Knowing your customer

Every practice understands that its clients are the basis of its reputation as much as its revenue. Yet how many will have taken this to the conclusion reached by a recent ACCA report on the challenges of knowing your customer (KYC), KYC: time to digitalise the first line of defence? – that ‘a single bad client can destroy the practice and its value’?

KYC and customer due diligence (CDD) have emerged as a significant first line of defence – and business challenge – in global anti-money laundering (AML) policies over the last two decades.

In Ireland, the introduction and development of AML legislation since 2010 have brought a growing requirement for risk-based approaches to KYC and CDD among designated persons, including accountants.

This has resulted in increasingly stringent demands for accounting practices to verify their client identities as well as the beneficial owners of the entities to which they provide services.

The most recent update in legislation in 2021, for example, includes a new requirement, where a beneficial owner is a senior managing officer (SMO) of an organisation, to verify the SMO’s identity and keep records of the verification process, and any difficulties in it.

Compliance concerns

While onboarding is typically the trigger for KYC requirements, changes in an existing customer’s ownership structure, as well as developments in AML and other legislation, such as GDPR, can also raise issues around the accuracy of information on record. This means small and medium practices (SMPs) don’t need a rapidly expanding client base for KYC and CDD to become issues.

Many with experience in the process may share the sentiments of an Irish respondent in ACCA’s KYC report who argued there was ‘very little evidence to illustrate that the enormous compliance burden placed on sole practitioners has reduced the risk of a crime being committed’.

Indeed, the authors of the report note that ‘the extent to which accountants are exposed to dealing with laundered money and proceeds of crime is hard to establish’.

However, fuelled by a surge in cybercrime and a political environment where the assets of growing numbers of sanctioned individuals must also be monitored, the AML compliance burden is only trending in one direction.

The ACCA report’s pragmatic view – that digital tools and greater cooperation between software companies and regulators in their development are the best way to reduce the bureaucratic burden on accountants – is one that will also likely resonate with many SMPs.

Going digital

While the appeal of digital solutions to KYC seems obvious, and paper-based approaches are undoubtedly time-consuming, and potentially frustrating for service providers and clients alike, there is little evidence of a seamless transition to online KYC processes taking place in the financial services sector to date.

Indeed, although the pandemic years hastened a requirement for digital approaches to KYC, the evidence suggests this actually worsened the experience of onboarding for many.

A 2020 study by Signicat found that 63% of consumers abandoned digital bank applications in that year, the highest figure ever recorded. As the pandemic turned a desire for digital services into an unavoidable requirement, ‘from “why?” to “why not?”’ as the report put it, the inherent weakness of the digital channels available to process ID credentials was exposed across the board.

KYC for SMPs

Against that, and with the requirements for KYC and CDD processes now virtually global, a burgeoning identity verification service sector is emerging. According to Future Market Insights, the identity verification market was worth $8.6bn in 2021 and will grow in value to some $40bn by 2032.

The differing approaches taken by major players reflect its currently fragmented nature: market leader, New York-based Refinitiv, offers a report-based service to its customers’ CCD needs, while startups such as German company IDnow employ AI and other technologies to verify customer identity at the point of onboarding.

KPMG UK has launched a cloud-based platform – KPMG Smart Customer Due Diligence – that optimises CDD business operations to reduce the total cost of KYC compliance, which the firm says can generate potential cost reductions of up 40%.

While banks and other large financial institutions are the natural target of this sector, offerings that also suit businesses of SMP size and scale are also emerging. Among them is Irish-based software-as-a-service (SaaS) company valid8Me, whose digital identity platform takes a distinctly market-disruptor approach.

CEO Patrick Horgan says that accountants who feel the challenge of adhering to AML and KYC regulations need not feel alone.

‘It has been a huge pain point across many sectors in professional and financial services for many years,’ he says. ‘Businesses are spending a disproportionate amount of their budget and time on manually validating, updating and storing identification documents.’

A learned helplessness

Horgan also observes what he sees as ‘a learned helplessness in terms of how regulated businesses are approaching this challenge. There has been very little in the way of real innovation over the years’.

valid8Me allows individuals and businesses to securely store, share and manage their key KYC data on its platform. ‘Once a digital identity is created and validated, customers have a reusable identity that can be instantly verified across any business or industry,’ explains Horgan.

‘This streamlines the onboarding process and enhances AML compliance in a radically future-proof and cost-effective way,’ he adds.

The valid8Me SAAS platform was launched in 2021 and received a significant boost earlier this year with the announcement that Grant Thornton Ireland was investing €12.5m in the company.

While it remains early days, Horgan says it can already offer businesses in Europe and North America a fresh approach to KYC.

‘You can now say to future customers: “We understand the pain points and friction with KYC and AML.” valid8Me is a secure and convenient way for you to prove your identity for free, and not only can you use it to prove your identity with us, you can use it to prove your identity on a go-forward basis with any company globally.’

Reasonable expectations

In an increasingly digitised and fractured global economy, the sophistication with which suspect assets, nefarious activities and beneficial ownership can be disguised or hidden presents a threat that accountants in practices of all sizes are obliged to take seriously.

While it is not unreasonable to expect high levels of vigilance in AML compliance as a consequence, neither is it unreasonable for accountants to expect the development of digital resources that can meet at least some of the administrative heavy lifting.

Yet how this expectation will meet with reality remains a surprisingly open question as financial services evolve in the post-pandemic world.