Real-world Know Your Customer (KYC) challenges

A focus on the United States

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REAL-WORLD KYC CHALLENGES:A FOCUS ON THE U.S.

About the survey

A recent Thomson Reuters survey conducted in early 2016 revealed the real-world KYC challenges experienced on a daily basis by multiple market participants operating in the global Anti-Money Laundering (AML) environment. In this report, we highlight the pertinent issues relating specifically to the USA.

In total 772 financial institutions were surveyed globally, of which 114 respondents were from the United States. Additionally, 822 corporates were surveyed, with 104 of these from the U.S.

The FIs comprised of investment, retail and global banks; hedge funds; asset managers; insurance companies and other financial market participants. In terms of corporates surveyed, a wide range of industries were consulted, including business and professional services; manufacturing; retail and consumer; technology; media and telecoms; healthcare and life sciences.

U.S. financial institutions and corporates surveyed

In total 772 financial institutions were surveyed globally, of which 114 respondents were from the United States.

822 corporates were surveyed, with 104 of these from the United States.

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REAL-WORLD KYC CHALLENGES:A FOCUS ON THE U.S.

What did the survey reveal?

• In the U.S., the ‘Know Your Customer’ (KYC) and client due diligence (CDD) aspects of fighting financial crime continue to be a hot focus for regulators – and for the financial institutions they regulate.

• The survey showed the top concerns of FIs to be changes in regulation/legislation and financial penalties, when considering changes to their CDD/KYC processes.

• U.S. financial services firms are spending more on average than their global counterparts on CDD/KYC – $78 million versus $60 million. 11% of U.S. firms spend over $101 million compared with 7% globally.

• Both U.S. corporates and financial institutions are anticipating significantly higher increases in onboarding times than the global average over the next 12 months.

• Costs for both client onboarding and due diligence refreshes are rising at a much faster rate in the U.S., and are expected to continue to rise more quickly, than in other jurisdictions around the globe. The rapid pace of change in the U.S. showing the importance of KYC and CDD in this region.

• A higher proportion of senior management and the board of directors are spending significantly more time and attention on CDD/KYC issues than globally – 24% versus 19%.

• The top challenge for U.S. financial institutions in conducting a CDD/KYC process is the size and complexity of the regulatory changes to implement – 38% acknowledged this challenge, compared with 33% globally.

• The U.S. are also more concerned than their global peers about the ability to secure budget – 24% of FIs selected this compared with 21% globally. This is not surprising considering that costs are rising faster in the U.S. than elsewhere.

• The volume of regulatory change was selected by 34% of U.S. financial institutions as a challenge, the same as the global response U.S. organizations also matched their global peers in their concerns about a lack of knowledge about the evolving regulations, at 22%.

DRILLING DOWNA snapshot of banks’ concerns

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REAL-WORLD KYC CHALLENGES:A FOCUS ON THE U.S.

• Interestingly, U.S. financial institutions were less concerned than the global sample about a lack of people resources (28% v 36%), a lack of time available (22% v 33%) and a lack of effective technology (16% v 21%). U.S. organizations were also less concerned about a lack of ability to access good quality customer identity data (10% v 17%). The sense in the U.S. seems to be that given enough budget, there are the resources in the marketplace to enable financial organizations to meet the KYC and client onboarding challenges they face.

A snapshot of corporates’ concerns

• U.S. corporates are feeling the impact of the pressure on their financial institutions. The time and cost of KYC/CDD compliance for U.S. corporates is expected to rise faster than the global average over the next 12 months.

• As in many other jurisdictions, there are varying accounts of customer experience when it comes to client onboarding. U.S. financial institutions report 4 contacts are made during the onboarding process; however U.S. corporates gave a much higher number, reporting 7 contacts.

• Some 14% of corporates have changed banks as a result of poor KYC and client onboarding processes. U.S. corporates are challenged mostly by document provision issues, including inconsistent requests and requests for documents available online.

• U.S. corporates appear to be more advanced than their peers worldwide when it comes to the reporting of material changes, but even so only 41% say they have made all their financial institutions aware of all their material changes.

• As U.S. corporates overall have more banking relationships than the global average, the impact of increases in the time and cost of KYC/CDD for them will have a significant multiplier effect that will be greater than that of their peers worldwide.

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REAL-WORLD KYC CHALLENGES:A FOCUS ON THE U.S.

Client onboarding New regulations and negative headlines mean U.S. financial institutions have become more focused on ensuring they are compliant with KYC/CDD rules – but this often results in the remaining spending of time, money and resources to adapt old processes to meet the requirements of the new demands.

U.S. corporates report a significantly longer period of time to be onboarded as a client – 30 days on average, compared with the 22 days that financial institutions reported. There is a substantial gap in another area as well – U.S. financial institutions report that they contacted their clients an average of four times to collect onboarding information – in contrast to U.S. corporations reporting that they have been contacted an average of seven times. This gap in the client experience points to potential issues with client experience that financial institutions should be paying more attention to.

At the extreme end, U.S financial institutions U.S. financial institutions also report a higher rate of client onboarding cases that take longer than four months – 18% versus 14% globally.

As a result of the regulatory and infrastructure strains, U.S. financial organizations said the time to onboard has increased by a significant 29% over the past 12 months – compared with a global average increase of 22%.

Both U.S. corporates and financial institutions agreed that the time to onboard will rise significantly over the next 12 months as well – financial institutions are estimating a 27% increase, while corporates say 28%. These are both substantially above the global average of 18% and 20% respectively.

There were signs in our survey that there is a lack of best practice infrastructure in some firms. U.S. financial institutions are much less likely to have a dedicated KYC or client onboarding function serving as the focal point for client data collection – just 30% of organizations reported having a client onboarding function to collect data, compared with 40% globally, for example. The credit function is more likely to take on this role, with 34% of US respondents saying this function contacted clients for onboarding data, in contrast to 24% globally.

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REAL-WORLD KYC CHALLENGES:A FOCUS ON THE U.S.

Ongoing monitoring Infrastructure seems to be lacking in other areas as well. In spite of all the regulation in the U.S. around KYC, some 15% of U.S. financial institutions reported that they have no formal due diligence refresh program for their client records in place– compared with 11% globally. They are also more likely to rely on periodic checks – 29% versus 27% globally. Some 21% review client records a certain period after they have been onboarded, while 10% only review when there is a trigger alert to do so. Just 7% review records in line with their risk appetite and 12% have best practice in place – that is having all client records dynamically checked.

U.S. financial institutions report that clients are contacted on average 3 times during the refresh process, and that the process takes, on average, 16 days to complete this is– below the global average of 20 days. However, that gap may soon close – U.S. financial institutions reported a 22% rise in the time that a due diligence refresh took over the past 12 months, compared with a 16% average globally.

Costs are rising faster in the U.S. too – with a 25% rise over the past 12 months compared with 16% globally. The U.S. is predicting that their costs will continue to rise more quickly than the global average over the next 12 months too – up 24% compared with 16% globally.

On the other hand, U.S. financial institutions were also far more confident than their global peers that they are being updated about material changes within client organizations – 30% said all their clients are proactive about reporting these, compared with 14% globally. Just 6% said their clients do not update them, compared with 10% around the world.

Generally, this is an experience that U.S. corporates support – 69% say they tell their financial institutions about most or all of their material changes, compared with an average of 61% globally. U.S. corporates are more aware of impending rule changes that will require them to report material changes to their financial institutions – 68% said they were fully aware and prepared, while another 20% said they were aware but not yet fully prepared.

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REAL-WORLD KYC CHALLENGES:A FOCUS ON THE U.S.

U.S. corporates have had just as poor an experience as their global counterparts around document provision for KYC and due diligence compliance. More reported having changed banks because KYC checks were taking far too long – 14% versus 13% globally. And U.S. corporates have had significantly worse experiences than their global peers around inconsistent requests for information and documents; and being asked for documents that were already available online.

In addition, 28% of U.S. corporates reported that their teams and related stakeholders have had to spend significantly more time and attention on KYC activities around being onboarded as a new client, compared with 21% globally.

Rule changes and poor client experiences are bad enough, but U.S.-based corporates have more regional and global banking relationships (averages of 11 and 13 respectively) than corporates from our global sample. This means that U.S. corporates are feeling the KYC/CDD pain multiplied across more banking relationships than organizations in other jurisdictions.

The client experience

However, even though these statistics are heartening, they still indicate that U.S. financial institutions believe 70% of their clients are potentially non-compliant around material change information.

This level of non-compliance could lead to serious difficulties. Generally speaking, U.S. corporates had slightly more material changes over the past 24 months than their global peers – an average of 7, compared with 6. U.S. organizations are more likely to have material changes related to ownership or ultimate beneficial ownership changes (29%); private/public listed status (20%) and mergers or other corporate actions (19%).

Indeed, this volume of changes, plus increased regulation means U.S. corporates say that over the next 12 months, they are expecting the time it takes to meet these requirements to increase by 34% – significantly above the global average anticipated increase of 26%.

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REAL-WORLD KYC CHALLENGES:A FOCUS ON THE U.S.

Costs On average U.S. financial institutions spend more on CDD/KYC – $78 million compared with $60 million globally, this is because 11% of respondents spend over $101 million annually. Not surprisingly, U.S. financial institutions are also expecting cost increases that are substantively above the global average – 26% increase versus a 16% increase around the world.

U.S. financial services organizations for gearing up are gearing up for change – they are slightly more inclined than the global average to spend on technology solutions for client onboarding regulatory compliance – 30% versus 28%. These organizations also have far more people than the global average devoted to CDD/KYC – 76 people versus 68 globally. The number of staff focused on these tasks has risen at a faster rate in the U.S. as well – 23% of financial institutions reported a significant increase in employees focused on CDD/KYC versus just 13% globally.

What types of challenges has your organization experienced when it has been asked to provide KYC documents and related information to the financial organizations it works with for compliance purposes?

Global % USA %

Inconsistent requests for information and documents 34 39

Dealt with many different people within the bank during the process

40 39

Different banks ask for different documents and information, no common standard

47 38

Asked for documents that are already available online 25 33

Had concerns about security around who was viewing my personal documents

33 25

Account opening took longer than anticipated 22 21

The delays and paperwork involved cost us time and resources 22 19

Did not understand why we were asked to supply the documents requested

22 18

Had to change bank as the KYC checks were taking too long 13 14

We generally have a good experience with this process 11 14

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REAL-WORLD KYC CHALLENGES:A FOCUS ON THE U.S.

Engagement by senior management

24% 19%

It is hardly surprising that the amount of resources that financial institutions are having to dedicate to KYC/CDD programs has focused minds at the top – particularly given that both cost and time are expected to rise higher than the world average in the US. A higher proportion of senior management and board directors at U.S. financial services firms said they are spending significantly more time and attention on CDD/KYC issues than their global peers – 24% versus 19%.

Engagement with the regulator

It’s obvious from the new rules from FinCEN, and continued supervisory focus on enforcement, that the regulators are continuing to make KYC/CDD a priority. Effective on July 11, 2016, FinCEN’s final customer due diligence rule clarifies and strengthens CDD requirements within the BSA regime for U.S. financial institutions. The key elements of the rule include:

1. Identifying and verifying the identity of customers

2. Identifying and verifying the identity of beneficial owners of legal entity customers

3. Understanding the nature and purpose of customer relations

4. Conducting ongoing monitoring

Indeed, a higher proportion of U.S. financial institutions reported significantly increased engagement with their regulators around CDD/KYC issues – 25% versus 17% globally.

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REAL-WORLD KYC CHALLENGES:A FOCUS ON THE U.S.

The 2012 FATF Recommendations

Some 47% of U.S. financial services firms have made changes to their CDD/KYC processes as a result of the FATF 2012 Recommendations – slightly higher than the global average of 44%. But more firms also say they have not made any changes and are not planning to – 25% for the U.S. compared with 21% globally.

U.S. financial services organizations are also less likely to outsource to meet the FATF 2012 rules. A significant 36% say they are investing in internal processes, compared with 27% globally. However, as U.S. financial institutions seek ways to better manage their increasing costs and ensure ongoing compliance, whilst also providing a positive client experience.

Conclusions Overall, it Is clear that the current direction of travel for KYC/CDD programs for U.S. financial institutions is unsustainable. Costs and resource demands are spiraling out of control as regulators hit firms with new rules and the threat of more enforcement actions. Attempts to keep going using existing infrastructure will eventually come unstuck, and the client experience for U.S. corporates will deteriorate further – there are signs that this is already beginning to happen. It’s clear that U.S. financial institutions need to consider a fresh approach to the challenges of client onboarding and ongoing client record refresh, such as outsourcing to an experienced KYC managed service provider.

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REAL-WORLD KYC CHALLENGES:A FOCUS ON THE U.S.

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© 2016 Thomson Reuters S037133/07-16

Please note that for purposes of this paper, all percentages have been rounded and are approximate. Full survey details with exact percentages available at:

Financial Institutions Survey

Corporates Survey

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