Are know-your-customer (KYC) checks an important line of defence against spiralling economic crime, or an increasing source of red tape and compliance box-ticking that serves little purpose and is not as effective as good personal judgment? And could the greater use of digital tools help shift the perception of KYC from a compliance exercise to one that adds value for clients and their advisers, or are costs a barrier to such a move?
As professional accountants in practice are all too aware, KYC procedures are an integral part of client acceptance procedures. Regulations require firms to check the identity of any new client and that the source of their funds is legitimate. These regulations are in place to help prevent and detect fraud, money laundering and terrorist activity, and go beyond simple record-keeping.
‘As businesses struggle to survive and cashflow is squeezed, the temptation to cut corners will increase’
Steps towards digital KYC
- Software houses need to develop tools at an affordable price. The expense of digital tools was cited as a reason for non-adoption by 42% of survey respondents, especially for smaller practices that make a smaller number of checks. The provision of pay-as-you-go services would be welcome.
- Accountants need to recognise that while the risk of exposure may be low (and the evidence is that many are unduly optimistic), the outcome has a high impact if the risk should ever crystallise.
- For larger practices, where personal relationships between staff and clients do not exist, digital tools could offer additional commercial benefits – but these need to be available at a commercially justifiable cost.
But all too often, KYC is seen as an administrative process that ties up valuable time just to meet regulatory requirements. Although there can be real value in carrying out a thorough process – avoiding reputational damage is an obvious advantage – there is a risk that the process is carried out purely to tick a box.
And that raises the question of whether the process can be automated and therefore be of greater value to both the client and the firm. The issue here is whether digital tools can identify a client who is likely to be dishonest.
A new ACCA report seeks to understand attitudes towards client due diligence and the use of digital tools in this process. The report, KYC: Is it time to digitalise the first line of defence?, reveals that client due diligence is often seen as essential for avoiding regulatory sanction and protecting the reputation of the firm rather than as a way to combat economic crime or even improve client relationships by holding all relevant information.
As one UK respondent to the report’s survey says: ‘I don’t think KYC stops any major crime. Being a small practice, we know reasonably well from only existing client recommendations that these checks just add to our non-productive time, which is increasing every year.’
The report also reveals that costs are acting as a barrier to the adoption of digital tools. This sentiment appears to be particularly strong among small and medium-sized practices in emerging markets.
‘Small practices don’t see the benefit of digital tools,’ says report author Jason Piper, ACCA’s head of tax and law. ‘This can lead to a Catch-22 situation where software developers will not develop the tools if firms will not buy them, but the firms will not buy the tools if they are not sure they work or are worthwhile.’
The report quotes a Grenada-based respondent as saying: ‘In the Eastern Caribbean, access to online KYC tools [is] cost-prohibitive especially for small firms/sole proprietors, including access to appropriate software developers.’
Others are guided by local regulations. ‘The local regulators prefer paper-based documentation, and going online is not common here,’ says an Ethiopia-based respondent.
‘Accountants should have proportionate and risk-assessed tools and processes,’ Piper says. ‘This means that they do not have to do the same as any large firm. They need to do what is suitable for their client base.’
The report indicates that paper still forms the basis of most smaller practices’ KYC procedures, even in Europe, with fewer than half (49%) of survey respondents using online tools in any form to carry out their checks, and 65% keeping all records manually with physical documentation.
Around 20% have made the move to an entirely online process, while hybrid processes (mixing physical and online tools) are more popular for verification checks than records maintenance. While 27% of practices use a blend for checks, only 14% opt for a blend of record-keeping options.
Piper says that if a practice is looking to update its KYC processes, then it should look at the digital options, but accepts that a paper system might be perfectly adequate for a practice that does not take on many new clients.
However, what he does not believe is adequate is the reliance on an accountant’s sense of ‘good judgment’ when assessing whether a client could pose a risk to the firm. ‘People tend to assume they are better at judging a character than they actually are,’ he points out.
Piper suggests that a normally honest business owner could be tempted into an illegal action. ‘As businesses struggle to survive and cashflow is squeezed, the temptation to cut corners or take advantage of some too-good-to-be-true opportunity will increase,’ he says. ‘Clients who two years ago might never have considered any unlawful activity may now present a significant risk of involvement in money laundering, whether wittingly or otherwise.’
Read the ACCA report KYC: Is it time to digitalise the first line of defence?
Read the ACCA report Combating bribery in the SME sector 2019
The Central Council of Accounting Bodies has issued guidance on this issue at Anti-money laundering: Guidance for the accountancy sector