Streamlining the KYC Compliance process

 

In this interview Mark Brotherton, Chief Operating Officer, Financial Institutions, Lloyds Bank Commercial Banking, and Kwaku Osafo, Chief Operating Officer, Banks, Financial Institutions, Lloyds Bank Commercial Banking, discuss how Lloyds Bank is extracting real value from its relationship with the SWIFT KYC Registry.

Mark Brotherton
COO Financial Institutions, Lloyds Bank

Mark Brotherton

Kwaku Osafo
COO, Banks, Financial Institutions, Lloyds Bank

Kwaku Osafo - Author

“Over the past few years in particular, ‘Know Your Customer’ (KYC) requirements have evolved and the amount of time we have been spending on due diligence has escalated,” says Mark Brotherton. Lloyds Bank has been sending out “far more” anti-money laundering (AML)/KYC questionnaires than before, and the number received continues to increase from a wider population of correspondent banks. As a consequence, increasing numbers of institutions are now refusing to fully complete other institutions’ questionnaires, requiring gap analysis to be conducted using existing sources. Brotherton continues “While we are very comfortable with our KYC standards, we see the SWIFT KYC Registry as a solution to this and we are taking the opportunity to streamline an end-to-end process that is in danger of becoming cumbersome.” Kwaku Osafo says “It is not only the volume of questionnaires that has increased; we have also seen the scope broaden. They’re much more exhaustive now.”

The overall burden continues to increase. Osafo says “We are actively investing in new systems. We also have the operational costs of making sure it’s all integrated into our process, and then there is the human cost as we reinforce our departments. The cost trajectory is up.” But determining the true cost of maintaining the correspondent bank population is very difficult, not least because this is now a large-scale process involving significant potential risk. Inevitably, the level of senior-management oversight has become more intense over time. “This is becoming more and more important. How do you put a value on our Group Executive Committee spending time on monitoring progress?” says Brotherton. 

The operational cost of the KYC process – dedicated staff time, salaries, chasing banks, etc. – is quantifiable, but the real cost is greater than that. “Throughout the organisation, senior people are spending their time on this,” says Brotherton who goes on to point out that the potential cost of non-compliance would be significantly higher both in terms of reputation and financial impact.

Time and cost saved, staff morale uplifted

 

“We believe that SWIFT’s KYC Registry includes a number of unique elements which make it particularly suited to Lloyds Bank’s compliance needs,” says Brotherton. “As a member-owned, not-for-profit co-operative, SWIFT occupies a position of trust in the market. Trust is crucial where data-sharing is concerned.” Initially, Lloyds Bank took a “project approach” to implementation of The KYC Registry, with the appropriate governance around it, but quickly moved to a business-led implementation supported by compliance, payments and legal colleagues. “This meant that we were able to manage the implementation on an end-to-end basis, for both inward enquiries and the enquiries that Lloyds Bank undertakes on other institutions. It was important that there was business ownership throughout which is why I became, and remain, the Lloyds Bank Accountable Executive,” says Brotherton.

Implementation has already had a positive impact, not least on the morale of the team at Lloyds Bank. “We are excited about the opportunities that are presenting themselves as The KYC Registry evolves,” says Brotherton. “As well as the time savings and consistency, we are seeing an uplift in staff engagement as our professionally trained staff spend more time analysing the data, and less on compiling it.” Data held on The KYC Registry is readily available to subscribers; thus, any requirement to “chase” data becomes redundant. This is an efficiency gain not only in the context of enquiries sent out, but also with regard to Lloyds Bank’s own response times to enquiries received.

“Like many of our peers, our operating model dictates that when we receive questionnaires, we have to reach out to various parts of the organisation to obtain the relevant data. Now that our data in The KYC Registry is fully populated, we expect considerable time savings, and also a continued development of our excellent relationship with our correspondents,” says Brotherton. A further benefit of The KYC Registry is that any follow-up communications after the completion and delivery of a questionnaire will typically be more focused than in the past, and as Brotherton suggests, more aligned with the correspondent’s specific risk appetite. “We are already starting to see a return on our investment with recent due diligence on some of our larger correspondent groups being 95% completed via the Registry prior to reaching out to the correspondent. The KYC Registry enables this clear-cut exchange of data.”

 

Even the questions get better

“Inevitably, we will see improvements in processes across the whole bank, not just in AML,” says Brotherton. “One of the key points about The KYC Registry is that it helps to drive consistency across the industry. But the true cost benefits will be achieved in the cooperation between all member banks.” Brotherton has recently undertaken a review of a sample number of the questionnaires received by Lloyds Bank. “It is apparent that there are variations in the questions that each institution currently asks. This is a huge opportunity for banks to work together, and within their own risk appetites, to ensure that the additional questions, beyond The KYC Registry, are kept to a minimum. The issue here is that if Lloyds Bank (or any other bank) was to address, say, fifty questions via the Registry, but then every potential correspondent was to ask a further fifty questions of its own, then The KYC Registry would become just a step in a larger – more cumbersome – process.”

The solution is for member banks to work together to achieve a balance between having sufficient information in the Registry, and not having too much. For Brotherton, The KYC Registry itself represents a route to this solution, in that it enables far more substantive, more effective communication between institutions. “It would take too much time and effort to put hundreds of questions on The KYC Registry so that all banks’ questions are covered,” says Brotherton. But the Registry delivers a terrific opportunity to address this issue and thereby to achieve further efficiency gains in a collaborative fashion. It may be appropriate, Brotherton suggests, for banks to review their own outgoing questionnaires, and ask themselves: do we really need to know this? At Lloyds Bank we are actively working towards the removal of the need to send a separate correspondent banking AML questionnaire so that the Registry becomes the primary source for most of our due diligence requirements.

"We have already taken the pro-active step of writing to our correspondents to highlight our support for SWIFT’s KYC Registry."

Efficiency gained, efficiency shared

“We have already taken the pro-active step of writing to our correspondents to highlight our support for SWIFT’s KYC Registry,” says Brotherton. The opportunity is for all banks to work together and achieve consistency in their fight against financial crime. SWIFT has developed the content of The KYC Registry on the basis of input from member banks, and has acted upon suggestions for improvement and this will continue to evolve. “An example is that there are now commentary boxes which allow organisations to provide context to their answers.” There has been no attempt to exclude challenging and even difficult questions, and the Registry is as appropriate for regional as for the larger banks. “Irrespective of their size, banks will attract value from The KYC Registry,” Brotherton says.

Key benefits of The KYC Registry? Osafo says “It helps make a cumbersome process much easier, and there is the comfort of knowing that this is SWIFT-managed.” Banks remain responsible for their own due diligence, but SWIFT’s reputation, and the trust associated with SWIFT, is beneficial to the process.

Brotherton adds: “For decades, there has been a good level of trust across the correspondent banking community, but this is in danger of being eroded. The KYC Registry is an ideal opportunity to build on that trust and to complement the more specific transaction-monitoring queries that inevitably will still be a feature of future due diligence.”

Banks with an interest in using The KYC Registry should contact SWIFT and conduct their own due diligence on whether the solution meets their legal and regulatory requirements.

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