One of the biggest challenges banks and corporates both face is identifying their customers so they can comply with Know Your Customer (KYC) and other regulatory requirements. GTNews spoke with Know Your Customer Limited (KYCL) co-founder, Richard Barrett, at the Singapore Fintech Festival to find out more about the complexities of KYC and how a start-up has innovated to solve the challenges.
The fundamental challenge
The firm was started, Barrett said, after he encountered difficulties in sending money. When he tried to transmit money overseas from China for some clients, for instance, it was difficult to find a bank that would handle the funds because KYC was so challenging.
As a lawyer, he said to himself that “I know the law. There has to be an automated solution.” After an extensive search, however, he found that there wasn’t an easy answer. “We talked to banks. While certain companies were providing corporate information, none were providing a sufficient solution.” The processes he saw gave a layman’s response and would not have been sufficient for a bank, let alone a regulator.
To develop a solution, Barrett said “a few of us got together. It took longer to do it than we thought – two and a half years.” The process for developing it provides insights into both the complexity of the KYC process and the unusual steps the firm had to take.
The global process for KYC
While KYC and anti-money laundering (AML) laws may seem similar across jurisdictions, individual countries’ interpretations vary widely. Even within the EU, where there is a directive for 28 states, the interpretations vary. Moreover, even when the registries are electronic, their systems have often been migrated from paper-based forms and they keep the same formats. “You see vast differences between jurisdictions as to what is in their system and the layout of forms.” The variations caused challenges, especially when KYCL was trying to use optical character recognition (OCR) and other technology to enhance the process.
KYCL eventually ended up finding that it has to deal with about 3,000 jurisdictions globally, “We have 212 countries. In America, 52 states, plus counties and cities. China operates company registrations per province.” In addition, Barrett explained, there are different laws and practices in different countries, and different forms when you incorporate a company. The process, registration number format, incorporation certificate and other components are different in each jurisdiction. Countries also use their national language or several official languages. “Each jurisdiction had to be analysed to determine what documents, what AML laws, what key principal documents, are necessary to do AML. When that process was complete, we organised the access.”
Once all those processes were completed for finding out information about a company, KYCL turned to the personal side to check on the directors and shareholders of a company. “We found that KYC, personal investigations, data retrieval, and proving ID and verification, must be beyond the civil test balance of probability.” To solve the issues with personal identity, Barrett said “we got the people who have the patent for airport identification.” Similar to how airports take your photograph and fingerprint and verify other data, so too does KYCL’s system do detailed comparisons of individuals
The complex process for verification
When a bank wants to open an account for a company, then, it has the customer complete an application form. KYCL uses that information to check registries worldwide for the company’s name and registration number, and it reports back to the client.
The process becomes more complicated when there are chains of companies, as companies can be owned by other companies or by persons. Companies may also buy a shelf company and change the name. The bank needs the constitution, annual return, certificate of change of name, and potentially other documents that show who the directors and shareholders are. The system hops jurisdictions, pulls the documents for each one, and finds the owner. Eventually, it gets to where there are human shareholders and determines who needs to be verified for KYC or AML requirements. It obtains date-stamped documents to prove that the information wasn’t obtained many years ago.
KYCL next asks the bank to have its applicant provide directors’ and shareholders’ email address and mobile phone numbers, selfies, photos of their passports and sometimes proof of address. “We need to verify the persons who are identified,” Barrett explained. “The selfie is compared to the passport. The ID card is verified to ensure that it is valid. Then we move to checking the other data points. Those are done by a series of checks – electoral rolls, phone book entries, court cases, residential tax registers. If that all passes, we proceed to checks for UN sanctions, terrorist financing lists, known drug gangs, criminal convictions, PEP.” When all that is done, if there is a match, the company tells the bank what it found. It is up to the bank to decide what to do.
The collation of the company information is rapid, Barrett said, taking only about 15 minutes. The difficulty is in the human side, and getting people to send in the documents. If documents are wrong or missing, the bank needs to follow up.
Verifying the information about individuals often relies on pulling documents from registries, so KYCL staff or agents may need to go to registries to obtain documentation. The Cayman Islands and British Virgin Islands, for instance, only make public on their registries the fact that the company exists, its registered address, and its registered agent. “We have arrangements with the registered agents in those jurisdictions. When the person seeks to open the account, he’s told to email those registered agents with instruction to upload documents. We can then acquire it. If you’re trying to hide stuff, you won’t give that, and you won’t get your bank account.”
Another difficulty, Barrett said, is that registries in some countries are dinosaurs. “You have to physically turn up in the office, submit a handwritten form, come back days later. There is no way around that.” In some countries, the process can take five weeks.
While costs for KYCL’s services vary, Barrett said the fees usually work out to about one-fifth of a bank’s current cost. The fees can also vary depending on what the client wants, such as a social media investigation or an investigation of the directors. Perhaps more important as regulatory scrutiny has increased, though, is the quality of the data that that is provided.
While banks have been the main clients so far, Barrett said other companies are also starting to seek out their services. Universities have made requests to verify the credentials of current or prospective faculty members, for instance, and hospitals want to make sure that the doctors or nurses they hire have the qualifications they say they’ve obtained.
While KYC is complex, innovative technologies are clearly providing solutions that can make KYC or AML easier and help keep the wrong people away.