Holistic Surveillance Model for KYC and AML Compliance

21 June 2018 | 4 minutes

By Michael Gorman

KX and First Derivatives regulatory expert Michael Gorman frequently addresses current issues facing legal, credit and risk oversight personnel at financial institutions on the KX blog. In this latest article he takes a look at issues banks are grappling with when complying with new customer due diligence rules to prevent fraud and abuse.

Regulatory pressures are driving banks to update their existing Know Your Customer (KYC) and Anti-Money Laundering (AML) practices globally. Some may ask why banks are just now addressing these compliance issues regarding the information received from existing and potential clients and sub-clients, since the need to do so has existed for years. The answer is simple – reputation and regulatory audit findings.

Why now?

By definition regulatory compliance increases the need for financial institutions to follow and report upon the due diligence procedures they have undertaken. But banks are also looking to protect their reputation and brand image — the most important intangible assets financial institutions possess.

Reputation and brand underpin the market perception of a bank, and tarnishing either can result in a loss of clients, profits, industry ranking and credibility amongst industry peers, as well as impact licenses issued by federal and local regulatory bodies. Hence disclosing the criteria around client onboarding and subsequent transaction monitoring — as well as increasing the rigor by which these criteria are applied — is crucial.

In addition to self-identified reputation and brand risks, financial institutions may also have to address deficiencies identified by an auditor or regulatory body. To address such findings a process change will typically be needed. In most cases institutions are required to move from a manual to automated process or enhance an existing system’s workflow. In doing so however they are often challenged in first identifying the tacit knowledge that is involved in manual tasks – and then in replicating it during automation.

Demand for data for compliance and business intelligence

Across financial institutions the demand for additional data is continually increasing. In particular, KYC and AML teams are striving to achieve the same levels of data aggregation their trading counterparts have had to meet for the recent updates to the Model Audit Rule (MAR), Markets in Financial Instruments Directive (MiFID) and similar regulations.  As a result they are likely to face problems in the sourcing, cleansing and governance of onboarding and operational data that to date has not had the same focus.

For financial institutions who strive to know their customers, the same imperative applies to their in-house data, which often is siloed and frequently uncategorized. Moreover their data may exist in many different formats, on a shared drive or, worst of all, in private folders. When applications do exist, banks are attempting to enhance existing infrastructures or develop new ones to allow them to normalize, standardize and group data to ensure there is consistency. However, whilst improving data unity and quality, most firms are neglecting the robustness of, and need for, a more holistic surveillance platform.

The holistic surveillance approach for KYC and AML compliance

In addition to dealing with data quality issues, financial institution compliance departments implementing KYC policies also face a constantly evolving regulatory environment. Therefore when setting policy, compliance and risk staff involved in KYC and AML must regularly review changes, so their systems are up-to-date.

Many banks today are using surveillance tools that require manual policy updates and which have out-of-date or inconsistent data. Instead, they need processes to ensure that their source data is current and periodically cleaned, and for KYC in particular, they need a surveillance solution that integrates with their client onboarding system to avoid having stale customer information.

These drivers have informed the latest generation of surveillance tools at KX, which has extended its surveillance package for AML detection and compliance. Today banks need to be able to look at historical and real-time analytics on bank transactions and trade data and test it with sophisticated algorithms which generate carefully crafted alerts for the compliance team.

Starting with trustworthy data, banks using the right surveillance tools have an opportunity to look at their entire risk management and regulatory infrastructure across the enterprise. This new approach is developing across the industry, where financial institutions are working to meet their regulatory needs while evolving their data management systems to expand their business capabilities.

Michael Gorman is Global Head of the Regulatory and Compliance practice at KX parent First Derivatives plc. His team combines subject-matter expertise, strong product knowledge, and data and technology DNA to offer a range of consulting services that can accelerate implementation of regulatory solutions. Read more here.

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