The Importance of KYC Remediation to Prevent Financial Crimes

  • Richard Marley
  • October 19, 2020
  • 8 minutes read
  • 8902

If we talk about financial institutions including banks and their processes, one can freely argue that the financial sector is mandated to have certain processes set up in place specifically for impeding financial crimes including money laundering and terrorist financing otherwise collectively known as ML/TF. A currency business in Costa Rica was closed down across 17 countries because the company laundered an estimated $6 billion from various criminal activities. If you are familiar with KYC or Know your Customer, you would know that it is a key practice that can not be underestimated by the financial industry, as it ensures that their customers are not encompassing money-related crimes. 

KYC processes require the financial sector to maintain an in-depth understanding of its customers and any associated money laundering risks. As client information changes with the times, many financial organizations are still resting on outdated customer data. This is where KYC remediation comes in, it prevents the financial sector from drawing into money crimes, by regularly maintaining and updating client’s information. 

What is KYC Remediation?

Remediation means getting rid of inaccurate client data that financial institutions seem to have ignored for years, after which regulatory authorities increasingly became more concerned about rapidly evolving financial crimes. Swiftly, KYC became the topmost concern for financial institutions. Since then several regulations have been initiated including KYC remediation which needed organizations to remediate customer KYC profiles to comprehensively evaluate risks. 

Therefore, KYC remediation is the ongoing process of updating customer documents and information gathered through KYC to meet regulatory compliance. Non-compliance with regulations may pose risks of ML/TF which can lead to reputational damages.  It allows businesses to conduct a risk assessment and optimize customer KYC files that emphasize the risk elements linked to every client.  A thorough remediation procedure can drastically minimize the business risk along with giving companies a chance to understand their customers better. 

The KYC Remediation Process

The KYC remediation process varies from company to company and is complex but the most used remediation strategy is screening, verifying, and identifying customers. The regulatory landscape constantly changes, so does the customer profiles. Successful compliance depends on updated KYC data, making the whole remediation process time-consuming and costly. 

However, ‘know your customer’ remediation process can be achieved by opting for automated compliance products, and can also be carried out manually. But the main objective is to distinguish between the customer risk profiles from non-risk profiles, meaning which clients are more apparently inclined towards financial crimes from those who are not. So it’s crucial for companies to have sufficient client information purposely to prevent money launderers from entering into the legitimate financial system. Failure to comply with remediation can put your company, reputation, and revenues in jeopardy. 

Therefore, it is mandatory for the financial sector to follow the policies put in place by FATF (Financial action task force) to deter financial crimes. Whereas, KYC remediation facilitates the financial sector to execute the obligation. The process formally includes the following steps:

  • The first stage is based on the exhaustive collection of customer information, after which companies can initiate their remediation process.
  • Organization of all the collected data to identify potential gaps, and conflicting information.
  • After the remediation process is finished, financial institutions take a risk-based approach to smoothly recognize the level of risk each customer presents on money laundering, corruption, tax evasion, and terrorist financing. 
  • After extensive screening, Financial institutions report the potential suspects to relevant authorities. 

KYC remediation is considered a fundamental step for the financial industry to meet AML compliance. Because it enables companies to become completely known about their customers and the level of protection they need from financial criminals. 

The importance of KYC Remediation

The importance depends on how swift the process is. Manually gathering customer information, compiling profiles, and running audits take too much time and incur higher costs. According to a survey in 2016, financial institutions spent an estimated $60 million on KYC processes annually followed by $78 million in the USA, and $80 million in Germany, Hong Kong, and the UK. Additionally, the cost of KYC remediation is only expected to grow remarkably over the next four years. The reason why financial institutions are adopting a risk-based approach to remediate instead of optimising KYC files, alone.

The whole remediation process not only ensures that the KYC files are optimised but also mitigate any financial risks presented by customers. Thus, it is as important as the KYC for customer due diligence. It allows you to perform a risk assessment on an on-going basis instead of one time only. Also, the entire process makes you aware of who your customers are and what they are trying to achieve (say for example in the form of illegal transactions) after entering your financial system. Since 2009, banks have been charged with $30 billion in fines globally because they failed to report or identify the financial crime happening right within their systems. Not to mention the reputational costs for being involved in money laundering scandals.  The reason why on-going KYC remediation and AML regulations are excessively highlighted. 

Challenges in KYC files Remediation

The process of remediating files only are no longer needed because it is surrounding with ample challenges as given below:

Outdated processes: Company KYC remediation processes, technologies, and solutions have evolved over the years, but still, many businesses continue to use old and broken ways of doing things since recently. Risk assessment and due diligence policies were considered adequate when they were not. Which has led to many organizations carrying out more than one remediation project in order to fill the gaps. Subsequently, untrained staff led to the same outdated process with the same results. 

Weak onboarding procedures: Onboarding is an integral part of the KYC remediation process. During the early stages of onboarding, financial institutions are supposed to collect client data, and poor customer onboarding makes it complicated to gather every single piece of information about a customer which is very daunting. This is directly related to outdated and inadequate processes of gathering, maintaining, and updating data making the entire onboarding process inefficient and prone to errors.

Poor customer offboarding: A lot of financial institutions have not yet opted for a formal offboarding process, so the customers who were onboarded years ago are still sitting in their records, even without the existence of any business relationship whatsoever. Therefore, it makes cleaning up the old data unsettling because sometimes the data is sitting not on one but multiple systems leading to duplication, error, and disparity.

Meeting regulations: Most financial institutions are using AML software to combat money laundering activities within their system. But companies lack clarity on whether to inspect every piece of client data available under the remediation program or just associated risk areas. This ambiguity makes it difficult for companies to implement the practices for KYC remediation. Firms start to remediate everything due to the lack of direction and at times miss out on the high-risk profiles while focusing on low-risk issues.

But recently regulators have stressed more upon the risk-based approach. It involves a risk assessment of high-risk profiles based on which firms decide which files to prioritize and are remediated first, making the entire process easier. In addition to this, continuously changing compliance standards makes it very challenging for financial firms to implement changes in their processes. 

Key takeaways

Seamless customer onboarding is a top preference for businesses, however, having a weak onboarding process and customer due diligence can only make the process difficult and expensive. Global financial businesses can opt for digital identity verification solutions for KYC to meet AML compliance. Digital KYC makes customer onboarding smoother and error-free. Also as client risk status is regularly changing, so the companies are obliged to have remediation processes in place to obstruct financial crimes right away. 

Due to the rising cases of money laundering, regulatory authorities are putting more pressure on financial institutions to curb the crime. The AML regulations have been amended many times since the pandemic and will continue to do so, as financial criminals find more sophisticated ways to misuse services. Investing in digital identity verification solutions is the need of the time for effective KYC remediation and compliance. 

Shufti Pro is a leading identity verification solution for KYC and on-going AML. Regular AML monitoring of clients through Shufti Pro develops comprehensive high-risk profiles for fraud prevention. With Shufti Pro’s ongoing AML compliance services, companies can establish consistency with authentic background data checks while maintaining high-risk profiles at the same time. It performs global AML screening for accurate risk profiling and updated risk status based on high-security standards followed by additional identity assurance.

Know more about Anti Money Laundering (AML)