Navigating toward more effective KYC/CDD operations · collection process by leveraging clearly defined data requirements and business rules — Reduce customer outreach by aggregating

kpmg.com

June 2019

Navigating toward more effective KYC/CDD operations

ContentsEvolve the Know Your Customer process 1

About the authors 2

Compliance actions: current state 3

Six limiting, and connected, challenges 4

Key areas of improvement 6

Reimagine KYC/CDD operations 8

Next steps 11

How KPMG can help 12

Evolve the Know Your Customer processFinancial institutions are spending as much as 35 percent more than necessary on AML/KYC operations.

In examining numerous major banks’ AML/KYC programs over the past five years, KPMG research indicates that the higher-than-necessary costs are directly related to banks’ inefficiencies in processes, data management, and information technology systems, among other functions.

It is estimated that up to 80 percent of the effort associated with AML/KYC is dedicated to information gathering and processing and only 20 percent to assessing and monitoring that information for critical insights. At the same time, the tiresome process, repetitive questioning, and long processing times create a frustrating experience for customers and employees.1

In short, the AML/KYC function at many banks is broken and/or significantly underperforming.

Financial institutions worldwide are spending billions annually on financial crime risk management. Yet, fines and other sanctions imposed after findings of banks’ noncompliance have actually increased in the past three years.

We believe there is an answer to this convoluted set of circumstances. We advocate addressing the compliance challenges in a way that not only complies with regulation to avoid fines but also saves time and money while making customers and employees less frustrated with the complex process of AML/KYC compliance.

KPMG offers a KYC/CDD transformation roadmap in which we identify areas that are creating limitations to effectiveness, provide target areas of improvement, and recommend action steps to get the work done.

1 “Could blockchain be the foundation of a viable KYC utility?,’’ KPMG International, 2018

© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. NDPPS 850428


1Navigating toward more effective KYC/CDD operations

About the authors

Jim McAveeneyPrincipalT: 630-639-9728 E: [email protected]

Jim is a practical, pragmatic, and outcomes-focused leader with over 30 years of financial services consulting experience. He collaborates with his clients from ideation to implementation of solutions to achieve large-scale changes necessary to advance the client’s organization. He has vast experience in leading programs transforming the client’s operational efficiency, customer experience, technology, and regulation, specifically focusing on KYC compliance.

Andrew HusbandPartnerT: +44 777-133-7960 E: [email protected]

Andrew is a partner in KPMG’s Financial Services practice with over 25 years of experience and is focused on supporting banking clients in structuring and delivering their most complex change initiatives. He has led and advised on many large-scale transformational change programs and has developed particular experience leading global financial crime and regulatory change initiatives for investment banking clients.

Chetan NairDirectorT: 614-638-7048 E: [email protected]

Chetan is a results-driven leader with over 20 years of experience in banking, lending, and KYC operations and has led large business transformation initiatives and system implementations for Fortune 500 companies. He has been successful in teaming with business stakeholders, senior management, and technology teams to effectively align investments with transformation initiatives and strategic business objectives within the banking and capital markets sector.

Richard RobinsonAssociate DirectorT: +44 778-903-2856 E: [email protected]

Richard has 18 years’ experience in the banking sector. He specializes in leading large-scale financial crime change and remediation programs. He focuses particularly on working with clients to enhance their financial crime operations, driving improvements in cost efficiency, customer experience, and quality of risk decisioning. Richard is a Managing Successful Programmes (MSP) practitioner and holds the International Compliance Association U.K. diploma in anti–money laundering.


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Compliance actions: current stateAmong the world’s regulators, those in the United States, by far, are the most aggressive in imposing fines and sanctions after finding evidence of noncompliance with AML/KYC regulations, the Bank Secrecy Act, and other violations of similar laws.

Beginning in 2008, and continuing through the third quarter of 2018, at least 11 agencies in the United States collectively have imposed nearly $24 billon in noncompliance fines.2 Scores of deferred prosecution agreements and nonprosecution agreements have also been reached in that period — and continue today.

All of the fines and actions have been leveled at a time when bank financial statements and analyst calls are filled with proclamations by executives that installing effective AML/KYC processes is a priority on their agendas.

Regardless of how much time and money financial firms already have spent on AML/KYC tools and processes, we believe they must continue to invest in newer technologies and processes.

Consider these data points:

— Some major financial institutions spend up to $500 million annually on AML/KYC programs. At least 10 percent of the world’s largest financial institutions spend $100 million (or more) annually on their AML/KYC programs. Average annual spending (including labor and third-party costs) is as much as $48 million.3

— KYC/CDD is driving up the costs of customer onboarding. In 2017, there was a 19 percent increase in spending compared to 2016, with a 16 percent increase expected in 2018.4

— The cost of AML/KYC compliance across U.S. financial services firms equaled $25.3 billion per year, based on responses to a recent survey from more than 150 decision makers at commercial banks, investment banks, asset management, and insurance firms.5

2 “Europe goes harder on money laundering with record ING fine,’’ The Wall Street Journal, September 4, 2018

3 “Know Your Customer will be a great thing when it works.’’ Forbes, July 10, 20184 “The Cost of Compliance 2017,’’ Thomson Reuters, July 20175 “Anti–money laundering compliance costs U.S. financial services firms $25.3 billion per year,’’ LexisNexis Risk Solutions, October 11, 2018

“The reality in this business is that inefficiencies in banks’ AML/KYC processes persist. We continually see the results of these challenges: lower productivity because significant rework has to be done, more government scrutiny as problems persist, banks’ reputations being damaged, customers often remaining unsatisfied, and the ongoing possibility of criminal prosecutions or other sanctions.’’

— Jim McAveeney, KPMG Principal,

Financial Services



Six limiting, and connected, challengesOur experience allows us to identify six specific challenges linked to ineffective AML/KYC operations:6

6 “Could blockchain be the foundation of a viable KYC utility,’’ KPMG International, March 2018

Limited controls: Increased AML/KYC requirements have raised “the cost of doing business” through additional controls (e.g., manual and systematic) required to meet compliance needs.

Process inefficiencies: Globally inconsistent, fragmented, and nonstandardized AML/KYC processes with limited end-to-end automation have resulted in lower staff productivity and increased rework.

Fragmented data: Siloed, duplicative, and inconsistent data (structured and unstructured) with limited ability to search and access internal and/or public sources to meet compliance needs.

Minimal technology investments: Increased transaction volumes will require continuous investments in technical capabilities (e.g., case management, client portal) to adequately scale operations to improve human capital efficiency.

Labor-intensive operations: Significant manual tasks are creating an unattractive workplace with redundant activities and poor controls resulting in suboptimal quality.

Negative customer experience: Cumbersome, disjointed onboarding and periodic customer refresh processes and systems have resulted in redundant and inconsistent customer outreach to collect and verify KYC/CDD data.


Source: “A Danish bank laundered $230 billion over 9 years—partly because it couldn’t understand Russian,’’ Business Insider.com, October 2018

In September 2018, a bank in Europe reported to its regulators that the bank unknowingly laundered $230 billion over a nine-year period because many of the bank’s documents were written in languages bank employees didn’t understand. Bank executives said they did not have adequate insight into branch activities and assumed the bank was taking appropriate anti–money laundering steps. At one of its branches, 44 percent of all deposits came from nonresidents of the bank’s home country. The deposits were later discovered to have been made by money launderers.

Case study




Key areas of improvementAfter discussions with financial institutions executives across the globe, we have identified three specific target areas that address challenges in the delivery of more efficient and effective financial crimes compliance — at a reasonable cost:

— Implement a data model/data dictionary to capture all required data elements, requirements, and business rules based on key customer attributes

— Define data lineage among policy, business rules, and technology to align with the policy and visualize impacts of future policy changes

— Leverage technology solutions (e.g., workflow/case management) and client channels to automate the processing of KYC/CDD cases to reduce time and improve operational efficiencies

— Confirm the right-skilled people are undertaking the right activities in the right way (e.g., sourcing options)

— Improve the customer experience by enhancing the KYC/CDD data collection process by leveraging clearly defined data requirements and business rules

— Reduce customer outreach by aggregating publicly available customer data

— Automate and centralize source information to streamline and improve employee experience in updating KYC/CDD information throughout bank systems

— Provide a true omnichannel experience by enabling self-service capabilities (e.g., portal, mobile)

— Evidence-based, robust, and auditable processes

— Conduct early risk-based assessment through customer segmentation

— Quality financial crime judgment, not just a data collection exercise

— Know your customer better through relevant data collection

Optimize KYC/CDD business operations to reduce the total cost of AML/KYC compliance by implementing a data model – driven approach

Enhance the customer and employee experience for onboarding and refresh (e.g., periodic customer refresh and event-based refresh)

Improve risk management/financial crimes compliance to assess and monitor KYC/CDD client information for critical insights

1 2 3


KPMG performed KYC/CDD Customer Refresh on high-risk customers for a top 3 global bank who had a regulatory driven imperative to improve their AML/KYC processes. KPMG successfully delivered the following outcomes:

— Ensured a risk-based outcome decision was made for each customer file with an audit trail evidencing the customer meets the bank’s AML/KYC policies.

— Refreshed hundreds of thousands of customer profiles and consistently achieved a 99% QA pass rate. KPMG priced the service on an outcome basis, meaning we charged a case fee when a customer file was completed and signed off by the bank. This provides certainty around cost of performing KYC/CDD and the quality of outcomes.

— Delivered an improved customer experience by guiding the customers to submit information and documents through a KPMG run customer portal which is supported by telephony, SMS, and email. KPMG achieved material engagement with customers 1 month earlier in the KYC/CDD life cycle than the in-house process.

— The Average Handling Time (AHT) of KYC/CDD Refresh was reduced by 50% using KPMG’s technology. All our technology is hosted in an AWS cloud and contains the following core components: – Policy lineage tool, which digitalizes the bank’s AML/KYC policies and creates a detailed data model which KPMG uses to drive the KYC/CDD Refresh.

– Data Aggregation technology to aggregate, filter, and categorize KYC/CDD data for analysis, escalation and review, saving both time and money to deliver a complete KYC/CDD client profile. Customer contact is only initiated where such sources have been exhausted.

– Multi-channel set of systems which allows the customer to interact through their preferred channel at a convenient time for them in their preferred language. 95% of the bank’s customers now choose to use the digital channels and we have had minimal customer complaints after running the service for over 2 years.

– Workflow tool which eliminates the need for operational procedure manuals and guides the KPMG KYC/CDD operational users though the review.

KPMG operates this technology in KPMG Operations Centers located in the UK, India, USA, Australia, and China.

Case study




Reimagine KYC/CDD operationsKPMG has developed a KPMG Know Your Customer Navigator that allows a bank to quickly assess the maturity of its current-state KYC/CDD operating model components and helps guide the bank’s creation of a higher-performing target-state operating model.

The KPMG Know Your Customer Navigator comprises the following four components:

— Policy and risk management

— Process and services

— People and organization

— Data, technology, and analytics.

The KPMG Know Your Customer Navigator depicts the four focus areas and consists of 12 Level 1 components described below.

Additionally, there are 44 Level 2 subcomponents that provide a holistic framework for highlighting the challenges KYC/CDD functions typically face and helping to identify opportunities for solving them. A sample of key concepts and leading practices for each of the four key areas is summarized on the following pages.


KPMG Know Your Customer

Navigator

1

Policy and riskmanagement

People andorganization

Data, technology,

and analytics

Process and

services

Policy andrequirements

2Book of work

and riskassessment

3Risk

decisioning andquality

4Core processmanagement

5Relatedservices

management

6Client

experiencemanagement

7Organization and

infrastructure

8People and

performance

9Data and

technology

10Bank-held datamanagement

11Third-party datamanagement

12Reporting and

analytics

Policy and Risk management:

Every AML/KYC process is underpinned by the financial institutions’ policy that is further prescribed by the laws and regulations of the industry and country of operation. Therefore, it is vital that there is lineage between the AML/KYC policy, data requirements, underlying processes, and technology to allow for not only the implementation of compliance with the policy but also the impact a change in policy will have throughout the bank’s AML/KYC ecosystem.

Another specific area of such improvement can be seen in the risk assessment and “decisioning’’ process. Banks must balance accepting customer risk with growing deposits; therefore, it is advantageous for the bank to define a decision process/workflow for customer onboarding and client refresh processes that are uniquely aligned based on key customer attributes and customer risk assessment models that can be adjusted based on actual/observed risk outcomes.

Our proprietary accelerators, which include a Policy Lineage Tool, provide the necessary traceability to a bank’s policies while determining the correct data elements and set of questions required to collect the KYC/CDD data and documents based on key customer attributes and risk level.



People and organization:

People make up an organization and that is ever more true with financial institutions where the bank’s growth can often be directly attributed to relationship management and properly offering products at key trigger points along the customer’s journey. Therefore, in order to drive profitability, high-cost resources should no longer have to dedicate a substantial amount of their time updating KYC/CDD data or performing highly manual periodic reviews.

Instead, KYC/CDD delivery centers with intelligent site-location strategies give firms access to deep talent pools at a lower cost and enable 24-7 delivery capacity (as required). By having a specific KYC/CDD delivery center, gaps can be bridged across the entire process, whereas before, many separate teams had to weigh in throughout the process. The centralization of certain processes with specialization of the employees’ skill set will continue to unlock efficiencies and greater returns.

Data, technology, and analytics:

The overall AML/KYC process should be driven by a data model approach with a critical focus on the lineage between data, policies, business rules, and technology. Banks must first create a data model/data dictionary by key customer attributes based on their policies that will become the master source of requirements and business rules. Furthermore, establishing clear lineage between a banks’ required data elements, as defined in their policy, and the questions a bank has a consumer answer when opening an account or refreshing his or her data, is critical for efficient and effective AML/KYC operations.

In addition, the collection of the appropriate customer data is both vital to addressing AML/KYC regulations and unlocking customer insights that can positively impact both product offerings and risk decisions.

By implementing the following KYC/CDD solution components, banks can enhance their overall customer experience, lower costs, and improve compliance with policy:

— Policy lineage tool: Automated rules engine that provides traceability to policy

— Case management solution: Case management tool that governs the case review and finalization process with audit trails

— Data aggregation service: Aggregates available structured and unstructured data from third-party data providers/web

— Self-Service Client Portal: An online portal for customers to update their information

— Intelligent automation: Machine learning and big data – enabled portfolio analytics

Process and services:

Banks must continuously monitor their customers throughout their entire lifecycle, with specific actions triggered during onboarding, periodic reviews, and event-driven reviews resulting from transaction monitoring, sanction alerts, beneficial ownership changes, or material news findings. It is imperative that the entirety of the AML/KYC operations are aligned and integrated to allow for efficiencies and to avoid remediation or rework, resulting from disparate legacy systems or disjointed processes.

The result of poor processes and services affects the bottom line drastically. Based on our experience, failing to align processes and services results in repeated customer outreach that would be deemed unnecessary by receiving 95 percent of customer submissions through bespoke KYC/CDD portals, specifically those that allow the customers to proactively perform their own profile maintenance. Additionally, banks should seek to employ a “search before”contact model by aggregating structured and unstructured data from third-party sources to reduce the amount of customer outreach required and improve client experience.

Our work suggests that it is advantageous for customers to use a portal as a single destination for KYC/CDD data collection. Additionally, we suggest banks provide customers with access to a customer support team, or even a digital assistant, with the ability to launch a real-time view of a customer’s progress on the portal to aid him or her in updating his or her own information, thus eliminating unnecessary customer outreach and improving data quality.


Next stepsBased on KPMG’s recent survey and our experiences, we have identified three maturity stages for financial institutions across the four focus areas of the KPMG Know Your Customer Navigator as summarized below. In our experience, it has become evident that most financial institutions are in the evolving stage of their journey and are seeking ways to become transformational.

Fundamental:

— Policies aligned with regulations

— Policies are well communicated within business lines

— Poor execution of policies via operational processes

— Significant manual tasks

— Limited, disjointed set of tools/technology

Evolving:

— Policies aligned with regulations


— Sufficient execution of policies via operational processes

— Leveraging technology to limit manual tasks

— Clear roles and responsibilities, appropriate spans of control

Transformational: — Policies aligned with regulations and decomposed into a set of business rules with traceability


— Strong execution of policies via operational processes

— Ability to easily understand the impact of a policy change on the operations

— Leverage delivery centers for effective operations

— Clear roles and responsibilities, appropriate spans of control

— Robust set of tools (e.g., data aggregation) and integrated technology



How KPMG can helpMaturing your AML/KYC operations from evolving to transformational can be accomplished by conducting a maturity assessment, analyzing tailored diagnostics, and developing a roadmap. We developed the KPMG Know Your Customer Navigator to assist in the journey.

Tailored diagnostics

Conduct a KYC/CDD maturity assessment using the KPMG Know Your Customer Navigator to provide initial insights into your issues and opportunities, supported by peer group comparables. A key deliverable for the maturity assessment is a heat map of your AML/KYC operations categorized by the main sections of the KPMG Know Your Customer Navigator:

— Policy and risk management

— Process and services

— People and organization

— Data, technology, and analytics

Results of the maturity assessment are then used to drive deep-dive diagnostics in priority areas. Examples include:

— Policy lineage review: structured analysis to understand the lineage between policy/business rules and underlying data and technology

— Customer experience diagnostics: wide-ranging customer journey mappings and complaints root cause analysis to identify areas where the customer experience can be enhanced

The maturity assessment and associated diagnostics will drive the development of a detailed transformational roadmap containing the following key deliverables:

— Opportunities register: a detailed set of improvement opportunities, highlighting “quick wins”

— Business case and transformation plan: developing the business case and a baseline transformation delivery plan

Maturity assessment Roadmap


Case study

A KPMG bank client was required to implement new AML/KYC policies which forced the bank to complete a gap assessment of its current state AML/KYC operations for onboarding new customers to operationalize their new policies.

KPMG conducted a maturity assessment aligned with the focus areas depicted in the KPMG Know Your Customer Navigator and developed a high-level future state and transformation roadmap of five business lines, two KYC/CDD systems, and over 20 onboarding systems. Utilizing the completed assessment, the business lines were able to identify the gaps and develop future-state processes, along with defined control points. KPMG helped the bank operationalize their new policies, working with them to define and track the lineage between detailed business requirements, technical design, and enhancements to the KYC/CDD systems. Within two years, KPMG supported the implementation of the new systems, allowing the bank to ultimately reach compliance on time and on budget, thus unlocking a 25 percent savings to the business lines.



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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name and logo are registered trademarks or trademarks of KPMG International. NDPPS 850428

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.


Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.

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Navigating toward more effective KYC/CDD operations · collection process by leveraging clearly defined data requirements and business rules — Reduce customer outreach by aggregating