Emerging market opportunities bring with them a new level of KYC risk – it is important that financial institutions identify and understand the associated due diligence challenges.
Businesses are expanding their reach and exploring opportunities in new territories as never before. That is not surprising, when you consider that 70% of world growth is expected to come from emerging markets by 2025.
Populations are rising and the ratio of those working to retirement means a growing customer base, especially for high-tech products and services.
In China, the bond market is predicted to double in size from the current US$9 trillion over the next five years. That will make it bigger than Japan’s and second only to the United States.
But all these opportunities come with a new level of risk and fresh set of challenges.
Language barriers, depth and breadth of information and operational efficiency can make it harder to on-board counter-parties (customers).
And without conducting enhanced due diligence (EDD), reputations and revenues could be at risk should companies, unknowingly (or knowingly) conduct business with individuals or entities engaged in criminal activities.
What parts of the KYC compliance program should be a priority?
I would prioritize reliable data, i.e. ‘golden sources’ of accurate verified data.
Screening utilities can also reduce the KYC compliance burden without negatively impacting the client on-boarding experience.
I think the automation of due diligence processes to reduce the burden of manual processing and duplication without compromising on compliance or risk is also key.
How does EDD reporting provide depth for better understanding customers?
The greatest risks in KYC and AML compliance come from high-risk or high-net worth customers and large transactions.
That is why it is appropriate to use EDD for those customers and transactions to provide greater detail and depth than would be the case with customer due diligence (CDD).
Regulators also require a higher degree of evidence that EDD has been undertaken and the collection of more detailed information, all of which has to be documented in detail.
In order to provide the required assurance, both internally and externally, EDD is likely to prove much more of a burden on the organization in terms of cost, time and effort.
This is particularly true in emerging markets where the costs of undertaking due diligence to the necessary level of detail is likely to be significantly greater than in advanced markets.
It is therefore vital to ensure that the segmentation of new and existing clients into CDD and EDD compliance regimes is robust and reliable.
The segmentation also needs to be regularly monitored to ensure that changes in customer profiles adequately reflect the level of risk assigned to the customer.
When identifying an EDD vendor, what criteria are most important?
Reputation is probably the most important criteria because you are outsourcing an important element of your compliance risk management to a third party.
How reliable are their processes and procedures in ensuring the accuracy of the identity information that they obtain on your behalf?
Are you seeking a global solution or are you adopting a country by country model? The answer determines the importance of a global footprint in making your decision.
A lot will also depend on the likely number of customers requiring EDD and future growth in those numbers when assessing the capability and capacity of the third party vendor.
Emerging markets webinar: can you mitigate KYC risk?
For further insight into KYC risk mitigation within emerging markets, watch the recording of the Thomson Reuters webinar recorded on 19 September where I was joined by:
James Swenson, Global Head of Proposition for Risk Managed Services
Pete Sweeney, Asia Editor Reuters Breakingviews