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KYC: A Headache for Treasurers and Banks

  • By Andrew Deichler
  • Published: 5/21/2019
kyc

The following article is excerpted from AFP’s latest Executive Guide.

If you put a group of corporate treasury professionals into a room and asked them what their greatest pain points are, it wouldn’t take long before one or more of them mentions know-your-customer (KYC) compliance. But what they may not realize is that KYC is huge headache for the banks as well.

The lack of centralization, common standards, transparency, security, and automation around KYC compliance has created a host of problems for treasurers and bankers alike. Those issues include higher costs, a lack of audit trails, a poor client experience, inefficient workflows, cybersecurity risks, and a lack of transparency.

PROBLEMS ON BOTH SIDES

The biggest obstacle for many corporate treasurers has been how banks have been going above and beyond what regulators demand of them for KYC. “Right now I have to get the same info to 10 different banks,” said a member of AFP’s Treasury Advisory Group (TAG). “I want a repository where I can upload the information once.”

Patrick Hallerstrom, senior director of treasury for Spotify AB, believes strongly that KYC compliance is necessary to safeguard the financial system against illicit activity, but acknowledges that it is a major pain point for corporate treasury. “The process that we, as customers, need to take part in is not only very manual, but also time consuming,” he said. “It also varies significantly across our banking partners.”

Spotify serves more than 96 million paid subscribers in 79 markets. Thus there is quite a heavy workload for treasury in providing the same or similar information in different formats to its banking partners globally. “So given this heavy workload—not only when we’re opening a new account with a new legal entity in a new market, but also on an ongoing basis—we need to take into consideration whether to add banking partners or to add local presence from a banking perspective,” Hallerstrom said. “So unfortunately, all too often, this could lead to us settling for the second-best banking structure.”

Bill Booth, principal/consultant with Treasectory and a former bank executive for PNC, pointed out that KYC rules are intended to hold banks accountable for really knowing their customers. “So, to the extent tools may be available to make it easier for corporates to provide consistent information to support the process, it’s still going to be incumbent upon the banking industry to show that they are actually developing an active and dynamic understanding of the very non-standard risks present across industries, geographies and cultures,” he said. “Unfortunately, that’s going to mean that for relationships with banks that take KYC seriously, corporates may still get a lot of follow-up questions.”

Further complicating the situation is the fact that each bank has its own approach to KYC, and many of them differ greatly. Some banks have global teams that handle KYC compliance, whereas others have local ones that work on it.

Throughout Booth’s experience as a banker, he has observed a disparity within banks between how information is gathered from clients and who ultimately receives the information. For example, if a bank is doing its due diligence on a client that is applying for credit, bank representatives are going to ask a lot of questions because of the clear risks around providing a loan. “Most of these questions are around financial risk, balance sheet risk, leverage, who their customers are—and that information tends to be partitioned within the bank,” he said. “It may not be readily available to the part of the bank that is charged with KYC. That tends to be more transaction-related and operationally driven.”

RESOLVING THE ISSUE

Fortunately, some banks have addressed this issue and are taking steps to remedy it. Booth noted that CRM platforms within banks are evolving to make client information more widely accessible so that different departments aren’t constantly hounding clients for the same data. “This has tremendous potential in terms of the way banks exchange information internally,” he said.

Additionally, Booth sees opportunities to improve the initial due diligence around the credit underwriting process. “A lot of the expertise there is typically around financial risk,” he said. “I think there could be a lot more training done around a better understanding of operational risk. So when that underwriting process is happening for a new relationship or renewing credit, there is more information gathered that can support operational risk issues. That gets to the heart of the objectives of KYC.”

Overall, Booth believes that everyone involved—regulators, banks and corporates—need to come to a better understanding of why there is so much scrutiny placed on KYC compliance. “You can get in trouble, not only for who manages your account, but also who you’re buying from and who you’re selling to,” he said. “So if everybody gains a better understanding of that ecosystem, then I think that goes a long way in terms of establishing expectations.”

For more insights, download the new Executive Guide on KYC Technology here.

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