Fraud Alert

Trade wars, a pandemic and heightened regulation are making KYC processes a priority and spurring institutions like Swift and the Fed to standardize them.

The World Bank estimated in its June 2020 Global Economic Prospects reports that the coronavirus-induced worldwide recession caused the global economy to shrink by as much as 5.2% by the end of this year. The study’s authors anticipate per capita income will shrink 3%.

Rising protectionism has cost the global economy as well, according to the International Monetary Fund (IMF), which projected that US-China trade war would shrink global economic output by nearly a full percentage point—and that was before the pandemic.

But those stresses can’t push aside compliance. In fact, things like ‘knowing your customer’ may be especially important as fraudsters seek to leverage pandemic-related confusion.

“Whilst many treasury teams currently are focused on managing operational stresses caused by the Covid-19 pandemic, it’s clear that simplifying know-your-customer [KYC] processes is still a priority,” says Bart Claeys, head of KYC and Reference Data at Swift.

During any period of policy uncertainty and increased regulatory activity, companies must remain “alert to a heightened risk of fraud and financial crime,” Amy Matsuo, leader of the US Regulatory Insights Practice at KPMG, said in a recent white paper, Ten Key Regulatory Challenges of 2020.

In the first half of 2020 alone, the US Treasury Department’s Office of Foreign Assets Control made 47 updates to its Specially Designated Nationals and Blocked Persons List, which identifies individuals and companies subject to economic sanctions by the US.

These relatively rapid changes have only aggravated the familiar pain known as KYC reporting. Regulators often have quite different format requirements for KYC reporting—and the more jurisdictions in which a company operates, the more the burden compounds. Maintaining numerous, and often bilateral, reporting requirements has historically made it difficult for companies to report material changes in their KYC information to their banks and other financial institutions. According to a 2019 study by Swift and EuroFinance, “93% of treasurers say that responding to KYC requests is more challenging today than it was five years ago.”

And it’s time-consuming. A 2016 global Thomson Reuters survey found that it took an average of 27 days per year for companies to provide their KYC changes and that more than two-thirds (69%) had not passed on KYC changes to their banks. A significant plurality of the respondents (39%) reported that they submitted only half or fewer of their KYC updates.

“Traditionally, banks reaching out to their corporate customers for renewing KYC data can take too much time,” says Spencer Schulten, executive director and US head of Financial Crimes Compliance at management and technology consultancy Capco. Reporting can be spread across multiple systems and can be out of date. “More importantly,” he notes, “having to follow up with customers to update KYC repeatedly can damage the banking relationship.”

Moving Forward

Standardizing KYC reporting across both financial institutions and their corporate clients took a significant step forward at the end of last year, when Swift gave the corporate community access to its Swift KYC Registry.

“Mutualization and standardization are critical as the banking community continues to trend toward automation,” says Schulten. “In that regard, Swift’s KYC Registry may be a game changer because it’s collaborative and not a commercial venture, unlike other platforms to exchange KYC.”

The platform, which the banking cooperative rolled out to its banking membership in 2014, permits users to upload and store a flexible mix of public and private data—such as entity identification, ownership, management structure, business activities and tax information—using a single format. The launch followed several months of testing with global corporations including BMW, Siemens and Unilever.

“The result means we can now upload our data in a standardized format, reducing the need to provide data in multiple formats to each of our banking partners,” says Rosanna Summerville, manager of Global Transaction Banking and Processes at Unilever. “They, in turn, will no longer have to request KYC data every time they need it. It delivers efficiencies for us both.”

Corporate access to the Swift registry started with 18 corporate groups and 16 global banks, representing 7,000 banking relationships. Participation has grown robustly since the launch, says Claeys, with around 180 legal entities representing 70 corporate groups as of the end of August.

“Rather than trying to onboard as many corporates as possible,” Claeys explains, “the initial rollout has been staged to help ensure that all data coming into the registry is comprehensive and up to date.”

Since corporate access the KYC Registry has been live for less than a year, it’s too early to measure its return on investment. But the corporate banking manager for one of its early adopters, Pepper Financial Services, said at the launch that the company hads already  saw some benefits from using the registry to manage its KYC data in a simpler and more secure fashion.

Besides providing central storage for users’ KYC data, it could develop into a two-way street, with Swift informing platform users if the data they submitted was clean, suggests David Bannister, senior analyst at Aite Group, a financial services research and consulting firm.

Clean KYC data can also help treasuries further automate and increase the speed of payments issued from their accounting software or enterprise resource planning platforms, Bannister says: “International payments have tended to be reasonably direct and are becoming more and more intraday, like other things.”

The Fed Weighs In

Across the pond, the US Federal Reserve last year announced plans to create an instant interbank settlement system, dubbed FedNow. Early last month, the central bank announced that it would launch the new service in phases sometime in 2023 or 2024, despite criticism from the financial services industry.

“The rapid expenditure of Covid emergency relief payments highlighted the critical importance of having a resilient instant payments infrastructure with nationwide reach, especially for households and small businesses with cash flow constraints,” Federal Reserve Board Governor Lael Brainard said in a prepared statement.

Errors such as incorrect account numbers or subsequent KYC queries by banks remain a thorn in the paw for automated payments, however. “Corporates cannot [respond to queries] effectively if they keep getting an unacceptable error rate that requires a lot of human intervention,” says Bannister. Automation may correct many common errors, but corporates would like to be aware of issues before a payment bounces, he adds.

A second benefit of using clean KYC data is that it would reduce the number of banking relationships corporates need to maintain, say the experts. The Thomson Reuters survey found that global corporations have 11 banking relationships on average, while regional corporations, midsized firms and smaller companies typically have nine, seven and four, respectively. One in 10 UK-based respondents went as far as to claim more than 50 banking relationships at the global level. At the regional level, 30% of UK respondents and 26% of US respondents said they have 10 or more. “Once you get to multinationals, they could have an insane number of banking relationships,” says Bannister.

According to the Swift-EuroFinance study, more than half of corporate treasurers whittled down their banking roster to avoid lengthy KYC processes that can hurt those relationships. “The corporates always wanted to simplify their banking relationships,” Bannister notes. “Now open banking allows them to.”