banks and other financial institutions are set up to facilitate and manage this risk assessment process.
KYB requires companies to provide detailed information as to who they are, what they do, who their beneficiaries are and this is then analysed and assessed by the bank or lending institution - based on their own risk appetite.This whole
process is undergoing a major digital transformation of late due to it’s cumbersome, manual nature, and the fact it takes way too long for today’s digitally native customers.
It also remains a static snapshot of the company at the point in time and is currently only required to be updated at most once a year, but typically every three or five years.
When you’re working with SMEs, things change rapidly and so five years can effectively be a whole lifetime.
And it doesn’t answer the obvious question: what happens when things change? How do you collect that information and keep records up to date like you need to?
This is a major challenge that until now banks and financial institutions have been trying to resolve through manpower.
But when you have thousands of SME customers, it's an expensive practice that needs to change.
The need to shift priorities and focus on in-life monitoring
Current practices to track and update customer information are expensive and time consuming - particularly if a large percentage of your customer base are SMEs.
Combine these costs with the inevitable remediation from missed accounts due to human error and the overwhelming volume of customers to call, and you can’t help but notice the need to double down on proactive customer monitoring.
You can’t deploy relationship managers for every customer you work with, so you have to find other ways to understand your customers and recognise changes in their risk profile.
Failure to act now comes with double jeopardy in that you could expose yourself to financial crime and then be penalised for exposing yourself to financial crime through poor processes and checks.
The good news is that in-life monitoring tools are now making it easier for compliance and risk teams to spot changes and stay on top of them as and when they occur.
Adopting a proactive approach to KYB and the benefits of doing so
As outlined above, it is no longer tenable to either wait for review periods to come around or manually check each and every customer when the time comes.
In fact, according to compliance consultancy firm Protiviti, 80% of the time required to conduct periodic reviews is spent on data collection and only 20% analysing the data gathered.
So, even when done well, KYB periodic reviews are over-indexing data collection and placing a heavy burden on teams to search websites, conduct credit checks and speak directly to customers.
Moving to a proactive approach and deploying tools which can automatically flag when things change in your customer base ensures you stay compliant with the most up-to-date information in your systems.
But it isn’t only compliance challenges that get resolved, you can quickly identify
upsell opportunities or growth potential within your client base.
Former prospects can be re-engaged with as and when you recognise a change in their circumstances which now makes them a more viable business proposition.
There is a significant competitive advantage to be gained through proactive customer monitoring as well as solving the obvious compliance challenges.