KYC – Knowing your client or killing your client?

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Nearly all financial institutions understand the “know your client” (KYC) requirements. It is an important step developed globally to prevent identity theft, financial fraud, money laundering and terrorist financing. Knowing customers is an integral part of doing business.

In the case of individuals, the process ranges from proof of identification and address through to understanding a person’s source of wealth, business interests and family connections, especially if they have politically active family relations.

For businesses, the requirement is to understand the business, the entity structure, history, directors and shareholders, how the business operates and makes money.

How difficult can KYC be?

KYC becomes an expensive part of on boarding for any new client and each financial institution must do their own KYC. It cannot be outsourced to another entity. This has the result of making clients feel they are unable to move freely to other accountable institutions due to the KYC protocols and processes, which are considered to be painful by them.

Aggravating factors include the transience of the population who battle to find proof of address coupled with an inefficient postal service.

In my own household I have not been able to prove I live in the house since I have no accounts addressed to me at my address. They are all delivered electronically or to a post box.

One of the requirements is for original documents, which makes a mockery of the efficiency of digital scans. And why? Are originals that much harder to forge than scans? No!

Let us look at an example:

What happens after a robbery in which the originals are lost? I had a case where a Zimbabwe national had to return to her country in order to obtain new documents which took her three weeks. She could not transact without her original documents since the certified copies of such documents were refused by the bank as identification.

Another example:

Many people in South Africa have emigrated or work overseas often leaving families, active businesses and dependants in the country. Often a trust vehicle is used to service such entities with a local trustee ensuring payments are made to the relevant areas.

A maintenance order or business requirements may have penalty clauses which allow for payments to be made promptly to the receiving party, whereas an accountable institution may perceive this as a high risk transaction. One Trust administrator stated his biggest cost in terms of resources is the constant requirement in terms of KYC and FICA due to this situation. Who pays for his time: the client!

Is there a solution?

There have been calls for a National KYC system, but what would the accountable institutions do with such information? The data would have to be fully encrypted in the database for security but the accountable institution will probably need to store KYC data as well so that they can prove that they have done their due diligence with the present legislation.

This then gives rise to the question on how easy it would be to remove documents from this registry when they are out of date or need updating, or destruction? How would the client determine a choice over what data is revealed and to who? Companies such as credit bureaux would be happy to host such data bases and have had the experience in handling such data. The know-how is there, but legislation lags.

Digital documents can be signed or “stamped” as valid by authorities. This would be a possibility for reducing forgery risk. A simple step using today’s technology would be for issuing authorities to email digitally signed PDFs of bank statements, and other accounts instead of issuing the bits of paper that everyone relies on to verify an address. When you email these digitally signed documents to people, they can easily see that they actually originated from the issuing authority and have not been tampered with.

Most people have a digital identity which could be endorsed by trusted institutions (banks, government, and other businesses). By proving ownership of this account, you should prove the link between a physical self and online activities such as Facebook and LinkedIn. Additionally on these accounts friends provide that kind of endorsement to prove you are who you say you are.

In closing

We all want to be responsible citizens, but KYC is becoming the death knell in our ears. There comes a point when the populace says it is simply too much trouble to continually identify yourself and where you live.

Existing methods are easy to fraudulently reproduce. Criminals refer to them as a trivial inconvenience. They can reproduce fraudulent identity documents and acceptable verification of address documents.

The cost going forward for institutions that need this information, such as financial services and telecommunications companies, to manage the data capture and storage process must increase, which will have the end effect of costing the customer more.

Hopefully the Financial Intelligence Centre will give accountable institutions much clearer, more unequivocal guidance and allow them to use technology in this fight going forward.