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A final note on KYC: it’s getting serious

OK, I’m going to cheat now and finish all the KYC chat by reproducing a couple of articles that spring boarded from the event.

First, Elliott Holley recorded the BAFT-IFSA session for Banking Technology.  Here’s what he wrote:

“Unbanked banks” suffer from tougher KYC rules

Senior transaction banking executives have called for a political discussion to rethink Know Your Customer policy in the wake of dire warnings that emerging markets are being cut off from the global correspondent banking network.

“Where you as a bank identify the risk and look to exit, and the authorities tell you that you can’t, that’s very difficult and we are still dealing with that,” said David Scola, managing director, corporate banking, FI coverage, Americas at Barclays. “It’s going to get worse as the correspondent banking network shrinks. It raises questions as we limit our direct relationships, and we as an industry need to pull together and work with the solution providers and the regulators to make sure our voices are heard.”

Speaking at the BAFT-IFSA conference in London this week, Scola was referring to Barclays’ High Court battle in November, in which a verdict was returned against the bank, effectively preventing it from closing down a number of small business accounts it held with cross-border remittance providers. Barclays had re-examined its KYC policy following a series of major banking fines in recent years, and come to the conclusion that it would end some 250 relationships, including one with Dehabshiil, a remittance provider active in Somalia.

Campaigners were concerned that the closure of the accounts by Barclays would cut off a vital lifeline to the country, where 4.2 million people or 41% of the population relies on remittances as its primary source of income for food, water, shelter, education and healthcare.

But according to Scola, the tougher stance on KYC taken by regulators in recent years has placed pressures on global banks that are driving them to act in a way that could have unintended consequences, including the inadvertent increase in systemic risk caused by shutting off some countries from the global correspondent banking network.

“Until this stage the topic has largely been driven by compliance,” he said. “That has not allowed for a lot of strategic development. The business needs to assert itself. We are holding conference calls to get opinion coordinated. We need to have the front office engage with the regulator so they understand the decisions being driven by the regulation.”

Scola was supported by Jim Nelson, head of financial crime compliance, Europe, at Standard Chartered, who added that individual regulators may have never worked in a bank, and might therefore have a perspective that does not take into account some of the key realities faced them. The implication was that banks need to work harder to educate regulators on the effect their rules are having on businesses – and on systemic risk.

“We need to articulate to our regulators so they can understand,” said Nelson. “We’ve been told to stick to our risk based approach to relationships, and we are having to revisit many that have been good for years. If we turn off certain countries from a KYC perspective, we’d be shutting them off from the international payments network, and I’m not sure that’s the right thing to be doing.”

Other commentators have recently warned about the concept of the “unbanked banks”, referring to the process by which large global banks increasingly withdraw support to smaller regional banks on the basis of reducing risk. The decline of the global correspondent network has been heightened by major fines inflicted on global banks, such as the $1.91 billion penalty issued to HSBC in December 2012 for failures in its AML procedures.

Barclays itself was fined $298 million over alleged sanctions breaches in Iran. In December 2012, Standard Chartered was also fined approximately $300 million for its role in sanctions breaches, including in Iran, Burma, Libya and Sudan.

Nelson added that his firm did not wish to see money channelled towards underground, illicit means as a result of the tougher rules, as that would work against the whole point of having tougher KYC rules in the first place. “I think we need to push for better standards,” he said. “Do we really want shrinkage? Is that what we want for society? I think it would be better to reinforce the existing map and reinforce enforcement and compliance. Commerce will happen, people need to live. There’s a need for global transparency.”

On 22 January, a Switzerland-based startup called KYC Exchange launched with the support of BAFT-IFSA, an association of organisations involved in international transaction banking. Headed by Joachim von Hänisch, a former director of financial institution business at Standard CharteredKYC Exchange aims to make the whole process of ‘know your customer’ significantly faster and cheaper by standardising the questions asked by banks, automating the process and placing it online.

KYC Exchange estimates that whereas a KYC request might take 30 – 50 days to turn around using standard industry measures, its own system can do the same work in five minutes. The time saved for a bank initiator is estimated at approximately 90%, while the receiving bank saves around 40-50%, according to von Hänisch. The commercial model is the same as a regular exchange, with users paying per transaction. So a bank would effectively pay for the connection between Bank A and Bank B.

This was followed by the £7.8 million fine of Standard Bank for money laundering, the first such fine of a commercial bank.  Here’s what happened, according to Bernard Goyder of the Trade & Forfaiting Review:

The corporate banking division of Standard Bank has been fined £7,640,400 by the Financial Conduct Authority (FCA) for failing to comply with anti-money laundering regulations (AML). The bank settled with the FCA after it was found that systems relating to politically exposed persons were inadequate. The bank complied fully with the FCA investigation and settled with the agency to receive a 30% reduction in the penalty.

The decision by the FCA is the first time the regulator has fined a commercial banking institution for breaching AML rules.

Banks are investing heavily in compliance as know your customer (KYC) regulations come into force. Michael Quinn, managing director responsible for trade at J.P. Morgan, said in January 2013 that the compliance restrictions placed on the industry were “burdensome” and placed a “heavy load on trade bankers”.  

The news comes as delegates at the Bankers Association for Finance and Trade (BAFT) conference in London between 20 and 21 January 2014 discussed the impact of KYC regulations on trade finance. The debate focused on the tension between the compliance risks of banks doing business with emerging market institutions and the corporate social responsibility obligation to keep money transfer channels open.

The issue was given greater public prominence in when Barclays pulled its money transfer service link with Somalia in June 2013, citing concerns about money laundering. A legal challenge by the Anglo-Somali community succeeded in forcing Barclays to keep its money transfer Dahabshiil open. The Somali diaspora sends around US$1.3bn home each year, helping 40% of the population. BAFT delegates said that cutting ties with foreign financial institutions is more than just a compliance issue and can have huge unintended social consequences.

Bank counterparties now face stringent checks each time they set up a new transaction with another bank. HSBC has said they it has relationships with around 30,000 financial entities worldwide. The cost of verifying a counter-party financial institution can be as much as $15,000, says Joachim von Hanisch from KYC Exchange Net, a compliance system provider. He said: “if you have a relationship with a bank, you not only need to screen the bank, you need to screen every single subsidiary of the bank and if the bank has a branch in a foreign country you have to adjust your screening and check how the bank in a foreign country is regulated.”

Von Hanisch’s solution is for banks to fill in a single compliance form they can send to a new counterparty at the beginning of each relationship. Under the current system, banks have to confirm articles of association, list of directors and a copy of the articles of association.  

“The difference between me sending you an old handwritten letter and me sending you an email which you can copy and paste. We are the only firm which now has a solution to do this.”

SWIFT, which runs the interbank payment system, is working on a registry based solution to the KYC conundrum. A spokesman for theorganisation said: “SWIFT is developing a global KYC Registry which centrally stores documents and data that banks can employ while on-boarding or re-evaluating their correspondent banking relationships. Initially the Registry will focus on KYC information for correspondent banking, which is the most urgent challenge facing the industry.”

Financial institutions in Latin America, the Middle East and Africa are finding it increasingly difficult to maintain longstanding corresponding banking networks. Delegates at the BAFT conference from emerging markets said they found it difficult complete transactions, making it far harder to service the trade finance needs of clients.

John Dryzal, president of global risk at Marsh & McLennan Companies, speaking at the launch of the World Economic Forum’s global risk report before the Davos annual meeting said “banks are repatriating trillions of dollars, exiting markets in the main part due to thebalkanisation of regulation”.

Chris Skinner, chairman of the Financial Services Club, told TFR he felt the discussion at the BAFT conference had delivered “recognition that the current KYC system was not working”.




About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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