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Why KYC and financial crime compliance matter
10 May 2021
Although the phrase ‘know your customer’ may seem insignificant to most people, it is of significant importance for banks. The process of knowing your customer, otherwise referred to as KYC, is what banks do to verify the identity of their customers, the source of wealth and funds, and the type of relationship they will have with the bank, either before or during a banking relationship.

Banks take the appropriate steps to have the reasonable belief that all customers who enter a formal banking relationship with them are who they say they are. This includes facts about the prospective or existing customers that enable banks to assess the extent to which the customer exposes the institution to a range of risks. These risks include terrorist financing and money laundering and financial sanctions issued by the EU, UN and US. Money laundering includes a number of predicate offences such as tax crimes, illicit trafficking in narcotics, human trafficking, insider trading, fraud and corruption.

The KYC process is a complex undertaking that involves the collection of documents which show proof of identity, establishing and verifying customer identity, and screening the identity information against political exposure, sanction lists, criminal lists, and unreliable customer’s lists. A bank must understand a customer’s profile and how they will be using their accounts, assess the risks of the customer’s profile, and monitor the transactions performed by the customer and ensure they align with expected behaviour.

By first verifying customers’ identities and intentions and then understanding their customers’ transaction patterns, banks are able to more accurately pinpoint suspicious activities. The importance of the process is not limited to the reputation of the bank and its shareholders but also to the stability of the wider financial services industry. It should as well be stressed that to know its clients is crucial for banks, not only because of regulatory obligations, but also to be able to support customers in the most appropriate manner and to provide them with the best services proportionated to their needs.

The increasing regulatory demands on banks have led to a sharp increase in costs as banks strive to strengthen their financial crime defences. Balancing a robust KYC and monitoring framework with core business objectives, competitive pressures and enhanced customer experience further complicates the cost outlook.

Banks continuously strive to implement cost-effective and risk mitigation measures in an effort to find an acceptable balance between the two. In recent years, many banks de-risked their customer book in an effort to reduce their risk exposure and associated costs. This has led to the termination of a number of customer relationships and a restricted list of customer categories considered to be within the bank’s risk appetite.

To be economically viable for banks to service specific categories of customers, fees proportionate with the customer’s inherent risk and span of their banking activities may need to be introduced. This is likely to stir controversy, however banks have an obligation to provide value for shareholders on the one hand and the public interest in safer banking on the other.

The real challenge at the end would be to transform financial crime compliance and the overall compliance requirements to drive a collaborative and mutually supportive relationship with customers, retain a competitive advantage for the bank, while being responsible bankers for customers.

This article was published on the Sunday Times of Malta - 9th May 2021.  Article was written by Anatoli Grech, BOV Chief Compliance Officer.

Any views, assumptions or opinions expressed in this article are those of the author. Issued by Bank of Valletta p.l.c., 58, Triq San Żakkarija, Il-Belt Valletta VLT 1130. Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry out the business of banking in terms of the Banking Act (Cap. 371 of the Laws of Malta).
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Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap. 371 of the Laws of Malta) and the Investment Services Act (Cap.370. of the Laws of Malta).