Chapter 5 the kyc utility

Chapter 5
The KYC Utilities
This presentation file is prepared in accordance with
Chapter 6 of the text book
“The presentation Slides for Teaching FinTech”
Website : https://sites.google.com/site/quanrisk
E-mail : quanrisk@gmail.com
Copyright © 2020 CapitaLogic Limited

Declaration
 Copyright © 2020 CapitaLogic Limited.
 All rights reserved. No part of this presentation file may be
reproduced, in any form or by any means, without written
permission from CapitaLogic Limited.
 Authored by Dr. LAM Yat-fai (林日辉),
Director, CapitaLogic Limited,
Adjunct Professor of Finance, City University of Hong Kong,
Doctor of Business Administration,
CFA, CAIA, CAMS, FRM, PRM.
Copyright © 2018 CapitaLogic Limited 2

What is KYC?
Kill Your Cash
Kill Your Card

KYC in the context of AML
AML
regulations
Know your
customer
Basic
CDD
Enhanced
CDD
Ongoing
monitoring
Know your
transaction
Sanction list
matching
Transaction
monitoring
Specious
transaction
Investigation
Reporting
Risk based
approach
Record
keeping

Basic customer due diligence
for corporations
 Customer identity
 Identify verification
 Relationship objective
 Beneficial owner
 Watch list searching
 Risk assessment

Enhanced customer due diligence
 More customer information
 Beneficial owner
 Purposes of the account
 Business background
 Employment background
 Family background
 Estimated net worth
 Source of wealth
 Source of funds
 Referees
 Most of the information cannot be verified

Ongoing monitoring
 Regular sanction list matching
 Search all customer names in updated sanction lists at
least weekly using computer applications
 Regular re-CDD
 Regular customer Once every three years
 Higher risk customer Once a year
 Event trigged
 Suspicious activities indicators
 Highlighted by the regular sanction list matching
 Supervisory initiatives
 Reported by media

Impacts from KYC
 Costly to the FI
 Offensive to customers
 KYC standards vary among countries
 KYC practices vary among FIs
 One customer submits documents to many FIs
 One customer KYCed repeatedly by many FIs but
only one FI will get the customer

Peer-to-peer KYC model
Many customers
Many FIs

KYC utility model
Many customers
Many FIs
One KYC utility

Major advantages
 To customers
 One unified submission
 To FIs
 Minimize confrontation with customers
 Shared KYC costs
 Set defacto KYC standards
 Outsource record keeping
 To both
 Speed up the KYC process

Adverse selection
 Higher revenue customers are KYCed by a FI
internally
 KYC information is restricted to one FI
 Lower revenue customers are referred to the
KYC utility
 KYC information is shared by many FIs

Prisoner's dilemma between banks
Bank A
KYC utility Internal KYC
Bank B
KYC
utility
(0.5, 0.5) (1, 0)
Internal
KYC
(0, 1) (0.5, 0.5)

Agency problem
 Higher KYC standards
 Less customers to submit KYC records
 Less FIs to use the KYC utility
 Lower revenues
 The revenue results a pressure to lower the
KYC standards

Prisoner's dilemma between
KYC utilities
Utility A
Higher
standard
Lower
standard
Utility B
Higher
standard
(0.5, 0.5) (1, 0)
Lower
standard
(0, 1) (0.5, 0.5)

Conflict of interests
 Customer profile improvement service
 To advise a customer how to make cosmetics to his
profile in order to
 Avoid red flags
 Enhance customer reputation
 Meet the KYC utility’s work flow
 FIs will no longer receive factual assessment
from KYC utility

Market failure of KYC utilities
 The open market is the smartest
 The open market will improve its effectiveness and efficiency in order
to maxima the profit
 A too smart open market will damage the interest of general public
 Initial objective
 To deliver higher quality KYC results at a lower total cost to the economy
 Ultimate result
 Lower quality customers employing cosmetic service will pass in KYC
 Higher quality but honest customer will fail in the KYC
 Market failure
 KYC utilities kidnap the entire KYC market
 Government intervention
 Financial regulator must strictly supervise KYC utilities

Regulatory concerns
 What, who, when and how to supervise?
 Must all KYCs be performed by KYC
utilities?
 Which party pays the cost?
 How to solve the cross-border issues?
 Will regulation discourage international
investors?
 How many KYC utilities?

Other issues
 Customers in developing countries have strong
hesitation to provide private data to KYC
utilities
 Any Chinese wall between FIs and KYC
utilities?

Major KYC utilities

Source: Celent report 2015

Markit/Genpact kyc.com
 Initiated by
 BNP Paribas, Citibank, Deutsche Bank, HSBC,
Morgan Stanley and UBS
 Now also subscribed by
 Bank of America, Merrill Lynch, Bank of Montreal,
Wells Fargo Securities, Standard Chartered Bank
 Operated by
 Markit
 Genpack

 15 major financial institutions
 3,100 large corporate KYC profiles
 140,000 other KYC profiles
 350,000 documents

Thomson Reuters Ord ID
 23 major financial institutions
 200,000 KYC profiles
 Huge number of documents

Thomas Reuters Ord ID
 Data Management Review Award 2015, A-
Team Group
 Best KYC and Client On-Boarding Solution Award
2015
 FTF News Technology Innovation Award 2015
 Best Operational Risk Management Solution
 Best AML/Anti-Fraud Solution

Certifications
 International Standard on Assurance Engagements 3000
Type II
 Association of Banks in Singapore standards and controls
for outsource service providers for Financial Institutions
 Audited by PricewaterhouseCoopers
 ISO / IEC 27001 on Information Security Management
 ISO9001 on Quality Management
 SOC2 on security, availability and privacy for its data
center operations

Major acquisition
 Thomas Reuters acquires Clarient Global LLC,
a major KYC utility in early 2017
 DTCC, Barclays, Credit Suisse, Goldman
Sachs, JP Morgan, BNY Mellon and State
Street as major participating FIs

Reuter’s ORG ID implementation
in South Africa
 Managed KYC utility launched in July 2016
 Challenged by high cost and complexities of the KYC process
 Time to on board increased by 20% annually
 Corporate customers demand fast onboarding, common KYC standards
and data security
 Cost increased by 18% annual
 Average cost on KYC USD 30 Million per bank
 43% South African banks struggle with volume and complexity of
regulations
 45% South African banks face lack of qualified time and resource for
KYC
 Driven by Barclays Africa, Rand Merchant Bank (a division of First
Rand Bank), Standard Bank of South Africa and Thomson Reuters

KYC utilities inter-connect
Blockchain
DLT

Chapter 5 the kyc utility

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