Know Your Customer (KYC) Compliance Guide for EU Banks

In continuation of our series on Know Your Customer (KYC) across the globe, we turn from KYC in the U.S. to KYC in the EU.

If there is one consistency in KYC world-wide, it is that regulations, costs to implement and conduct operations, and fines continue to increase.  Since 2012, when several major global banks were hit with substantial fines, a great deal of focus has gone to increasing regulation around KYC and Anti-Money Laundering (AML).  According to Rob Wainwright, the Director of Europol, “the banks are spending $20 billion a year to run the compliance regime” yet only 1% of criminal proceeds are seized every year in Europe.  Fines are also on the rise and predicted to top $400 billion by 2020 in Europe and the United States collectively.

What Does KYC Cover?

Know Your Customer or KYC is the process by which banks and financial institutions verify the identities of their clients and assess any potential risks of forming a business relationship with them. The goal of KYC is to prevent banks from being used, intentionally or not, for money laundering and other illegal activities. Know Your Customer processes include the collecting or monitoring of:

  • Identity documents and personally identifiable information
  • Cash financial transactions above €10,000
  • Individuals and entities established in third country jurisdictions
  • Transportation of cash or monetary instruments across borders

KYC in the EU

In 2015, the European Union and Council for the European Union passed one of the most sweeping legislative acts on Anti-Money Laundering (AML):  The Fourth Anti-Money Laundering Directive (AMLD IV).  The AMLD IV replaced the three previous directives and focuses heavily on Customer Due Diligence (CDD) and Beneficial Ownership.  Its articles included:

  • More specific descriptions of what actions constitute money laundering
  • Increases in Customer Due Diligence (CDD), enhanced CDD, and simplified CDD requirements and guidance
  • Detailed requirements for identification and Enhanced CDD of Beneficial Owners
  • A requirement to collect and hold Beneficial Owner information, as well as communicate it to a central register, accessible to authorities and EU Financial Intelligence Units
  • Increased CDD procedures on a Politically Exposed Person (PEP) (a person who is currently or was entrusted with prominent public functions), as well as on a PEP’s family members and close associates
  • An enhanced risk-based approach and risk management systems to determine whether the beneficial owner or customer is a PEP
  • A decrease in the cash threshold of transactions that require enhanced CDD to €10,000 from €15,000
  • Expansion to include other institutions and individuals that are involved in financial activity, such as the entire gambling sector and legal, tax, and audit professionals, while participating in financial transactions

European Member States were required to implement the new directives into national law by 26 June 2017.

On 9 July 2018, the Fifth Anti-Money Laundering Directive (AMLD V) was approved.  The directive was proposed in the wake of terrorist attacks in the EU in July 2016.  Heavily-focused on Beneficial Ownership, the AMLD V includes measures to:

  • Increase transparency on the real owners of companies and trusts
  • Make public the Beneficial Ownership registers for legal entities
  • Improve the access of Financial Intelligence Units to centralized bank registers
  • Interconnect the national registers on Beneficial Ownership to facilitate the sharing of information
  • Introduce new criteria, including Beneficial Ownership transparency, for assessing high-risk third countries
  • Include in the European Commission’s list of high-risk third countries any third countries with low transparency on Beneficial Ownership, no sanctions, and those that do not exchange information
  • Apply the rules to entities that provides services related to virtual currencies and pre-paid instruments

Member States are required to comply by 10 January 2020.

How EU Banks can Build a KYC Program

There are two primary components for building a KYC program: the Back Office, which is the system that banks use internally to manage customer onboarding and review documentation, and the Front Office, which is the experience that customers have when submitting and verifying application information like name, address, workplace, income, etc.

While most banks have a Back-Office system in place, it’s actually the Front Office experience that is most impactful for improving and streamlining customer onboarding. As we detailed above, recent regulations further increased the burden on customers to provide information, especially around beneficial ownership, making the onboarding process even longer. The longer and more burdensome an application process, the higher the risk of attrition, making it even more important for banks to build focus on a great onboarding experience.

At Avoka, we specialize in digitizing and automating the front office and KYC experience for banks through a six-step process:

  1. Rapid Time to Market: By leveraging re-usable components, real-time design reviews, and the ability to quickly build proofs of concept, a KYC process can be designed and implemented within days, instead of weeks or months, with Avoka.
  2. Adaptive Forms: Avoka Transact’s adaptive forms can be customized to ask for information dependent upon previous answers, significantly streamlining the amount of questions needed to ask customers during the onboarding process.
  3. Mobile Responsiveness: Avoka Transact’s forms were built to “Design Once, Deliver Everywhere”, which means you can spend less time worrying about how your forms will display across different device sizes and browsers.
  4. Flexible Integration to Existing KYC Systems: Avoka integrates with a wide range of partner solutions as well as systems of record that can be used to deliver and receive customer data from KYC databases.
  5. Loose Coupling with Back Office Systems: Avoka Transact is a customer engagement layer that pushes updated customer records to the bank only once the package is complete, which means no changes or release cycles to the bank back office systems of record.
  6. Security, Privacy, and Local Hosting: Avoka Transact meets the most stringent requirements for security, encryption, personally identifiable information (PII) and hosting location.

The Success of a Top Global Bank

A top global bank was facing several challenges related to their processes for updating and validating KYC information on all business customers.  Feedback from customers indicated that they found the process to be laborious and time consuming.

In addition to the amount of time required to complete the information request, customers were asked for the same information multiple times and questions that the customer believed the bank should already know.  In short, customer dissatisfaction was high.  In addition, their process was considered to require more effort than competitor banks.

The bank also found that, as the cost of compliance increased, a number of customer segments and types were becoming less commercially viable.

By teaming with Avoka, the bank launched an enhanced, digital customer experience.  Data was pre-filled for the customer, reducing the time required to complete the information.  Avoka’s omnichannel solution increased convenience by enabling customers to complete the information from any device.

The new process improved operational effectiveness and reduced compliance cost.  Both the time to review a case and the cost per review decreased to 30% of the previous average.

Read the full story here.

Stay tuned for our next blog in the series to learn about KYC in Australia!If you are in the process of building a KYC process for your customers, contact us today to learn how we can help!



Lisa Adams