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.
 

Client onboarding

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.
 

[[[PAGE]]]

The more banking relationships you have, the bigger the KYC burden

Our survey results yielded a number of interesting figures regarding corporates and their banking relationships. The global average showed that corporates had up to nine banking relationships regionally and eleven globally. What’s more, each banking relationship could pose a different KYC challenge, putting even more strain on the teams at companies who have to respond to these myriad requests. The good news is that South African corporate respondents reported a lower level of complexity, with an average of three regional banking relationships and nine relationships at a global level.

However in some areas, corporate concerns equated to those in the global sample – and these were particularly strong pain points. For example, 49% of South African corporates reported that different banks asked for different documentation and information, and that there was no common standard in place, compared to 47% of global respondents. Concerns around the security of personal documents were one percentage point higher than the global average (34%), potentially reflecting more general concerns about crime and security in the country.

The reporting of material changes is another area where the pain could potentially increase for corporates as FIs adopt a more robust approach to ongoing due diligence. Corporates in South Africa are much less aware than their global counterparts of their potential obligations to report material changes to their banks and FIs – even though they reported the same average number of material changes (six in the 24 months preceding the survey). What is potentially concerning is that 17% say they reported fewer than half of their organisation’s material changes. On the other hand, 45% of South African corporates reported spending more time and attention reporting material changes to their FIs in the 24 months preceding the survey. And overall, those who responded to the survey said they expect to spend an additional 20% of their time reporting material changes in the 12 months after the survey, indicating an increased awareness of the issue and a dedication to compliance.

Time dedicated to these processes is a major concern for South African corporates: 30% stated that the delays and paperwork involved in supplying KYC documentation demanded too much time and too many resources, well above the worldwide average of 22%. Furthermore, 50% (in line with the global average) reported that they spent more, or significantly more, time and attention providing KYC documentation during the 12 months preceding the survey. Twenty Eight per cent of C-suite respondents in our global survey said they were focusing more time on the adoption of a new approach to managing document requests for KYC compliance. Time which could be better spent on growth related activities within their organisations.

[[[PAGE]]]

Relieving the burden

Financial institutions recognise the stress felt by their clients in trying to keep up to date with complex and changing KYC regulations. There is also an appreciation of the negative experience clients may have when going through onboarding and KYC processes, more importantly, that these can result in damage to their customer relationships. There is a growing appetite, in regions such as South Africa, to streamline and simplify these processes for corporate customers, with the aim of reducing the time and cost spent on supplying this information. This will inevitably lead to the all-round favourable outcome of financial institutions and their customers being able to do business much more quickly and efficiently.

As a result of an unprecedented partnership amongst the largest financial institutions in South Africa and Thomson Reuters Org ID, we have launched the South African KYC Service which simplifies the collection and distribution of KYC information for juristic entities. Large corporations, hedge funds, asset managers, and others can use the South African KYC Service as an efficient, centralised solution to distribute KYC documents and information to multiple financial institutions through a secure and free-of-charge web-based portal. The foundation of the South African KYC Service is a policy that has been standardised across all participating financial institutions.

Steve Pulley Managing Director, Risk Managed Services, Thomson Reuters Steve Pulley is Managing Director of Thomson Reuters’ Risk Managed Service business spanning KYC and Client On-boarding Solutions (Org ID and Goldtier) and our Enhanced Due Diligence offerings, having joined the firm in February 2013. Prior to assuming this expanded role in March 2016, Steve held the position of Managing Director Org ID responsible for taking the embryonic Org ID proposition to market and evolving it into the market leading proposition it has become. Before that Steve was Global Head of Industry Solutions and Partnerships for the Financial & Risk business unit. He joined Thomson Reuters from AnaCap Financial Partners, a €2bn Private Equity firm focused on investments in European financial institutions where he was a Managing Director involved in all aspects of the investment life cycle. During his career with AnaCap, Steve led a series of acquisitions and sat on the Board or Supervisory Board of five portfolio companies. Previously he was a management consultant with Oliver Wyman in London and New York. As a member of the Capital Markets Practice he led and worked on a range of strategy, risk management and post merger integration projects for financial institutions in Europe, North America and Asia. Steve is a graduate of Oxford University with an MA (Hons) in Mathematical Sciences and is married with one daughter.