Today’s businesses are under increasing pressure to know more about their customers.
Not only is digital transformation driving rapid developments in the compliance sphere, but regulators are demanding more visibility and accountability from financial institutions around storing and the updating of information on the nature and purpose of customer relationships.
Relying on Know Your Customer (KYC) processes at onboarding and at periodic intervals is no longer sufficient. This is leading financial institutions to look at pKYC (Perpetual KYC), an ongoing approach to due diligence based on the dynamic refresh of customer data in response to key triggering events.
In comparison to the more traditional, reactive ways of updating KYC information, pKYC focuses on building adaptive KYC processes that can evolve over time. However, a successful transition towards this new approach requires investment in data quality, KYC standards, and cultural buy-in from senior management.
In this page, we’ll explore the key drivers of the shift to pKYC, the challenges and benefits involved, plus the practical steps for implementing a perpetual Know Your Customer model.
“Perpetual KYC”, also known as “continuous KYC”, “event-driven KYC” or “dynamic KYC” (and shortened to pKYC) is a new approach to due diligence that reflects the rapidly evolving financial markets that institutions now work in. Instead of working reactively, this new approach is based on continually monitoring for events that would alert an institution about the need to review and update its customer information.
It consists of due diligence based on the discovery of data triggered by:
The law already requires financial institutions (FIs) and other regulated entities to conduct ongoing due diligence to gather comprehensive and up-to-date information on the organisations with whom they do business. pKYC takes this into account, creating a continuous KYC due diligence process and builds it into the systems that underpin compliance as a whole.
As compliance requirements continue to increase, this enables departments to improve their efficiency and effectiveness, ensuring more work is completed to a greater level of accuracy and reliability, due to the more current nature of information.
One of the main advantages of pKYC is the regular updating of customer information through ongoing KYC monitoring. However, ongoing monitoring alone is not the same as perpetual KYC. PKYC comprises the end-to-end process from client onboarding through lifecycle management, as well as the tools and technologies that underpin the system.
Ongoing monitoring is a key step in the pKYC journey using clear data attribution lineage to highlight key attributes that are relevant to risk profiles. The next phase in pKYC is to then use that data to refresh and reconcile customer profiles with this additional information and automatically maintain up-to-date profiles.
Perpetual KYC is a response to a range of developments in the current marketplace, including changing regulations (such as the EU’s 5th Money Laundering Directive), the continuing proliferation of digital data and the challenges faced by businesses in updating their systems.
In the face of an increasingly complex global finance landscape with more potential for financial crime, regulators are putting more emphasis on firms to develop clear, auditable processes to manage ongoing customer checks. Now, the expectation from both global regulators and stakeholders is that financial institutions should be aware of customer risk at all times. The growth in Anti-Money Laundering (AML) legislation and awareness has continued in recent years, with financial institutions having to comply with these regulatory requirements to avoid reputational damage, sanctions, and hefty penalties.
The challenge for firms is that current processes are not designed to deliver this sort of comprehensive, real-time view. In most organisations, KYC is conducted at specified intervals after onboarding – traditionally one, three and five years – for the duration of a customer relationship. The time between these periodic reviews is dependent on the level of perceived risk posed by that customer, which is determined during the onboarding process. This means that KYC is immediately out of date, and banks can be exposed to significant risk until a review is conducted.
Outdated processes also have a tangible effect on the bottom line for firms. According to research by the financial crime agency Themis, the cost of anti-money laundering (AML) compliance is rocketing. In April 2020, the Europe, Middle East and Africa (EMEA) region was reported to be spending US$137 billion on financial crime compliance annually.
Moving to a software-based, event-driven KYC review process brings due diligence into real-time, reducing risk while making financial institutions more compliant, more efficient and more effective.
Despite the crucial nature of ongoing monitoring, sourcing up-to-date information on customer relationships is not straightforward. Compliance teams struggle for a variety of reasons, both structural, technological and practical. Some of the most common challenges include:
For teams that manage a significant volume of clients, identifying how frequently customers should be subject to KYC monitoring is an intricate process. All customers are required to be monitored but the frequency and the nature of checks should be defined by a firm’s risk-based approach.
Firms working with manual systems are at a particular disadvantage due to the scale, level of detail and amount of steps involved in KYC. Manually scheduling reviews, completing them in a timely manner and keeping a clear audit trail requires a significant amount of organisation and human resources. Firms need strong systems to rely on.
Onboarding new customers is the primary concern for a business but for a compliance team, they must also balance this with the regulatory requirement for existing relationships to remain compliant. Teams with limited resources may find themselves struggling with priorities especially as the front-line business teams pile on the pressure to onboard new customers quickly.
Many compliance teams operate with budgets already overstretched. Manual KYC due diligence is a prime example of an inefficient and expensive process where analysts are reviewing files scheduled for an update only to find out that nothing has changed. The whole research file must be checked using multiple data sources, potentially taking days for a large corporate entity.
Find out how automation addresses the key KYC challenges faced by due diligence teams and provides a foundation for pKYC in our in-depth blog.Read the blog
For organisations struggling with the challenges of ongoing KYC monitoring, perpetual KYC reimagines the due diligence process from the ground up, creating systems and practices that take into account the needs of teams, businesses, stakeholders and regulators. By implementing the right tools and automation, firms can reduce manual work for teams while also improving compliance, reducing risk and enhancing efficiency.
Key advantages of pKYC include:
Check out Encompass’ Perpetual KYC capabilities and see how your organisation could significantly benefit from pKYC.
Encompass CEO Wayne Johnson examines the importance of perpetual KYC (pKYC) in the ongoing fight against global financial crime.
pKYC is still an emerging concept in financial crime compliance but it’s generating significant interest from organisations.
Many regulated businesses are looking to explore the possibility of maintaining KYC profiles dynamically and adjusting their risk assessments as and when new information becomes available. In fact, 80% of KYC practitioners and heads of compliance who participated in a recent poll agreed that a dynamic approach would make organisations more likely to spot the risks that may arise under their watch between periodic reviews.
For organisations undertaking digital transformation of their risk and compliance operations, pKYC appears a natural progression towards a data-driven target operating model. However, a successful transition towards this dynamic approach requires major changes within the organisation.
Establishing the necessary digital framework to make perpetual KYC possible is a multi-phased project that firms expect to take up to 10 years to implement. However the benefits of perpetual KYC can be felt progressively as businesses move incrementally towards a pKYC model.
Nick Ford (VP for Strategic Alliances, Encompass) and Chris Laws (VP, Product, Strategy and GTM, Dun & Bradstreet) recently sat down with Ashley Blake from Business Reporter to discuss the emergence of perpetual KYC, and how it's the next step in the evolution of financial crime compliance. Watch the video below.
With regulations and customer circumstances changing regularly, many businesses are forced to update or amend client data sets frequently and ensure that KYC files are fit for purpose and in-line with the organisation's global KYC policies.
When approached manually, KYC refresh and remediation can create a huge amount of work for KYC teams. It can also lead to soaring compliance costs if outsourced to external teams, or can cause service interruptions for customers as they wait for their information to be updated.
Where KYC refresh and remediation are reactive processes, revisiting customer files as necessary when regulations change, pKYC is a proactive approach built into the broader KYC culture. pKYC goes beyond these strategies by relying on continuous, full-time monitoring of relevant events to maintain KYC profiles dynamically and adjust risk assessments as and when materially important new information becomes available.
AML and KYC legislation has continued to grow in importance, and in volume, in recent years, bringing additional responsibilities for firms.
In the face of these new demands, manual processes are becoming an area of vulnerability due to their cost, inefficiency and practical limitations. For example, manual AML processes cannot be scaled and audited to provide the level of protection required in today’s complex regulatory landscape.
Perpetual KYC has the potential to be a key tool for organisations to future-proof their KYC and AML processes and guard against risk in the long term. By moving to an ongoing monitoring model, KYC and AML teams can work proactively to manage exposure and work with the most up-to-date and reliable view of customer information.
In the event of regulatory shifts or changes in customer circumstances, customer files are automatically updated based on the new criteria. For ongoing AML monitoring, this could include unwrapping corporate ownership structures or screening relevant individuals and entities for PEP, sanctions and adverse media risk. Automating repetitive and manual CDD and EDD processes reduces risk for businesses as well as ensuring compliance in a changing AML landscape.
Perpetual KYC is becoming a more pressing issue for organisations across the finance industry and beyond, with some deeming it the ‘holy grail’ in the evolution of global regulatory compliance due to the potential benefits and risk reduction offered.
With the advent of digital technology, many have already implemented digital transformation programmes to build better customer relationships. These steps have already changed due diligence processes drastically, with a majority already committed to taking a digital approach to client onboarding. Moving to a pKYC model is a natural progression, taking the processes and tools underlying the onboarding processes and applying them within an ongoing monitoring KYC framework.
One of the key drivers enabling more organisations to move to ongoing monitoring for AML and KYC processes is the proliferation of API-connected networks within the financial ecosystem. CDD requires accessing a large number of data sources to collate information, determine UBOs and unravel corporate structures. Whereas once this could only be done manually, more businesses are now using APIs to connect their KYC systems to relevant databases to source the insights they need automatically.
As more banks and institutions build pKYC into their existing frameworks, adopting pKYC can give you a competitive advantage by reducing costs, improving service levels and reducing risk. Those businesses that are able to start their journey to pKYC sooner have the opportunity to get ahead of competitors and accelerate their compliance journey for the future.
As more organisations target perpetual KYC as a goal for their KYC and AML teams, it’s important to recognise that evolution in this regard doesn’t have to be an all or nothing affair. Moving to a pKYC model is a significant investment of time and resources, in line with the major benefits on offer. However, there are many advantages available on the journey towards the ultimate goal of reaching a state of continuous KYC due diligence and robust compliance.
Attention paid to process automation, workflow analysis and resource management will all yield efficiency gains and insights for the teams that undergo this process. By building a strategic path to perpetual KYC, organisations can target progressive improvements on the way to implementing a fully realised system.
In this ebook, learn how current regulatory pressures and RegTech innovations have created the potential for perpetual KYC due diligence.
Although perpetual KYC offers many potential improvements on current KYC methods, there is still a lot to be defined when it comes to full implementation in the compliance sphere. This is mainly because it’s a recent concept, which has yet to be fully explored by regulators and practitioners.
Like any new idea, any effort to introduce an alternative way of working in KYC and AML must contend with implementation issues, teams’ natural attachments to existing KYC processes and varying change-appetite within organisations. To minimise risk and maximise chances of success, you need to dive a little deeper and to see pKYC in practice.
While pKYC brings a range of benefits, it can require significant changes to existing processes, culture and digital infrastructure. Some organisations are not yet at a level of digital or data maturity to embark on pKYC. For other businesses, the perceived challenges or risks involved in making the change to a continuous kyc due diligence model can seem, in the short term at least, too much of an undertaking.
From the implementation of new measures, technologies and training, to access to external information from primary and premium data providers, the potential increase in associated costs could be seen to outweigh the initial benefits of putting a dynamic approach to KYC in place.
Other potential barriers to implementing pKYC include:
As you can see, the technology that underpins your current KYC systems can either be a roadblock, or an enabler to change. Your organisation’s journey to pKYC is therefore greatly dependent on your approach to technology.
Nick Ford (Encompass) and Dal Sahota (Accuity) discuss all things KYC and digital transformation, exploring the successes, the challenges, and what the future may hold.
The core basis for pKYC is digital transformation. Since pKYC is based around the fast, accurate and automatic movement and management of information, the systems used must be digital-first. This means organisations must first move away from legacy systems and paper-based processes for document and data gathering.
The transition to a dynamic, risk-driven approach of continuous KYC requires financial institutions to deploy information already held within their organisation and then integrate it with external data sources. The information architecture within the business must also be appropriately detailed and structured to assign, manage and update relevant risk profiles without loss of information or misattribution.
Automation is critical to this, and there are already a number of RegTech platforms that facilitate the move towards dynamic, continuous KYC and could be particularly helpful for organisations that feel overwhelmed at the prospect of a radical change in their KYC processes.
Once implemented, a pKYC system supports the whole customer journey from onboarding and throughout the entire customer lifetime, ensuring a seamless experience along with full compliance and risk mitigation.
When a client joins your business, a digital profile is created that houses all relevant KYC and AML details necessary for compliance and service. This profile is the core of that customer’s digital experience, serving as a single source of truth for teams.
The pKYC system then automatically monitors the client file for internal or external alerts, changes in data from PEP/sanction alert providers and reviews, with more complex issues pushed to analysts to manage by exception.
The digital KYC profile refreshes on a regular basis automatically in response to set triggers or timelines determined by the KYC team to ensure that data remains current and complete.
The refreshed digital profile is then updated in the CLM via API, with all new information structured according to the risk profile required.
Encompass is the world’s leading KYC due diligence automation platform, trusted by top financial institutions, banks and legal firms.
Our KYC experts work alongside your team to understand your specific needs and goals to create a digital transformation roadmap and pKYC plan to future-proof your AML compliance and KYC activities.
The Encompass platform delivers a range of benefits for your organisation, including:
With perpetual KYC solutions, you can automate manual processes and KYC data collation to build a dynamic digital KYC profile, complete with an automatic audit trail, providing the digital baseline to easily review and assess risk when needed.
Key capabilities of the Encompass platform include:
Encompass’ pKYC solutions bring all of your KYC and AML processes onto a single platform to streamline the manual KYC data collation process with intelligent process automation. The platform instantly creates a digital KYC profile of the most current data and documents available, ready to review when future due diligence is needed.
By focusing on set criteria, lower risk profiles can be processed quickly and a prioritised investigation workflow is provided for KYC analysts to work more efficiently.
Encompass is a market leader in pKYC software, with experience advising trusted businesses around the world. Working together, we help you build an ecosystem of component parts and providers, from software vendors, data and alerts to risk assessment and technology, to push your perpetual KYC project forward.
Nick Ford (Encompass), Neil Isherwood (Dun & Bradstreet), Mathias Ros (Capgemini) and Yair Samban (Pegasystems) explore the drivers behind the movement towards pKYC, the potential benefits, and next steps for businesses looking to transition to the new operating model.Watch the webinar
Encompass’ award-winning KYC platform empowers KYC teams with unrivalled access to trusted global data sources.
Our know your customer (KYC) and anti-money laundering (AML) platform enables organisations to streamline time-consuming KYC processes and clearly demonstrate AML compliance.
From UBO verification and KYC remediation to PEP, sanctions and adverse media screening, our market-leading KYC products help you build and maintain the most accurate picture possible of your customer relationships, efficiently and effectively. See Encompass in action below and learn more over at our How Encompass Works page.
If you’d like more information about any of the topics discussed on this page, including pKYC, ongoing monitoring or digital transformation, you can get in touch with the Encompass team. Our KYC experts will be able to answer your queries and advise you on any queries you may have.
Alternatively, if you’d like to book an in-depth session with Encompass and learn more about how our software and advisory services can help you move towards a state of continuous KYC, you can request a free pKYC consultation tailored to your specific business needs.
Just fill out the form below and a member of our team will be in touch.