Regulation on financial institutions is getting tougher and tougher, with the enforcement of these regulations leading to huge amounts in fines to organisations. However, despite this the majority of these institutions still rely on outdated business KYC processes.
Russell E. Perry is the CEO of kompany, a RegTech platform for Global Business Verification and Business KYC (KYB). Russell’s professional experience extends across several industries, including telecommunications, online gaming and most recently, regulatory technology.
Here he shares his thoughts on how perpetual KYB will be the new compliance standard for Business KYC.
It’s no surprise that stricter anti-money laundering regulations are increasing the burden of proof on companies when it comes to fulfilling their regulatory requirements. The enforcement of these regulations is also intensifying, with close to $9 billion USD in fines last reported as of October 2020 – already more than the total of penalties in 2019 but without a final tally yet reported.
Despite this, most financial institutions today still rely on outdated, inefficient, and manual Business KYC processes that are not only expensive and time-consuming, but also offer a poor experience for their own clients. In fact, many of the world’s biggest accounting firms source their Business KYC data from static databases, which is not compliant with Anti-Money-Laundering (AML) regulations and exposes their organisation to significant fines and reputational risk. Additional hurdles arise when one considers that much of the world’s KYC data is not standardised in how it is retrieved and processed.
For example, despite being home to Europe’s biggest economy, Germany does not have a centralised governance system for its company filings. Instead, over 100 regional authorities manage their own local registers. Considering the country’s commercial backbone, the small and medium-sized enterprises, total around 1.6 million companies, this is a data challenge for compliance departments, who (by EU anti-money laundering law) need to access and disseminate this information. Standard compliance checks, such as those for ultimate beneficial ownership identification, are currently taking compliance teams weeks to months of manual review to complete. And of course, the more human the task the more room there is for error.
Exchanging periodic KYB with perpetual KYB
kompany was founded on the premise that compliance doesn’t have to be a burden. With the right technology and audit-proof data at your disposal, it’s possible for teams to turn their AML obligations into a competitive advantage by reducing, if not entirely removing, the manual work that can lead to the mistakes that expose companies to regulatory scrutiny, all while servicing their clients better.
When your compliance teams have direct access to original trusted sources like government registers and financial authorities, you remove faith from the compliance equation as the data being used for KYB checks is simply truthful.
Achieving perpetual KYB is key to detect compliance risks as they occur. Periodic, or momentary snapshots of an entity and the people behind the company, lead to data gaps and ever-growing compliance backlogs. This is where real-time monitoring and alerting of company information is essential. With perpetual KYB services, a team would always be capable of detecting compliance risks as they occur, allowing them to stay constantly aware of vulnerabilities rather than waiting for the next pre-scheduled review.
While so many industries remain trapped in an outdated performance of checks and balances, we’ve predicted and embraced the move towards perpetual KYB. And of course, verifying who you’re doing business with has never been more important than now.
Crisis makes the case for embracing regulatory technology
The COVID-19 crisis has also increased the demand for kompany’s business verification services as digital compliance solutions are being called on now more than ever, as a result of stay-at-home orders and mandated office closures. And as publicly funded business stimulus programs are being leveraged in light of the economic challenges of the pandemic, governments continue to demand that the highest standard of AML due diligence be upheld and enforced. Despite this, there has already been a significant increase in business fraud and supplier/vendor failures due to the increased demand on responsible parties to identify and approve transactions, whether those be emergency funds or Personal Protective Equipment.
It’s been predicted that the United Kingdom alone stands to lose nearly £26 billion to fraud through its UK COVID loan scheme with a high risk that the funds have been moved into illicit channels. While it may seem obvious to blame this on the urgency of releasing these funds, when you consider both the instantaneous and seamless business verification capabilities of RegTechs, it becomes staggering to think how avoidable such economic injuries really are.
What does the future of RegTech look like?
As, we’ve seen throughout 2020 the current market and regulatory climate warrants a far more automated, audit-proof business verification process, specifically one with an exponentially lower margin of error, as compliance risks have never been higher.
While RegTech may have origins as a subsect of FinTech, Deloitte put it best when they said, “RegTech is the new FinTech”. As clients increasingly move to seamless digital platforms, we anticipate a universal adoption of regulatory technology in the future, one that includes the participation of regulators as well.
Having said that, if regulated entities across industries want to stand a chance at staying on the right side of the law, all while maintaining their competitive edge, RegTech will evolve from a “nice to have” to an essential pillar of any successful business model. After all, understanding exactly who you’re doing business with has never been more important than now and the companies that are willing to adopt perpetual KYB practices will define themselves as compliance leaders in 2021.