For a bank to implement effective know your customer or KYC processes, it must be able to successfully determine the risks of onboarding particular customers. Banks should always be on the lookout for malicious agents who intend to use their systems for unlawful activities, like money laundering or funding terrorism.
In the United States, banks also have to be compliant with the standards set by anti-money laundering (AML) regulators such as the Financial Crimes Enforcement Network. Their KYC processes must be in line with legislation like the Foreign Corrupt Practices Act (FCPA) and the USA PATRIOT Act of 2001. Proper KYC compliance has two benefits: it prevents banks from facing steep penalties from regulators, and it prepares them better against threats of financial crime. But even the most stringent and exacting KYC protocols for customers will be for nothing if the bank is working with bad data.
The best know your customer processes always begin with the collection of comprehensive, good-quality data. Before making any other adjustments to your current KYC protocols, you must examine your methods for gathering and managing customer data. Doing so will increase the faith of your AML officers in the work that they’re doing and keep you in the good graces of regulators. Protect your bank against scandal, disrepute, and heavy financial losses by watching out for bad data and improving your data processes for KYC.
What Constitutes Bad Data for KYC Compliance?
The first thing that needs to be made clear is the concept of “bad data” and what it encompasses. What makes data “bad” or inappropriate for use in KYC compliance?
The following may apply to the customer data that’s entering your system:
- The data contains inaccuracies about the customer’s personal details.
- The data is incomplete and does not portray the customer’s situation in full.
- The data is inconsistent with other findings in the system that are related to that entity.
- The customer data is poorly structured.
- There are redundancies for the same entity in your system, such as multiple data entries for just one person.
- The data mixes entities, such as customers’ first names and last names, for example.
- The data follow different formats and isn’t standardized for consumption into the system.
Bad data can be a result of inflexible siloed systems, lack of investment in infrastructure to clean it up, or complacency about data entry standards. But whatever the central problem may be, it can be extremely costly to the bank in the long run. A common issue associated with bad data is the deluge of false positives, which require time and money to investigate and distract from real threats.
The opposite idea also applies, as bad data can increase false negatives and allow malicious agents to actually slip through to the system. When this happens, the bank could stand to lose a lot of money and have its reputation with both regulators and customers tarnished for good.
How Can You Ensure the Integrity of Your KYC Data?
Faced with the threat of bad data, you may be wondering how to improve your data standards and therefore strengthen your bank’s KYC processes. Remember that it’s not just a matter of acquiring accurate KYC data, but preparing and managing it properly as well.
That being said, it may be time to invest in a proper mechanism, such as software dedicated to AML, to help you gather, screen, and standardize KYC data. Such a software solution must employ match rules that are actually effective at ensuring the data’s quality and integrity. With it, you should be capable of 360-degree views on your customer data and be able to streamline your KYC data sources. Some solutions can instantly aggregate third-party information from news feeds, blacklists, or lists of politically exposed persons (PEPs). Lastly, you will want to ensure smooth data integration from multiple sources and formats, especially if your banking system operates internationally.
Done together, these initiatives to improve data collection and management will make it easier to conduct KYC and pass the strict standards of AML regulators.
Banks tow a fine line between leaving their customers unsatisfied and safeguarding themselves from being implicated in financial crime. You may be tempted to think of KYC in its extremes—either overly restrictive or overly lax in its implementation. But compliant and effectively managed KYC will be extremely freeing to your organization. You will be able to trust your data to save you from an array of bad situations.
Remember that KYC shouldn’t be a matter of analyzing for the sake of or striving to increase your number of flagged transactions. It should be about upholding the integrity of data and exercising good data screening and management practices. This is what will help your institution achieve balanced KYC processes that are secure, efficient, and worthy of both your good customers’ and regulators’ trust.