# Rules of Engagement
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2017-11-04
Category: FINANCE
Category URL: https://financedigest.com/category/finance
Meta Title: Outsourcing KYC for Banks: Safeguard Compliance & Cut
Meta Description: Discover how outsourcing KYC to Equiniti KYC Solutions can help banks ensure regulatory compliance and control costs effectively.
URL: https://financedigest.com/rules-of-engagementhtml

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_Outsourcing KYC is a good way for banks to safeguard their continued regulatory compliance and control spiralling costs, explains Toby Tiala, Programme Director, Equiniti KYC Solutions._

In a bid to combat money laundering, market manipulation and even terror funding, the rising tide of conduct-based regulations continues to challenge banks globally. The cost of compliance – and non-compliance – is steep. The [average bank spends](https://www.financedigest.com/card-spending-in-uk-falls-below-pre-covid-average-ons.html "Card spending in UK falls below pre-COVID average – ONS") over £40m a year on Know Your Customer (KYC) processes yet, in 2016 alone, bank fines worldwide rose by 68%, to a staggering $42bn. [\[1\]](#_ftn1)

**A double squeeze**

Resource stretched mid-sized banks, in particular, are having a [tough time](https://www.financedigest.com/building-economic-resilience-in-tough-times.html "Building Economic Resilience in Tough Times"). As [regulators up the ante they are creating an operating](https://www.financedigest.com/russian-regulator-says-mobile-operator-mts-breached-anti-monopoly-laws.html "Russian regulator says mobile operator MTS breached anti-monopoly laws") environment increasingly conducive to fines. To cope, [banks are expanding their compliance resources to mitigate their risk](https://www.financedigest.com/the-risks-and-rewards-of-ai-in-banking-in-2022.html "The risks and rewards of AI in banking in 2022") of transgression. Those with resource limitations are, therefore, the most vulnerable.

They are right to be worried. Since 2008, [banks globally](https://www.financedigest.com/be-simple-in-bank-capital-bank-of-england-tells-global-regulators.html "Be simple in bank capital, Bank of England tells global regulators") have paid a staggering $321bn in fines. Earlier in the decade, high profile [money laundering](https://www.financedigest.com/the-problem-with-current-anti-money-laundering-processes-a-lack-of-context.html "The problem with current Anti-Money Laundering processes: A lack of context") and market manipulation cases caused the level of overall fines to skyrocket. After a brief period of respite (when governments and the Financial Conduct Authority backed off [fearing industry](https://www.financedigest.com/german-industrial-output-slumps-recession-fears-rise.html "German industrial output slumps, recession fears rise") suffocation), the fines have been steadily creeping back up. This time, however, big ticket fines have been replaced by a far higher number of smaller penalties. Put another way, the regulators are now tightening a much finer net than before.

A bank’s ability to profile and identify risky customers and conduct enhanced due diligence (EDD) is critical to ensuring compliance with [anti-money laundering](https://www.financedigest.com/anti-money-laundering-time-to-take-a-new-approach.html "ANTI-MONEY LAUNDERING: TIME TO TAKE A NEW APPROACH?") (AML) law. This is no trivial task. Major banksare ploughing expertise into their KYC and creating proprietary systems dedicated to meeting the new requirements. Mid-sized banks, however, don’t have this luxury and are challenged by the need to beef up their resources. Applying regulations like AML4, PSD2 and MiFID II to complex [legal entities](https://www.financedigest.com/legal-entity-identifier-a-financial-tool-for-transparency.html "Legal Entity Identifier – A Financial Tool for Transparency") like corporates and trusts is a convoluted business.

**New focus**

A large proportion of regulatory fines result from high [risk customers slipping through the cracks, usually stemming from ineffective beneficial ownership analysis, customer risk rating](https://www.financedigest.com/boe-flags-risk-of-recession-and-10-inflation-as-it-raises-rates-again.html "BoE flags risk of recession and 10% inflation as it raises rates again") or EDD. This is especially common in complex entities with numerous ‘beneficial owners’ – something that has brought these individuals into sharp focus. A beneficial owner in respect of a [company is the person or persons who ultimately own or control](https://www.financedigest.com/hospital-acquired-infection-control-market-global-leading-companies-analysis-revenue-trends-and-forecasts-2027.html "Hospital Acquired Infection Control Market Global Leading Companies Analysis, Revenue, Trends and Forecasts 2027") the corporate entity, directly or indirectly. Conducting KYC to effectively identify high-risk beneficial owners of complex entities is skilled and complicated work, to say the least.

Nowhere can the new focus on beneficial ownership be seen more clearly than in the EU AML4 Directive, which recently came into force, in June 2017. This directive is designed to expose companies with connections to money laundering or terrorism, and decrees that EU member states create and maintain a national register of beneficial owners.

[**Big impact**](https://www.financedigest.com/analysis-financial-literacy-or-luck-the-year-small-time-traders-made-a-big-impact.html "Analysis-Financial literacy or luck? The year small-time traders made a big impact")

The [growing focus on beneficial ownership is having a clear impact on banks’ relationships with their trade customers](https://www.financedigest.com/walk-in-coolers-and-freezers-market-preference-for-customized-and-smart-machines-growing.html "Walk-in Coolers and Freezers Market: Preference for Customized and Smart Machines Growing"). According to research from the International Chamber of Commerce, [\[2\]](#_ftn2)  40% of banks globally are actively terminating customer relationships due to the increasing cost or complexity of compliance. What’s more, over 60% report that their trade [customers are voluntarily terminating their bank](https://www.financedigest.com/canadian-banks-fighting-brokers-back-for-customers.html "Canadian Banks Fighting Brokers Back For Customers") relationships for the same reason. That this could be evidence of the regulations working will be of little comfort to [banks that are haemorrhaging revenue as a result](https://www.financedigest.com/polands-bank-millennium-third-quarter-results-hit-by-payment-holidays.html "Poland’s Bank Millennium third-quarter results hit by payment holidays").

The UK has already formed its beneficial owners register but caution is advised. The data [quality still has room for improvement and the regulations make it clear that sole reliance on any single register](https://www.financedigest.com/healthcare-quality-management-market-is-expected-to-register-highest-cagr-of-12-during-the-forecast-period-2021-to-2031.html "Healthcare Quality Management Market Is Expected To Register Highest CAGR Of 12% During The Forecast Period 2021 to 2031") may not translate into effective AML controls.  Mistakes – genuine or otherwise – may still occur but automatically checking these new beneficial ownership registers is a clear step forward.

The [key for mid-size banks](https://www.financedigest.com/russia-bans-western-investors-from-selling-banking-key-energy-stakes.html "Russia bans Western investors from selling banking, key energy stakes") is to zero in on what will both enhance their KYC procedures and deliver clear and rapid visibility of high risk entities. Once established, this will enable them to manage their own risk profile, together with their customer relationships, and minimize the negative [impact on their revenues](https://www.financedigest.com/wework-rival-iwg-quarterly-revenue-dips-on-prolonged-pandemic-impact.html "WeWork rival IWG quarterly revenue dips on prolonged pandemic impact").

Highly complex KYC and EDD [activity can severely inhibit the onboarding process](https://www.financedigest.com/how-process-automation-increases-productivity-in-the-insurance-sector-while-giving-employees-room-for-more-high-value-activity.html "How Process Automation increases productivity in the insurance sector while giving employees room for more high value activity") for new customers, often causing them to look elsewhere. The deepening of these procedures is making matters worse – it can now take up to two-months to onboard a new client according to Thompson Reuters [\[3\]](#_ftn3), with complex entities usually taking the most time. Large banks have proprietary systems to accelerate this process but, for mid-sized banks, this is a serious headache; not only does it extend their time-to-revenue from corporate clients, it can also turn them away entirely, and [lead them straight](https://www.financedigest.com/how-a-trail-of-breadcrumbs-is-leading-straight-to-financial-infrastructure.html "How a trail of breadcrumbs is leading straight to financial infrastructure") into the hands of their larger competitors.

**Combine and conquer**

For these banks, outsourcing their KYC to a dedicated specialist partner is a compelling solution. These partners have agile, tried and tested KYC systems already in place, are perpetually responsive to the changing [regulatory requirements and have highly skilled personnel dedicated to navigating the KYC and EDD challenge](https://www.financedigest.com/big-bank-ceos-to-sell-lawmakers-on-relief-diversity-efforts-amid-economic-regulatory-challenges.html "Big bank CEOs to sell lawmakers on relief, diversity efforts amid economic, regulatory challenges") in the shortest time possible. Plugging into a KYC-as-a-Service partner enables mid-size banks to seriously punch above their weight, by accelerating their onboarding of new clients to match (and often beat) the capabilities of [large banks](https://www.financedigest.com/swiss-national-bank-makes-another-large-draw-on-fed-swap-line.html "Swiss National Bank makes another large draw on Fed swap line"), dramatically reducing their overall compliance costs and helping them get ahead – and stay ahead – of the constantly shifting regulatory landscape. This, in turn, releases internal resources that can be redirected in support of the bank’s core [revenue drivers](https://www.financedigest.com/publishers-and-brands-view-commerce-content-as-a-key-revenue-driver.html "Publishers and Brands View Commerce Content as a Key Revenue Driver") and day-to-day business management.

It is clear that the regulatory squeeze is [set to continue for the foreseeable future](https://www.financedigest.com/title-n95-mask-market-future-is-set-for-massive-growth-with-high-revenue.html "N95 Mask Market Future is Set for Massive Growth with High Revenue"). [Banks that have the vision and wherewithal to accept this notion and take positive steps to reorganise internally will not only be able to defend](https://www.financedigest.com/how-can-banks-defend-the-latest-generation-of-scam-victims.html "How can banks defend the latest generation of scam victims?") their ground against larger competitors, they may even turn KYC into a competitive differentiator.

Specialist outsourcing is fast [becoming the norm for a wide variety of core banking](https://www.financedigest.com/are-banks-destined-to-merely-become-infrastructure-providers-in-the-banking-industry-of-the-future.html "Are banks destined to merely become infrastructure providers in the banking industry of the future?") processes. Few, however, are able to demonstrate as rapid and tangible benefit as the outsourcing of KYC.

[\[1\]](#_ftnref1) [https://www.thomsonreuters.com/en/press-releases/2016/may/thomson-reuters-2016-know-your-customer-surveys.html](https://www.thomsonreuters.com/en/press-releases/2016/may/thomson-reuters-2016-know-your-customer-surveys.html)

[\[2\]](#_ftnref2) http://store.iccwbo.org/content/uploaded/pdf/ICC\_Global\_Trade\_and\_Finance\_Survey\_2016.pdf

[\[3\]](#_ftnref3) [https://www.thomsonreuters.com/en/press-releases/2016/may/thomson-reuters-2016-know-your-customer-surveys.html](https://www.thomsonreuters.com/en/press-releases/2016/may/thomson-reuters-2016-know-your-customer-surveys.html)


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