KYC Utilities: The Promised Silver Bullet for Nordic Banks?

KYC utilities provide access to a unique and validated source of data, but liability for satisfying KYC and AML obligations ultimately remains with Nordic banks.

The Nordic banking landscape has witnessed significant upheaval over the past few years, moving from an untarnished reputation for having the safest financial institutions in the world to being mired in a number of complex, global money-laundering scandals.

Domestic and international regulators have roundly responded by imposing significant monetary penalties, amounting to nearly $20 million (which is expected to increase in the coming months) on some of the region’s leading banks, resulting in billions being wiped from their market value. This has reinforced the need for robust and effective Anti-Money Laundering (AML) and Know Your Customer (KYC) programmes from a reputational and competitive standpoint.

The Value of KYC Utilities

In a bid to rebuild their standing in the eyes of both regulators and customers, six of the Nordics’ biggest banks have now joined forces to set up a joint platform for handling Know Your Customer (KYC) data. The Nordic KYC Utility will initially offer KYC services for large and mid-size Nordic corporate customers from 2020.

From an operational point of view, we estimate that up to 80% of financial institutions’ AML and KYC programmes share commonalities (e.g. similar questionnaires, documentation, screening and risk-scoring processes, and continuous monitoring programmes etc.). This means that essentially every financial institution is performing the exact same compliance procedures and processes on the same entities and individuals, in a process that delivers zero differentiation or competitive advantage.

Instead, the utilities can offer significant opportunities to enhance overall client service by making it possible for clients to upload data and documentation to a utility once – regardless of how many accounts they hold with various financial institutions.

Addressing the Question of Liability

In our view, there is absolutely no doubt that there is huge merit in having a centralised KYC or reference data service utility that can be used by many financial institutions. However, a shared KYC utility does not absolve financial institutions from compliance with anti-money laundering obligations.

The European Banking Authority (EBA) currently recommends that, since banks are still liable for information retrieved from third parties, they need to double-check any information obtained from a shared KYC utility. This means that to fully comply with AML and KYC obligations, financial firms must retain the final decision on whether or not an applicant has satisfied the requisite KYC checks.

Plainly speaking, this means that banks are still liable for AML and KYC failures. Yes, a utility will certainly help ease the operational burdens of compliance, however, it does not eradicate the responsibility or the need to invest in robust onboarding and client lifecycle processes.

Conclusion

In order to relieve this compliance burden and automate KYC and AML processes, financial institutions must invest in KYC solutions and integrated IT infrastructure. This will enable them to create a sustainable competitive advantage: streamlined processes that deliver clarity of data, a consistent KYC process and an enhanced client experience.