The recent surge of sanctions against individuals, companies and government entities in response to Russia’s invasion of Ukraine has created extraordinary pressures on financial institutions worldwide to re-examine and re-engineer their Know Your Customer (KYC) and Anti-Money Laundering (AML) processes to make them more effective, more efficient, and more automated.

The need for automated KYC processes

The challenges KYC processes face are increasing on multiple fronts. Regulators and government investigators are dramatically increasing their enforcement efforts. Sanction-enforcing activities like the seizing of yachts and real estate holdings are daily headline news. Individuals on sanction lists and their associates are working furiously to obfuscate all evidence of their financial assets and other holdings, using shell companies, cryptocurrencies, false identities, and other tactics.

There has been growing pressure for several years to bring greater transparency to the issue of ultimate beneficial ownership (UBO) and to restrict the use of shell companies as a tactic that can be used to facilitate money laundering, fraud, and other illegal activities. The UK and European Union countries have mandated the creation of ownership registries, and in 2021, the U.S. Congress enacted the Corporate Transparency Act. FinCEN has also begun the rule-making process to define exactly how the law will be implemented and enforced.

Sanctions and improved KYC

In a world of sanctions, these questions of beneficial ownership are more critical than ever, both at the beginning of any new customer relationship between a financial institution and a person or a company, and as an ongoing relationship that must be monitored over time.

Thankfully, a significant majority of bank customers are relatively low-risk. They are not violating the laws or hiding their true owners. But doing the necessary KYC monitoring of these low-risk customers is often a resource burden.

The benefits of an automated KYC approach

Adopting a more automated KYC approach through the use of advanced analytics can dramatically reduce the resources required for KYC monitoring, especially for the 70% to 90% of customers that are considered low-risk. The explosion of available data that can be mined for KYC monitoring now makes this possible. KYC teams can monitor changes in corporate ownership and other key factors and metrics in real time, getting alerts when changes occur, updating risk models, and deciding what changes need closer review. Ownership data is now commercially available on more than 250 million companies worldwide, according to major data providers.

The nonprofit group Transparency.org advocates for increased ownership transparency as a means to fighting corruption:

Public registers of beneficial ownership were unthinkable a decade ago, but [their positive] impact to date makes a strong case for global adoption.

In 2016, the United Kingdom became the first country to set up a public register of corporate beneficial owners. The EU followed in 2018, when its updated anti-money laundering directive required EU member states to establish publicly accessible registers of beneficial ownership. Luxembourg was one of the first countries to follow through, making its register public the following year.

Although more countries are establishing ownership registries, each registry covers only corporate entities within that nation’s borders. Advanced IT solutions are needed to consolidate data from multiple sources and identify shared ownership across geographic boundaries.

How advanced technology is improving KYC automation

Entity Resolution and graph analytics functionality enable KYC teams to identify any links between customers or potential customers and other entities (people, organizations, companies, watch lists, sanction lists, etc.) Any links that would impact a customer’s risk profile can be identified upfront, and then any changes in that customer’s profile can be automatically updated on an ongoing basis.

Based on current world events, the momentum on this issue is growing. As more forward-thinking compliance team leaders move to pilot and implement automated KYC monitoring – especially for low- to moderate-risk customers – KYC teams are being freed up to devote more of their efforts to higher-risk customers. Amid the challenges around sanctions and beneficial ownership, this is more vital than ever.