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Know-your-customer compliance costing banks their corporate clients

The burden of know-your-customer processes on banks' corporate customers has increased significantly in the wake of strengthened money laundering regulation and hefty fines, and is damaging banks' client relationships.

Most treasurers polled in a new survey said they have reduced or limited the number of banks they work with to minimize know-your-customer, or KYC, requirements, while 37% reported that they are less likely to change banks for KYC reasons.

The research, conducted by global payment messaging network Swift and EuroFinance, surveyed 200 treasury and finance professionals worldwide. It points to regulation as the "overriding catalyst" for the growing KYC hurdles.

Swift is now opening its KYC registry to all companies connected to its network in an attempt to streamline processes, and banks are also coming together to embrace the KYC utility model, seeing it as one possible answer to the problem.

Costly for corporates, banks

Companies typically receive KYC requests when onboarding with a new bank, as well as ongoing follow-up requests and renewals. This is particularly burdensome for large multi-banked corporates, which often have 40 to 50 banking relationships and hundreds of legal entities that all have to go through individual KYC processes, said Bart Claeys, Swift's head of KYC, in an interview.

For some firms, providing KYC documentation to their banks ties up as many as three full-time employees, according to the research, while also causing delays in opening accounts, duplication of effort and difficulties in sourcing information.

Bank-client relationships are suffering as a result. Thirty-one percent of the treasurers polled said KYC has negatively affected their banking relationships, while 28% said it has caused them to abandon the account opening process at least once.

The findings highlight an ongoing challenge faced by banks as regulation to combat financial crime is intensifying worldwide. Ninety-three percent of the respondents said that KYC requests are more challenging today than five years ago, and this development is only likely to continue, Claeys said.

"The KYC challenge and the burden around it are not going to reduce, because there is more regulation which is still coming into play," he said.

The fourth money-laundering directive in the EU, which introduced enhanced requirements for ultimate beneficial owner, or UBO, identifications, is cited by the research as a piece of regulation that has added to the KYC load. The fifth money laundering directive, which will come into force in January 2020, will further strengthen the UBO requirements.

Collaborative approach

A lack of standardization around the KYC process is one challenge adding to the complexities for corporates. Banks have tended to develop different KYC questionnaires, rather than working together to ease the task for the clients, Claeys said.

Swift is now attempting to harmonize the KYC documentation collection process with its KYC Registry, which opened to all 2,000 Swift-connected corporate groups on Dec. 16.

It followed a testing period with 18 corporates including Bayerische Motoren Werke AG, or BMW, Spotify Technology SA, The Unilever Group and Huawei and 16 global banks including JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., and HSBC Holdings PLC.

The KYC Registry provides one central utility for corporates to upload, maintain and share KYC information with their banks. While banks will still have to carry out their own risk assessments and additional due diligence on clients, the solution aims to make the initial information collection process more efficient.

Since 2014, the registry has helped financial institutions conduct KYC on correspondent banks, meaning that 5,000 banks are already using the service.

Banks elsewhere also hope the utility model can help ease the compliance burden, with some taking a regional approach.

In the Nordics, for example, the six largest banks — Danske Bank A/S, DNB ASA, Nordea Bank Abp, Skandinaviska Enskilda Banken AB, Svenska Handelsbanken AB (publ) and Swedbank AB (publ), several of which are facing money laundering allegations — recently formed a joint venture company to develop a solution for handling KYC data. In Africa, meanwhile, the African Export-Import Bank is spearheading Mansa, a new customer due diligence platform.


Others believe that new technology is necessary to ensure the privacy and security of customer data in a decentralized manner.

Technology firms such as Cambridge Blockchain Inc and Tradle Inc. have developed blockchain-powered KYC solutions, while a large group of banks, including BNP Paribas SA, Deutsche Bank AG and ING Groep NV, have participated in trials for sharing KYC data using R3's blockchain-based Corda platform.

While these initiatives are still in the early stages, they are a good indication of a change in mindset from the banks toward a "noncompetitive" approach to KYC, Claeys said.