Cleaning up the mess: how to approach KYC remediation

Do you need to implement a Know Your Customer (KYC) remediation process to quickly bring your back book up to date? Are your existing processes slow, inadequate, or costly?

An effective KYC process is critical for businesses that might attract those with criminal intentions. KYC is often considered a customer onboarding activity, however, to be effective, it must be maintained and updated for the duration of a customer relationship.

Now that global banks have such tight control, financial criminals are looking for softer targets, including small and medium-sized financial services providers and FinTech firms. Businesses with limited resources for compliance programs need a solution that speeds up their KYC processes without compromising the quality of due diligence. To minimize risk, you need control, visibility and transparency.

What is KYC remediation?

KYC remediation involves revisiting and updating customer records to ensure they meet current regulatory standards and accurately reflect the customer’s risk profile. It’s not just about correcting outdated information—customer data needs to be complete, accurate and compliant with evolving regulations.

Within the broader framework of Anti-Money Laundering (AML), KYC remediation is essential. It ensures that your business has a clear, up-to-date understanding of who your customers are, what they do, and the risks they might pose. In a world where financial crimes like money laundering and terrorism financing are becoming increasingly sophisticated, keeping your customer records accurate is critical to protecting your business and maintaining regulatory compliance.

Without effective KYC remediation, you risk operating with incomplete or outdated customer information, which can leave you vulnerable to regulatory penalties, reputational damage and financial loss. It’s not just about meeting regulatory requirements—it’s about safeguarding your business from the inside out.

KYC remediation drivers

Since the turn of the millennium, the pace of regulatory change has been staggering. Sanctions programs are now increasingly used by governments to punish and motivate rogue nations to comply with commonly accepted international political norms. Sanctions programs now also require the identification of majority-owned subsidiaries, along with beneficial owners of sanctioned companies. This has left many firms with outdated customer files that no longer offer protection from compliance-related risk.

In some cases, this has led to wholesale de-risking of customer segments, simply because of the time and cost involved in remediating these files using current manual processes. In other cases, access to financial services has been interrupted while KYC files are remediated and brought back into line with regulatory requirements. The customer experience is impacted, resulting in greater pressure to complete the remediation process quickly and potentially impacting the quality of the due diligence process.

Regulations driving the need for  KYC remediation vary by region but will typically fall under the following categories:

• anti-money laundering (AML)
• tax evasion
• anti-bribery
• data protection
• counter-terrorism financing
• anti-corruption

All regulated firms need a KYC remediation framework that keeps risks low, regulators satisfied, and the bottom line healthy.

Challenges in KYC remediation

Implementing a robust KYC remediation process is critical, but it’s not without its challenges. Understanding and addressing these challenges is key to developing a robust and efficient remediation strategy that safeguards your business while maintaining compliance.

1. Complexity and scale of data management
One of the primary challenges in KYC remediation is the sheer volume and complexity of customer data that needs to be managed. As regulations evolve, the amount of information required for a compliant KYC profile has increased significantly. Gathering, verifying and updating this data across thousands of customer records can be an overwhelming task. The complexity is further compounded when dealing with global operations that must adhere to multiple regulatory frameworks.

2. Balancing speed and accuracy
Rushing the data remediation process can lead to errors, missed information and ultimately, compliance failures. The challenge lies in striking the right balance between speed and accuracy, while ensuring thorough risk assessment. You need to remediate customer profiles swiftly to meet regulatory deadlines, but without compromising the thoroughness and reliability of the data.

3. Resource constraints
Financial institutions face significant resource constraints when it comes to KYC remediation. The remediation process can be resource-intensive, requiring a dedicated team of analysts, robust technology infrastructure and ongoing training. Many find there is a shortage of experienced analysts available, and it is impossible to keep on top of the workload. Allocating sufficient resources without overburdening the business is a delicate balancing act.

4. Customer relationship management
Requesting updated information from customers can be a sensitive task. If not handled carefully, it can lead to frustration and damage the relationship. Customers may be reluctant to provide additional details, especially if they don’t understand why it’s necessary. This challenge requires a nuanced approach that balances regulatory compliance with maintaining positive customer relations. Clear communication, avoiding repeat outreach requests and a transparent remediation process are essential to avoid alienating your customer base.

5. Regulatory uncertainty
The regulatory landscape is continuously evolving and staying ahead of these changes can be difficult. What’s compliant today may not be tomorrow. This uncertainty can make it challenging to maintain up-to-date KYC records. Firms must continuously monitor regulatory developments and adapt their remediation processes accordingly. Failing to do so can leave your business vulnerable to penalties and compliance risks.

6. Technology integration
While automation and advanced technologies can significantly enhance KYC remediation efforts, integrating these tools into existing systems can be challenging. Legacy systems may not be compatible with modern KYC technologies, leading to inefficiencies and potential data silos. The challenge is not just in adopting new technologies but ensuring they seamlessly integrate with your current processes to provide a comprehensive, unified solution.

Understanding these challenges is the first step toward a successful KYC remediation process. With these obstacles in mind, you can implement practical solutions and strategies to address them effectively. Let’s now look at the main steps to achieve this.

KYC remediation policies and compliance

Your internal policies need to mirror the regulations that apply to you. These form the backbone of your KYC remediation process and must evolve in line with regulatory requirements. This means fully understanding regulations in your industry and the jurisdictions within which you and your customers operate.

KYC remediation is not a one-off task. New regulations are formed and revised on an ongoing basis, so you need to be ready to review and revise your internal policies to match.

Ensuring your policies are updated is just the first step. Now, you are ready to tackle the remediation of your back book, which involves implementing processes that bring your data, reporting and compliance policies together.

Identify customer profiles for remediation

Once you have your policies defined, it is time to start acting on them. Your existing customer data must be brought in-line with new regulations that have come into effect. You need to identify outdated data and high-risk clients and have a consistent process in place for gathering missing and outdated information, ensuring your teams understand this process, and record your activity, so that it is auditable for both internal and external regulators.

Gather your KYC data

As regulations evolve and expand, the amount of information needed to ensure an adequate standard of KYC has dramatically increased. Gathering this data is a huge undertaking. You need to be able to gather disparate information from multiple sources to get a complete and accurate picture of each customer. The process can be time-consuming, labor-intensive and costly.

Automating the data-gathering phase significantly reduces the time it takes to update old records and frees up your high-value analysts for more strategic work.

KYC data analysis and identifying Ultimate Beneficial Owners

Requirements for identifying and verifying Ultimate Beneficial Owners (UBOs) have become more stringent since the Panama, Paradise and Pandora Papers revelations. This requirement is often a large component of current KYC remediation projects.

Without automation, you will need a team of analysts to crunch through large volumes of complex data to manually piece together corporate ownership structures and work out where ownership and control lie. You can minimize the time and overheads associated with this by using data visualization. This is especially useful when identifying UBOs, or re-examining them.

Complex company ownership structures can disguise the natural persons with controlling votes or shares in a company. Following a tangled thread that leads you back to that individual is made easier with diagrams and charts that decision-makers can interpret.

Set up adverse news alerts

While registries and data vendors can only provide you with so much, the news can also give you an extra level of assurance and provide triggers for KYC remediation, as fresh information comes to light across the globe online and in print every day. But, who has time to screen every news item — and how often can you do it? If one of your customers becomes politically exposed, you need to be in the know and must update their KYC accordingly. Technology that searches for adverse news items flags risks relating to your customers without eating into your operating costs.

Leveraging technology and automation for effective KYC remediation process

As we have explored, managing KYC remediation involves navigating complex regulations, gathering extensive data, and analyzing intricate ownership structures. These tasks can be overwhelming and resource-intensive.

Here’s where technology and automation come into play, facilitating a risk-based approach by enabling more efficient identification and management of high-risk profiles.

Automation streamlines the process of updating and verifying customer data, including the crucial task of identifying and updating outdated data. By reducing the manual workload, technology minimizes errors and accelerates the process, ensuring that KYC profiles are accurate and up-to-date.

Digital KYC profiles provide the data foundations for advanced technologies, such as AI and machine learning to enhance data analysis. They provide deeper insights into customer profiles and detect risks that might go unnoticed with manual methods. Automated tools also simplify identifying Ultimate Beneficial Owners (UBOs) by visualizing complex ownership structures, making the task more manageable and less time-consuming.

Integration of technology ensures that KYC processes blend seamlessly with your existing systems. This integration not only improves efficiency but also helps maintain a comprehensive compliance framework without disrupting your operations.

At Encompass, we understand the challenges of KYC remediation and offer solutions designed to address them. Our corporate digital identity (CDI) platform leverages automation and advanced analytics to streamline your KYC processes, ensuring accuracy, speed, and regulatory compliance. By incorporating Encompass’ solutions, you can enhance your remediation efforts, reduce operational burdens, and stay ahead of regulatory changes.

In conclusion

KYC remediation is not a set-and-forget process. You will need to continually review your policies to ensure best practice and regulatory compliance. Your customer profiles need to be proactively maintained through the customer lifecycle.

Get in touch to find out how Encompass can transform your KYC remediation process.
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Editor’s note: This blog was first published on 26 September 2018, and has been updated to its current form for accuracy and comprehensiveness