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From Perpetual KYC to Perpetual KYB: Challenges and Opportunities

Historically, the space of individual Know Your Customer (KYC) compliance has always been one step ahead in terms of industry awareness and digitisation trends compared to the connected area of corporate KYC, or “know your business” (KYB) compliance. Hence, to know what’s coming for KYB, it’s worth paying attention to what’s currently happening in the world of KYC.

At the moment, there’s a lot of talk about Perpetual KYC in the retail customer verification space. The term, increasingly used by RegTech providers and industry experts alike, refers to a shift from periodic checks towards ongoing digital verification. It promises to be a gamechanger in terms of not just security and compliance but also customer relationships.

And it’s no stretch to imagine that the same is in store for business verification.

What do we mean by Perpetual KYC?

Traditionally, financial institutions and other regulated companies conducted KYC checks on their retail clients periodically. This would entail running them through AML screening systems and requesting up-to-date ID documents at specific – and often extended – intervals. However, this approach left them vulnerable, as circumstances could change between the first KYC review and the next. As a result, any risk assessments could become outdated, and illegal activities could slip through the gaps.

Perpetual KYC, on the other hand, means continuously reviewing clients’ data. As customer profiles are updated more regularly, companies can rest assured that they rely on the most up-to-date data.

As a digital-first approach, Perpetual KYC relies on advanced technology capable of continuously monitoring individuals for any screening matches or for suspicious transactions. If the system detects any non-material changes in client data, it can update the database automatically or request an updated ID document ahead of its expiry date. And if it detects any unexpected client behaviour, it can trigger an alert for the compliance team to review and, if necessary, intervene.

What’s driving the growth of Perpetual KYC?

For the past number of years, as AML and KYC regulations have become stricter and penalties heavier, financial institutions have become more aware of the risks and limitations posed by periodic reviews. On top of this, as more companies switch to Perpetual KYC processes, the benefits of an ongoing verification system are becoming clearer across the industry.

In fact, Perpetual KYC dramatically reduces risk, offering tighter security while cutting down on costly remediation processes. It can also improve customer relations, as it can remove the need for periodic data requests “no matter what”, only engaging the customer when there is a specific reason for doing so.

According to a recent poll run by UK-based consultancy Beyond, 73% of companies are working towards implementing a Perpetual KYC system. So, it’s a mistake to think of “Perpetual KYC” simply as a buzzword. It’s the future.

In terms of what characterises this new approach, Perpetual KYC is possible only if it relies on a process that is:

  • Digital. All customer details are stored digitally in a standardised format.
  • Dynamic. No more static client profiles and risk assessments. Instead, clients are continually monitored to identify any changes in circumstances.
  • Trigger-based. If the technology in use identifies any material changes, or if it flags any unexpected client behaviour, it will trigger an alert. This means the company can act immediately, where previously this change may have gone undetected until the next periodic review.

How can we translate Perpetual KYC principles into the world of KYB compliance?

For the most part, retail or individual customer data won’t change too much on a day-to-day basis. The type of events that could trigger a review, such as a change in address or in last name, don’t tend to happen too often. However, you cannot say the same of business customers. Companies are dynamic entities by nature, and it’s not unusual for a company’s structure to change unexpectedly from one day to another.

So, while it might be based on the same essential principles as Perpetual KYC, Perpetual KYB processes involve more steps and different types of checks. But what does this mean in practice?

A simpler and more immediate approach to Perpetual KYB relies on advanced RegTech solutions to automate the most repetitive and time-consuming aspects of ongoing reviews.

In this case, the process starts during onboarding, when incorporation documents are automatically retrieved from official registries and read through optical character recognition, natural language processing and artificial intelligence to extract company information. This data is then used to identify the company structure and automatically screen all entities and individuals connected to the client against AML watch lists.

In this model, AML screening would then be repeated daily. In the event of a new AML hit, the compliance team would review it and, if necessary, update the business customer’s risk profile. Advanced systems also download new company documents at short intervals and update the company structure and the list of directors and shareholders automatically. Once again, the digital system continuously monitors the client’s entity and the newly appointed shareholders against AML watch-lists, raising any red flags to the compliance team to review.

If compared to the traditional process based on manual reviews, this approach is already a great improvement in terms of effectiveness and efficiency. However, recent technology advancements can help compliance teams take a step further.

As we have seen, a company’s structure can change significantly from one day to the next. Hence, there might be times when the compliance team is performing AML checks on individuals that have left the company since onboarding. It’s at this point that an advanced Perpetual KYB process can offer even more protection.

Innovative Perpetual KYB technology can automatically keep tabs on clients’ company structures by checking every day if a new resignation and appointment document has been filed with the relevant registry. When that’s the case, the system can automatically download the new documents from the registry and update the company structure in real-time. This approach enables compliance teams to identify new officers and shareholders in real-time, as and when they’re appointed. As a result, they can make AML checks on reliably up-to-date structures without having to chase their clients for documents.

Where KYC leads, KYB will follow

Periodic reviews are no longer fit for purpose.

Fraudsters and money launderers act in real-time. But if a company only reviews its data periodically, there’ll be long periods where their database will be static. The data might not be up-to-date, which means that any risk assessments may not be up to date either.  

For all the challenges it poses, Perpetual KYC brings a range of benefits. It’s more secure, it’s less time consuming, and it can even improve customer relations.

Compliance teams in the KYB space should actively seek ways to implement the principles of Perpetual KYC into their practices. Of course, this will mean handling more significant complexities and getting to grip with new technologies. But once the sector gets used to ongoing digital processes, it may come to wonder how it ever got by without them.

From Perpetual KYC to Perpetual KYB
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Claus Christensen

Claus Christensen

CEO

Know Your Customer

Member since

12 Sep 2017

Location

Dublin

Blog posts

9

This post is from a series of posts in the group:

RegTech

Regulatory technology, is a new technology that uses information technology to enhance regulatory processes. With its main application in the Financial sector, it is expanding into any regulated business with a particular appeal for the Consumer Goods Industry. Often regarded as a subcategory under FinTech, RegTech puts a particular emphasis on regulatory monitoring, reporting and compliance and is thus benefiting the finance industry.


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