If you talk to anyone in the AML field nowadays, it is very likely that you hear the buzzword “perpetual KYC” (or “pKYC” in short) every now and then. Yet, what is perpetual KYC and how is it so different from today’s prevalent approaches to KYC? Or is it? Here at Finalix, we beg to differ slightly.
So, first and foremost, what is perpetual KYC? pKYC is the notion that client profiles are to be updated continuously and with the thorough help of technology to make “smart” updates and reduce efforts on the RM’s end. Eventually, once clients are due for periodic reviews, RMs do not have to renew entire profiles or parts of them, but can merely tick the box to confirm that everything is still accurate, current and complete. Sounds good, doesn’t it? Yes, but technically, this is what financial intermediaries should already be doing anyway. There is no salvation for a bank, if one of their clients is involved in a money laundering scheme and the bank tries to build their defence on outdated, years old KYC data, arguing that the next periodic review is only due in 3 years time.
Perpetual KYC is old wine in new bottles – well meant, but truly nothing new.
Many consulting firms and IT companies promise major advancements and efficiency gains through delicately modelled technology to perform pKYC. While it is true that technology can and probably will improve efficiency, they might be over-selling the idea a bit.
Quite often, the data quality does not suffice for well automated predictions. Sometimes, there might not be enough data in general to develop meaningful patterns and models. Ultimately, not every prediction and data analysis from client transactions and profiles might be so clear cut in the realm of data protection. Are you sure you may use a person’s transaction information to tailor your marketing offering?
Do not just focus on how to continuously update your KYC profiles. Think about what needs to be reviewed and updated in the first place. Not everything does.
Many financial institutions are so concerned about review efforts that they start tweaking and adapting processes and responsibilities in every possible way. What gets overlooked most of the time, however, is that not all data ages in the same manner. While information on current income, disposable assets or occupation may change from one day to another, other attributes such as education, addresses or even source of wealth are more likely to stay the same over a longer period of time, if not across the entire client relationship. Thus, we like to differentiate between “static” and dynamic” data.
Static data needs to be captured during client onboarding or the first time when profiling a client, yet unlike dynamic data it can be assumed correct and current even years later and without further affirmation. Dynamic data, on the other hand, needs closer inspection and should be the focus of your client review activities. It is here where technology can and does provide additional benefits. With smart technologies financial institutions may detect changes of circumstances and notify RMs and/or bank personnel accordingly. Surveillance may focus on what might shed a new light and meaning onto a client relationship but ignore the data that can be taken as given.
Do you have a proper household/grouping logic when it comes to periodic reviews?
To further reduce the time spent on review activities, try to establish a proper and clearly cut household logic first. Think about which persons and entities should be looked at as a group instead of individually. Therewith you can avoid looking into the same or related people over and over again. More importantly, you can also spare yourself the trouble of approaching the same group of clients on the same issue multiple times. At best, a proper household/group view may also foster your own understanding and general knowledge of the clients, their behaviours and interests.
Ultimately, both of the above takes on static vs. dynamic data and the household logic can lead to even more efficiency gains. Provided your risk rating mechanism has been properly calibrated and puts you in a position to pursue a full-fledged risk-based approach. You might notice that not all your clients might have to be reviewed as often as you thought and, moreover, be able to focus on the ones that could else be likely to become your very own compliance Waterloo.
