If KYC is easy, why is everyone struggling to get it right?

Our PwC colleagues, Sebastien Cuvelier and Lionel Nicolas, emphasised the complexity of streamlining the KYC process in an article entitled “What does it take to really know our customers” in the AGEFI February 2023 edition. According to these experts, business and control functions need to strengthen their data tools and quality to boost the internal and client process experience. They also argue that a key component of the complexity is that KYC requires qualitative analysis. With that in mind, we will detail in this article why Hybrid Managed KYC Solutions (HMKYC ) could be an answer. HMKYC means flexibly—providing the expertise when (e.g. regular review peaks) needed and where (e.g. onsite within your environment) needed—instead of having full outsourcing or temporary staff. It is about augmenting the existing in-house capacity and process. The importance of the qualitative element of the KYC analysis requires immediate access to resources with strong AML/KYC expertise who are able to swiftly operate complex KYC technicalities, while balancing business constraints. 

The need is an agile approach. 

In this macroeconomic environment, all businesses are being challenged to find solutions to cut costs and optimise resource planning. As a consequence, more often than not, KYC internal resources are already planned to the maximum capacity. This means it is not possible to deal with unexpected events such as special regulatory or event-driven reviews, which fall on top of regular review cycles and Business-As-Usual (BAU) client onboarding. Moreover, the market buzz around “Perpetual KYC”, or constant, trigger-based and automated KYC updates, is a great concept when the business partners are straightforward and rather simple client types and no other external events may affect the process. However, the Luxembourg market consists of many complex products and client types. And when paired with the cross-border element of multiple nationalities and jurisdictions to be covered, items such as  e.g. GmbH, S.à r.l. or Ltd. are  similar, but there is a difference- the devil is in the detail operationally. This requires in-depth expertise and qualitative analysis to meet regulatory expectations swiftly and special review may come on top anytime. Therefore, perpetual KYC may not work well in practical terms but the whole KYC process in general needs to be very performant.

Adapting to a specific part of the process and providing experts on-demand helps financial institutions increase the capacity required to deal with unexpected events, tailoring to the effective need that they may have and allowing them to manage their capacity limitations. HMKYC pairs this strength with the usage of the internal digital tools used by the financial institution or adding digital solutions where applicable. Experts involved in HMKYC have in-depth knowledge of different tools that they have worked with and can bring the necessary expertise to fine tune them. But the financial institution does not need to embark on the adventure of moving to a completely new set-up or IT landscape as you usually have in outsourcing contexts. Businesses need to focus on automatisation and digitalisation to improve the experience and efficiency. However, as explained by S. Cuvelier and L. Nicolas in their article,  if the necessary data quality is not provided, digital tools will remain a powerless means whether they are internal or sourced from a third-party provider. This results in the need to have technical experts who are able to adapt and assess the risk exposure. Some tasks can be automatised, but in the end, the risk assessment always requires a human (qualitative) analysis. 

The KYC pitfall: expertise.

A key benefit of HMKYC is providing access to expertise that may not be available in-house. When unexpected KYC events occur and the internal KYC planning is already at full capacity, having immediate access to a specialised KYC team allows for swift adaptation to business needs which will remove the pitfall. The latter can be either accomplished by taking over a full end-to-end process or by integrating into the current process to increase the overall capacity. A team of specialists will also be able to understand the process faster and the business’s AML/KYC procedures and risk-based approach to ensure the adequate mitigation of the AML risk exposure. At the same time, this allows financial institutions to maintain control over certain aspects of their KYC processes, whilst also leveraging on the expertise and resources of external service providers on a cost-effective basis. 

KYC service providers have specialised knowledge and experience in performing complex KYC tasks, such as Enhanced Due Diligences, Backlog Reviews and Special Regulatory Reviews, and can provide financial institutions with on-demand support and the qualitative support to assess the risk and meet regulatory requirements. Through HMKYC, financial institutions will have the knowledge of key experts deployed quickly, achieving the capacity needed to face unexpected events and avoid a critical blocking of BAU operations.  

Hybrid Managed KYC Solutions: Doing the things right and doing the right thing

Efficiency, or doing the things right, is important from a process and cost perspective. However, effectiveness, or doing the right things, is crucial for the success thereof and it requires the right process, remediation and KYC expertise to do so. HMKYC Solutions can support improving both of these aspects, ensuring organisations have the right team at the right time of the process. Financial institutions can choose which aspects of their KYC processes to outsource and which to handle in-house. By outsourcing certain aspects of KYC to a third-party provider, financial institutions can reduce the workload of their internal teams and focus on other critical business functions without giving away full control and using new external tools. On-demand experts are able to adapt to the business process and tools, and have an extensive understanding of practical challenges, which also helps to create long-term efficiency solutions during the provided support.

For instance, during a large regulatory remediation involving over 50 KYC resources, undertaken to meet the regulatory deadline, our experts were able to identify process burdens and quick wins or workarounds to achieve delivery output four times higher than the current in-house solution. This added value was essential to supporting the financial institution to meet the regulatory deadline. Similarly, in another remediation triggered by audit findings, a KYC checklist-based review led to the risk of not meeting the deadline and on a decision of whether to exit the business or not. On-demand experts, supporting the first line of defence, were able to provide the qualitative analysis required to mitigate the risk exposure, leveraging on information that was presently available or easily retrieved, rather than getting stuck on an administrative approach of whether or not they had the required document as per the checklist. 

Turn costly exercises into effective operations.

As the AML/KYC regulatory landscape continues to evolve, financial institutions are facing increased pressure to maintain their KYC compliance, while also balancing cost and efficiency. Hybrid Managed KYC Solutions is an efficient and effective way to address this challenge and use it to achieve better operations. Financial institutions can reduce their costs by outsourcing certain aspects of their KYC process to a third-party provider, while effectively still maintaining control over critical aspects of the process. 

KYC is never black or white. When talking about more complex legal structures and multijurisdictional client types, it is a complex process that requires a lot of expertise, since you typically do not find fully prescriptive KYC requirements in any circulars or laws. Luxembourg products require an in-depth business and AML understanding to adequately assess their risk exposure. On-demand specialists able to adapt and enhance the KYC process help businesses to achieve the qualitative expertise required to assess the problem and transform a backlog into an opportunity for better future operations. 

Backlogs can be seen as a burden to deal with, in addition to Business-as-Usual challenges. A remediation process can be the right moment to improve the operational efficiency of both the first- and second lines of defence. HMKYC can help financial institutions turn a costly exercise into an added value for their day-to-day operations, increasing the compliance effectiveness of their organisation. Instead of just patching things up, it is about doing the right things.