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Knowing your Customer is Harder than it Sounds

Alan Samuels, Vice President, Global Head, DDIQ, Exiger

Alan Samuels, Vice President, Global Head, DDIQ, Exiger

If there’s one thing you’d assume about any established financial institution, it’s that they understand who their customers are.

While it may sound simple, the “know your customer” (KYC) mandate is actually one of the most time-consuming and laborious compliance challenges financial institutions face. The difficulty lies in the endless amount of information publicly available online. When financial institutions are required to navigate corporate registries, news sites and sanctions lists, the volume of searchable data quickly becomes overwhelming. Artificial intelligence (AI), however, holds the key to alleviating this burden for financial institutions.

In the United States, KYC requirements originated with the Patriot Act, passed in response to the September 11^thattacks, to prevent financing of terrorist activities, including money laundering. As the industry struggled to implement new checks and screening It turned out that many financial institutions were not always aware of their customers’ true identities, their customers’ beneficial owners’, their sources of funds and where funds were sent. This weakness opened the door for regulatory enforcement actions, which have resulted in more than $26 billion in fines over the past decade.

KYC Compliance Challenges

In response to unwavering regulatory scrutiny, financial institutions have continued to invest in KYC compliance, at the heart of which, is conducting thorough due diligence on customers, clients and counterparties. Financial institutions must search and review all the information available in the public domain related to a particular individual or entity. This process can be incredibly cumbersome and time consuming.

One significant challenge with the process is managing false positives. When financial institutions search massive data sets, the likelihood of receiving false positives is very high. Another problem financial institutions have to overcome is the requirement to demonstrate comprehensive, consistent and auditable KYC compliance processes across different reviewers, departments, offices and regions.

Five Ways Financial Institutions Are Using Technology to Improve KYC

Technology, the use of robotic process automatic (RPA) and artificial intelligence (AI) in particular, are making significant inroads into easing the pain in the KYC process. By deploying these solutions, financial institutions are able to enhance the search process and automate manual review.

Enrich Customer Profiles

Financial institutions can improve the quality of their KYC search process by supplementing their customer profiles with enriched information gathered from company websites, corporate registries, data vendors and other publicly-available sources. Especially in instances where customers may share the same or similar names, enriched data can help ensure financial institutions are looking at the correct information and reduce irrelevant results.

Deepen Searches

Technology allows financial institutions to simultaneously search across multiple data sources, from public sources to third party data vendors and internal watchlists. A technology-enabled search also brings the ability to read and translate different languages.

Financial institutions can deploy natural language processing (NLP) to extract information about, and identify, entities and individuals for any sort of news story or article in the public domain. It can also be used to extract information about, and identify, risk events and the links of those events to the entities and individuals.

Reduce False Positives

Ultimately, the power of technology is to reduce an analyst’s workload by hiding false positives. These are articles or events which are not about a target customer, or not about any risky or illegal activity carried out by that customer. An AI-powered solution can quickly, consistently and accurately identify and document that an article that mentions a customer and money laundering is not an indicator that customer is a suspected or convicted money-launderer, rather it can understand that a simple keyword search only showed up because that customer works at an anti-money laundering firm.

Better Manage Relevant Results

By reading and understanding an article, an AI-powered system can organize and categorize the results into different risk event buckets, such as sanctions, money laundering, fraud, and financial crime. Technology can also rank and score relevant results based on risk severity, allowing analysts to prioritize efforts by highlighting the most significant contributors of risk.

Enable Auditability and Monitoring

The right technology can help financial institutions evidence their KYC processes to regulators who are looking for an audit trail of reviews, alerts and dispositions. An AI-backed KYC screening solution can provide case management workflow tools, allowing analysts to quickly filter, highlight, escalate and disposition results. A technology-enabled process also provides a replicable, consistent, transparent and auditable process. Finally, certain technologies allow financial institutions to continuously monitor and refresh customer information so that important risk changes are highlighted as soon as possible.

Know Your Customer … Better

KYC compliance has become increasingly challenging for financial institutions in light of the growing amount of information they are responsible for reviewing and the requirement to demonstrate consistent and comprehensive processes to regulators. Technology allows financial institutions to meet these challenges head on with scalable and auditable solutions to gain confidence that they truly know their customers.