Beyond Compliance: The Reality of KYC Challenges for Corporate Treasurers
by Steve Pulley, Managing Director, Risk Managed Services, Thomson Reuters
In the past, only basic KYC checks were performed on new banking clients. The globalisation of banking and the financial crisis of 2008 put an end to this relatively relaxed approach. Driving this change since the early 1990s has been the Financial Action Task Force (FATF), established as a G7 initiative to develop policies to combat money laundering and a prime mover behind the adoption of a risk-based approach (RBA). RBA was designed to move compliance on from a rigid, ‘one size fits all’ methodology to a more pragmatic style, which, in principle, frees up banks and other financial institutions (FIs) so they can direct their resources more efficiently, ensuring the greatest risks receive the highest attention.
The less welcome side-effect though, has been the allowance for banks (and their national regulators) to interpret KYC policies and procedures as they see fit, leaving corporates struggling to keep up with different requests from their various banking partners. The timing and nature of data requests from financial institutions are often inconsistent, resulting in an administrative burden and potentially increased costs for their corporate clients.
In addition, the pace of regulatory change is accelerating globally and the consequences of non-compliance keep growing. In South Africa, regulatory change around KYC has recently gained significant momentum. For example, new electronic fund transfer regulations were introduced in June 2015, and a range of amendments to the Financial Intelligence Centre Act (FICA) are being pushed through in 2016.
Examining the challenge
Thomson Reuters recently conducted two surveys in order to get a deeper understanding of the real-world KYC challenges experienced on a daily basis by multiple market participants operating in the global Anti-Money Laundering (AML) environment. The first targeted financial institutions (FIs) globally and 772 individuals responded, of which 101 were based in South Africa. The second survey focused on corporates, with 822 global respondents with 116 based in South Africa. The results of these surveys have enabled us to compare the situation in South Africa to other regions around the world.
On the surface, South African FIs are faring better in the client onboarding space than their global competitors. It is, however, possible that this is as a result of less stringent requirements that will change under the revised FICA (as evidenced elsewhere). Respondents reported a significantly shorter average onboarding time of just 17 days, compared to a global average of 24 days. The average longest time to onboard a new client was also shorter at 52 days, compared to the global average of 58 days.
The rate of change, however, is accelerating. The change in onboarding times is beginning to approach the global average – South African FIs reported a 20% increase in average onboarding times in the 12 months preceding the survey.
However, global corporates describe a different experience, with one in ten experiencing an onboarding journey that took up to four months or longer. Specific to South African corporates surveyed, the lack of regulatory pressure for ongoing monitoring and less robust approaches to onboarding at some FIs, have historically led to a more favorable experience around KYC compliance than for corporates globally.