KYC and the imperative for digital transformation
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Adopting a pKYC culture

By Dr Henry Balani | March 29th 2022
Adopting a pKYC culture | Encompass blog

Organizational culture is key to the success of digital transformation projects.

For financial institutions (FIs), failure to adhere to anti-money laundering (AML) regulatory requirements can result in fines, enforcement action and a loss of public confidence, that can lead to undesirable outcomes for bank shareholders and employees alike. With the potential costs of getting it wrong, perpetual KYC (pKYC) transformation projects understandably require higher standards of success than non-regulatory driven initiatives.

What is pKYC?

Today’s corporate Know Your Customer (KYC) due diligence processes are periodic and can be fragmented and costly as a result. This can leave FIs exposed to risk from undetected changes between periodic refresh and remediation workloads, especially if there are long intervals between these processes.

By moving to pKYC and continuous compliance, portfolio risk and the workload backlog is reduced, helping drive overall operational efficiency in due diligence processes.

People, process and technology

Business transformation projects have three components – people, process and technology.

  • People and organization culture are key to success, and the focus of this article.
  • Process focuses on the underlying business practices that drive the firm. With pKYC projects, compliance policies need to be clearly defined by the risk tolerances and business rules that form the basis of the customer relationship. Processes should be well aligned with the regulatory requirements of the jurisdiction the bank operates in, and regulators clear on the processes the bank has developed to ensure compliance.
  • Technology provides the underlying tools required to enable a business transformation project. These include the workflow, rules engine, data and platform in which the business process executes.

People are arguably the most important component, with cultural buy-in fundamental to success. Employees at all levels of the firm, from senior executives to compliance analysts, must feel comfortable the pKYC solution will address operational and regulatory business requirements.

The complexity and importance of adhering to regulations means existing KYC approaches are well entrenched, making the introduction of new processes challenging, as they disrupt existing, well-established approaches. Human nature is typically risk averse and senior executives consider compliance a cost burden that impacts the bottom line. A pKYC transformation project introduces new risks as new compliance processes need to be developed, tested and implemented. A new approach to compliance will be assessed on costs and regulatory adherence.

Whitepaper: Delivering the future of KYC begins with the needs of the firm

Bringing IT and operations teams onboard

For technology and operations, pKYC projects need to demonstrate they will be effective in managing costs and improving process efficiencies.

pKYC solutions are currently immature in addressing compliance requirements, meaning management teams will deeply assess their effectiveness before fully deploying. Solutions that enable pKYC tend to be Software as a Service (SaaS) based, which means external platforms need to be integrated into current technology operations. This potential loss of control can make IT teams more reluctant to move away from the critical regulatory driven operations they currently manage.

Gaining buy-in from compliance and analyst teams

Finally, employees at the ‘coal face’ including the compliance and analyst teams that conduct customer due diligence (CDD) reviews, need to be fully onboard with the new pKYC approach.

Traditionally, these teams are impacted most by any changes to the compliance processes. Staff can be reluctant to adopt new processes that require changes to their day-to-day operations. Well thought out transformation projects that are carefully managed, together with comprehensive platform training will go a long way to ensuring buy-in, and a higher probability of success for a pKYC deployment. Gaining acceptance from these teams is vital – the cultural transformation required of these teams should not be underestimated.

Regulators and enforcement agencies

The relative ‘newness’ of pKYC means regulators and enforcement agencies are unfamiliar with the approach and additional education is needed to convince them of its merits.

Typically, regulators and enforcement agencies are less interested in how banks comply, over their ability to adhere to their compliance requirements. Banks that decide to adopt pKYC need to be able to demonstrate the level of accuracy achieved is the same or greater than their conventional KYC approach. Results from pilot pKYC projects that run in parallel with conventional approaches provide a useful comparison. As more banks decide to incorporate pKYC projects within their portfolio, this will help establish credibility and a greater willingness from these groups to endorse pKYC.

In summary, the cultural and people component of any business transformation project is key to success. This is especially important as pKYC is a relatively new approach to addressing regulatory requirements. Regulatory compliance is essential for banks and a change in approach to improve operational efficiency will need to address regulatory requirements satisfactorily.

The merits of pKYC continue to be shared across banks, and, as the approach matures, it will eventually become a mainstream solution to addressing CDD requirements.

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Author: Dr Henry Balani

Dr. Henry Balani is Global Head of Industry and Regulatory Affairs at Encompass. He is a noted industry thought leader and commentator on Regulatory Compliance issues and trends affecting the financial services industry. As a published academic, Dr. Balani also lectures on international business, economics, and regulatory compliance courses globally. Dr. Balani holds a Doctorate in Business Administration from the University of Wisconsin, an M.B.A. from Northern Illinois University in the USA, and a B.S. in Economics from the London School of Economics.

LinkedIn Profile | Dr Henry Balani

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