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A WHITE PAPER FROM FINEXTRA IN ASSOCIATION WITH MITEK DECEMBER 2016
A WIN-WIN FOR FINANCIAL INSTITUTIONS AND REGULATORS
DIGITALISING KYC
01 Introduction ...........................3 02 The regulatory environment .....5
03 The technology option .............8
04 The value of mobile capture and identity verification solutions ............ 11
05 Conclusion: Time to act ......... 12
06 About .................................. 13
CONTENTS
01INTRODUCTION
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3Heightened concerns about the global terrorist threat are reflected in a raft of regulations designed to strengthen the anti-money laundering (AML), anti-terrorist financing (ATF) and know your customer (KYC) activities at financial institutions. Regulators have identified the financial industry as an important component in the fight against terrorist financing and have placed significant obligations on the industry, which increasingly is at the front line of the battle.
A sound financial system, with proper scrutiny and analytical tools in place, may help to uncover anomalous transaction patterns, thus contributing to a better understanding of terrorist and criminal connections, networks and threats. Ultimately, say regulators, this will lead to relevant preventive actions by all competent authorities involved.
The International Monetary Fund (IMF) and World Bank have estimated that the annual amount of money laundered globally is between 2-5% of global GDP, or $800 billion-$2 trillion. According to the US Department of State: “Terrorist financiers are reverting to traditional ways such as hawala, trade based money-laundering and cash couriers, particularly in countries with non-existent or weak national anti-money laundering systems to move their funds to finance their terrorist activities. Financial and anti-money laundering tools help to expose the infrastructure of criminal organisations, the web of corruption, or a conspiracy to commit terror acts; provide authorities with a roadmap to those who facilitate the criminal and illicit activities; lead to the recovery and forfeiture of unlawfully-acquired assets; and support broad deterrence against a wide range of criminal activities including the financing of terrorism, which cannot be thwarted absent a comprehensive anti-money laundering regime.”
The seriousness of the fight against financial crime is reflected in the substantial fines imposed on financial institutions for any transgressions. In the US, the Government Accountability Office said that between January 2009 and December 2015, financial institutions had been fined a total of $12 billion for violations of bank secrecy, AML, sanctions and other related regulations. In the UK, Rob Gruppetta, Head of the Financial Crime
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Department at the Financial Conduct Authority (FCA) told a London conference on financial crime in November 2016 that the social and economic costs of serious and organised crime to the UK were assessed in the past at £24 billion. In October, the FCA fined Sonali Bank (UK) Limited (SBUK) £3.2 million for AML “systems failings” and separately fined the bank’s former money laundering reporting officer £17,900.
Speaking during a Finextra webinar in November 2016, Mark Mullen, CEO at UK digital only Atom Bank, says the framework for financial crime risk management is expensive to create, but “ultimately, it’s your licence, it’s your ticket to the game”. Banks operate in an “evidentiary environment” and must prove to regulators that information is being captured correctly and that risk-based decisions have been made and can be audited.
“I don’t think we’re peculiar as an industry. Our objective is clearly to focus on getting things done as smoothly and efficiently as possible, and making the overall customer journey as slick and engaging as you can make it, but equally, we have a moral imperative. We have no desire to have our reputation damaged by being singled out as a bank that has lax or in any way misfunctioning AML and cyber security rules. Reputations are hard to build and easy to destroy and once damaged, difficult to recover,” Mullen said.
In the US, the Government Accountability Office said that between January 2009 and December 2015, financial institutions had been fined a total of $12 billion for violations of bank secrecy, AML, sanctions and other related regulations.
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THE REGULATORY ENVIRONMENT02
Such fines underline the importance for banks to ensure compliance with AML and KYC regulations. Banks in the UK are required to comply with AML laws and KYC requirements, most of which are enshrined in the Money Laundering Regulations Act 2007 and apply across a range of sectors and institutions. The KYC information that is gathered for compliance to this Act is also used to help banks adhere to financial sanctions regimes that are in place across the globe.
UK banks are also subject to the European Commission’s action plan against money laundering and terrorist financing activity, which includes the 4th and 5th Money Laundering Directives (4AMLD and 5AMLD). By 26 June 2017, UK banks must comply with Article 30 of 4AMLD, which sets out member states’ obligations regarding the collection and availability of information on the beneficial ownership of corporate and other legal entities incorporated in their territory.
The adoption of 4AMLD “represented a significant step in improving the effectiveness of the EU’s efforts to combat the laundering of money from criminal activities and to counter the financing of terrorist activities”, says the European Commission. The Directive is being updated via 5AMLD to reflect advances in technology and communications, which have made it more possible for criminals to cover their tracks in the globally interconnected financial system.
The FCA states that financial firms must have in place “policies and procedures in relation to customer due diligence and monitoring”, among others, but neither the law nor its rules prescribe how firms should do this. Practices will vary depending on the nature of the money-laundering risks they face and the type of products they sell. For example, a large retail bank with many customers will likely need to develop or purchase customer monitoring software, but a smaller organisation may be able to monitor its customers using a low-tech solution, says the FCA.
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The regulator adds that firms applying a risk-based approach to financial crime need to seek out information about money-laundering trends and threats from external sources, such as law enforcement, as well as relying on their own experiences and observations. This allows firms to effectively review and revise their use of AML tools to fit the specific risks that they face.
4AMLD Examining 4AMLD in more detail, it is clear the Directive puts some pressure on financial services to comply with its new and more extensive requirements in a shorter time frame. It raises the stakes even further for banks and financial institutions in an already highly-regulated area, raising the bar in several key areas, including:
• Enhanced due diligence requirements regarding high-risk third countries. The immediate impact for financial services is that there will be fewer scenarios where simplified due diligence is acceptable. The situations where customer due diligence (CDD) needs to be conducted again would multiply exponentially, as all the institutions affected must review their definition of high risk to be aligned with the expanded definition within 4AMLD.
• �Amplified�definition�and�obligations�regarding�politically�exposed�persons (PEPS) and their families. The 4AMLD asks for a more focused approach to business partner and customer due diligence controls, including the documentation and implementation of enhanced due diligence measures for higher risk countries, sectors, products and customers within the policies and procedures. Parents, spouses (or equivalent partners), children and their spouses or partners are also to be treated as being PEPs. These measures require stronger KYC controls.
• Expanded�reach�to�cover�more�types�of�organisations. This will include fintech companies such as virtual currency wallet providers and exchangers. This amend reflects the latest financial crimes where virtual currencies are used for money laundering.
“ Many of the criticisms of the AML regime, and the burdens it imposes, relate to the due diligence checks, and there is a perception that anti-money laundering checks like this are a barrier to business, innovation and, ultimately, competition. Today’s AML regime was mainly developed in the 1990s, and while it does recognise digital identity, the way that many firms have put it into practice can make it feel paper-based.” CHRISTOPHER WOOLARD, DIRECTOR OF STRATEGY AND COMPETITION, FCA
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• E-money�products�will�be�specifically�regulated�under�4AMLD�for�the�first�time. Countries have discretion to apply some exceptions and allow some exclusions to this regulation, given certain conditions. Virtual currency exchange platforms are included and must go through the same level of scrutiny than traditional financial institutions.
• Lower�KYC�thresholds. These will force every institution to review their threshold limits based upon their risk assessment criteria and risk/convenience. For example, for eMoney operators, there are now lifetime limits, as opposed to annual limits. Threshold limits that were previously set at €2500 are now at €250. If lifetime limits are passed, the KYC threshold drops to €150. These are considered so low that virtually every user will rapidly hit the threshold.
• Financial intelligence units. The power of these units has been strengthened and they will have greater access to information. The units will be allowed to access centralised bank and payment account registers and electronic data retrieval systems.
• Updated sanctions. It is now mandatory for EU countries to impose these sanctions on firms and individuals that don’t comply with 4AMLD. The maximum fine has been set to at least twice the amount of the benefit derived from the breach or at least €1 million.
5AMLDWhile tackling 4AMLD, financial institutions must also keep a wether eye on further revisions to the Directive in the form of the fifth AMLD, which seeks to improve access to beneficial ownership registers for companies and trusts, and to make it more difficult for prepaid cards and crypto-currencies to be used to fund criminal activity. Several versions of 5AMLD have been circulated and most of the amendments are expected to apply from 26 June 2017, the same date as 4AMLD will come into force. European member states will be required to enable access to information about the beneficial ownership of companies from 1 January 2018.
5AMLD reflects advances in technology and communications, which have made it more possible for criminals to cover their tracks in the globally interconnected financial system.
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THE TECHNOLOGY OPTION03
In several speeches during 2016, Christopher Woolard, Director of Strategy and Competition at the FCA, stressed the importance of technology – and more specifically Regtech – to potentially “free up large sums of operational and capital expenditure which are currently spent on compliance. This potentially increases firms’ capacity to innovate.” Through Project Innovate, the FCA has helped more than 300 firms to navigate the regulatory system, reducing barriers to innovation while maintaining regulatory standards and consumer protections.
Woolard said AML was one of the FCA’s priorities: “We want the UK financial system to be a hostile sector for money launderers”. It was important, he added, that “unintended consequences” of AML regulation did not exclude consumers or businesses from using financial services, or fintech firms from providing services.
“Many of the criticisms of the AML regime, and the burdens it imposes, relate to the due diligence checks – commonly referred to as Know Your Customer checks, and there is a perception that anti-money laundering checks like this are a barrier to business, innovation and, ultimately, competition,” he said.
“Today’s AML regime was mainly developed in the 1990s, and while it does recognise digital identity, the way that many firms have put it into practice can make it feel paper-based.”
This is an area that concerns the FCA, he added, and the regulator would like to see innovative methods deployed by financial services firms. AML processes should be simpler, slicker and more cost-effective for both firms and consumers. Commercially-available tools, government-backed identification initiatives, and technology developed by firms in-house will all play a part. The aim is to:• streamline customer due diligence checks• strengthen anti-impersonation checks• share customer due diligence data between institutions• monitor transactions for suspicious activity
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9The Money Laundering Regulations Act 2007 requires firms to undertake CDD because regulators believe that financial institutions can better identify suspicious transactions if they know their customer and understand the reasoning behind the instructions they give.
While the 4AMLD puts pressure on banks to comply quickly, it also extends a helping hand as it encourages banks, prepaid card operators, virtual and digital currency processors, exchanges and wallets to embrace the digitalization of traditionally cumbersome processes such as identity verification, ownership validation, and extensive background checking.
Until recently, market regulators and supervisory bodies in the EU required financial institutions to verify the identity of their customers in person, or via original ID documents that would be sent to the institution’s premises for authentication.
The situation has now changed as 4AMLD accepts that electronic means of ID verification are as valid and trustworthy as in-person methods. Moreover, it points out that electronic ID documents also have advantages in terms of account opening, record keeping and the monitoring of high-value transactions. The FCA has stated that bank must maintain high standards for identity verification of new customers. If they adopt digital identity services to undertake verification, these also must meet stringent governance standards.
“ For banks and financial institutions in the UK – and across Europe – the success of digital onboarding will be linked to the adoption of cost-effective enrolment methods that not only tick all the AML and KYC compliance boxes but also ensure a pleasant, secure and instant user experience.”
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For banks and financial institutions in the UK – and across Europe – the success of digital onboarding will be linked to the adoption of cost-effective enrolment methods that not only tick all the AML and KYC compliance boxes but also ensure a pleasant, secure and instant user experience. This is because consumers are now accustomed to signing up to digital services such as social networks or on-demand streamlining from their computers or mobile devices in just a few seconds. Until now, AML requirements prevented banks from offering the same type of convenience.
During a recent Finextra webinar, Brendan Reilly, Global Head of Client & Market Execution, Barclays, said if onboarding is done right, it can be a differentiator. “The opportunity is large, but we have to be realistic. I don’t really see a client ever being delighted by an onboarding experience because no one likes the process of providing information, no matter how good it is. But it is possible to materially improve the onboarding experience and it is exceedingly important to do it because that first operational experience the client has with you – in that moment – they will become a recommender or a detractor. Corporates are members of the same associations – they talk to each other – and we don’t want detractors.”
The prospect of digital identity verification and digital onboarding will greatly simplify KYC. Digitalisation potentially frees financial institutions from an over-reliance on paper documents and in-person appointments to perform KYC checks. It also opens the prospect of leveraging the latest technologies to streamline this vital but traditionally cumbersome process. Such a move brings obvious efficiency benefits to the institutions themselves – as well as powerful improvements in the onboarding experience for their customers.
“ I don’t really see a client ever being delighted by an onboarding experience because no one likes the process of providing information, no matter how good it is. But it is possible to materially improve the onboarding experience and it is exceedingly important to do it because that first operational experience the client has with you – in that moment – they will become a recommender or a detractor.” BRENDAN REILLY, GLOBAL HEAD OF CLIENT & MARKET EXECUTION, BARCLAYS
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THE VALUE OF MOBILE CAPTURE AND IDENTITY VERIFICATION SOLUTIONS
04
The latest ID document verification solutions enable an enterprise to verify a user’s identity during a mobile transaction, meaning financial institutions, payments companies and other businesses operating in highly regulated markets can transact business safely while increasing revenue from the mobile channel. Functionality such as data prefill further reduce the friction in the mobile user’s experience. Innovative solutions like these are proven: some are embedded in the apps of thousands of organisations and used by tens of millions of consumers daily for new account openings, insurance quoting, mobile cheque deposit and other services.
Initiatives such as Smart Origination - customer onboarding technology developed in collaboration between Mitek, Fujitsu, ImageWare Systems, InAuth, Intelligent Environments and Trunomi – are also playing an important role in smoothing the digital KYC experience for customers. Smart Origination enables financial institutions to collect, process and verify documents and the identity of new applicants in less than five minutes. It operates across multiple channels to give a seamless customer experience, ultimately increasing conversion and reducing the cost of acquisition of new customers.
Smart Origination reduces identity fraud by up to 99% and decreases application abandonment by 40%, enabling financial institutions to reduce the financial expense associated with fraudulent customers and more easily attract new customers.
Financial institutions and payments processors are already reaping the benefits of digitalising onboarding and KYC. For example, AmBank, one of Malaysia’s leading financial services providers, is taking advantage of a solution from Backbase, provider of omnichannel digital banking systems, integrated with OCR and document validation capabilities from Mitek, to deliver digital onboarding for its 6 million retail and corporate customers.
Meanwhile, one of the world’s leading payments processors has dramatically reduced the time required to verify users’ ID documents and successfully lifted 92% of temporary restrictions that halted money movement, following its implementation of a solution from Mitek to check the identities of users sending and receiving money. Prior to implementing the solution, the payment processor had to suspend users’ accounts while IDs were reviewed and checked. This meant some users had to wait up to seven days. The process now takes just minutes.
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CONCLUSION: TIME TO ACT05
As regulators increasingly embrace – and encourage – fintech solutions, the time is right for financial institutions to consider digitising their KYC processes. The ‘digital first’ attitude of today’s tech-savvy consumers and financial services users mean that cumbersome onboarding processes may lose an institution potential new customers.
A seamless mobile user experience and strong and secure identity verification are not mutually exclusive, as is shown by the emergence of innovative digital solutions for KYC that meet the needs of both consumers and regulators in this fast changing environment.
“ Financial institutions and payments processors are already reaping the benefits of digitalising onboarding and KYC. For example, AmBank, one of Malaysia’s leading financial services providers, is taking advantage of a solution from Backbase, provider of omnichannel digital banking systems, integrated with OCR and document validation capabilities from Mitek, to deliver digital onboarding for its 6 million retail and corporate customers.”
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06ABOUT
Finextra This report is published by Finextra Research.
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For more information:Visit www.finextra.com, follow @finextra, contact [email protected] or call +44 (0)20 3100 3670
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14 MitekMitek (NASDAQ: MITK) is a global leader in mobile capture and identity verification software solutions, headquartered in San Diego, California, and with offices in London and Amsterdam. Mitek’s ID document verification allows an enterprise to verify a user’s identity during a mobile transaction, enabling financial institutions, payments companies and other businesses operating in highly regulated markets to transact business safely while increasing revenue from the mobile channel. Mitek also reduces the friction in the mobile users’ experience with advanced data prefill. These innovative mobile solutions are embedded into the apps of more than 5,400 organisations and used by more than 70 million consumers for mobile check deposit, new account opening, insurance quoting, and more. For more information, visit www.miteksystems.com. (MITK-F)Follow Mitek on LinkedIn: www.linkedin.com/company/mitek-systems-inc-Follow Mitek on Twitter: @miteksystemsConnect with Mitek on Facebook: www.facebook.com/MitekSystemsSee Mitek on YouTube: www.youtube.com/miteksystemsRead Mitek’s latest blog post: www.miteksystems.com/blog Mitek Contact:Rick DammiaansSales Development [email protected]
06ABOUT
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