Three KYC Blind Spots to Avoid When Screening and Reviewing Counterparties

Financial Counterparty Know Your Customer (KYC) and Anti-Money Laundering (AML) screening continue to be vital components of proactive compliance and risk management. Yet the goal posts keep shifting as regulators constantly adjust their requirements for effective compliance and frequently publish updates to sanctions lists.

In 2019 alone, Accuity recorded 242 changes to major sanctions lists including the United Nations (UN), European Union (EU), Her Majesty’s Treasury (HMT), and the Office of Foreign Asset Control (OFAC). OFAC in particular has continued to release updates at pace amidst the COVID-19 pandemic, supporting the age-old saying, “crime never sleeps.”

Within this fast-moving regulatory environment, KYC and AML professionals need to be aware of the blind spots that could jeopardise the financial crime screening process.

  1. Dynamic Risk Profiles

    Typically, screening financial counterparties occurs during their initial onboarding, followed by periodic review and remediation. The problem with this approach is the assumption that the counterparty’s risk profile remains static during the review cycle.

    This is not always the case. During this time frame, the counterparty’s risk profile could shift dramatically. For example, a change in shareholders to include a Politically Exposed Person (PEP) or even a sanctioned entity could significantly alter a counterparty’s risk profile and put your institution at risk.

    Monitoring for corporate actions that may affect the counterparty’s risk profile, such as a change in shareholders or an acquisition, can help mitigate this risk by triggering event-driven KYC reviews. This monitoring process ensures your counterparty’s risk profiles are informed by the latest information, enabling you to take remediation actions quickly and protect your institution from regulatory and reputational scrutiny.

  2. Changing Regulations
    Regulations are constantly evolving, and the number of sanctions in place continues to grow; for example there has been a staggering 40% increase in OFAC sanctions records in the last five years.

    With the backdrop of the pandemic and increasing geo-political conflicts, sanctions are getting complicated and it is important that you do a deeper Enhanced Due Diligence (EDD) on your counterparties rather than a mere name matching exercise against a basic data-set. The periodic KYC process leaves out key changes of regulatory information, exposing your institution to increased risk. When running a KYC review once every 12-36 months, you produce a snapshot of the counterparty’s risk at a single point in time. However, when performing on-going screening, you view the equivalent of a livestream video.

    Automated ongoing screening enables you to know exactly when your counterparty’s risk status changes with minimal cost and manual effort. Remediation can happen as the need arises and mitigate unnecessary risk between reviews. By leveraging continuous screening, you can closely manage your correspondent relationships in real time.

  3. Elusive Ownership Structures

    Regulators are increasingly requiring ownership structures to be defined down to even 10% of ownership to facilitate a more comprehensive understanding of who is behind your counterparty in some jurisdictions.

    This has proven to be a large feat for KYC teams, as gathering this information is complex and time consuming. Depending on the process in place, there is no concrete audit trail to track and demonstrate this research to regulators.

    Relying on a central repository of Ultimate Beneficial Ownership (UBO) information can combat this tedious process and ensure you remain compliant. By choosing a reference set fueled by the most accurate and regularly updated UBO data, you can be confident that you know who is behind your counterparty’s organisation when entering and reviewing your counterparties.

Accuity can help you navigate these blind spots by downloading our Avoiding the KYC Blind Spots whitepaper.