The first thing that comes to mind when one thinks of know-your-customer (KYC) initiatives is the complexity around anti-money laundering (AML) regulations. Generally, the more one can reduce complexity, the better. When it comes to KYC this boils down to reducing the amount of employee time spent on such tasks in order to free people’s time for more productive work. Recent intelligence from KPMG estimate the amount that larger financial institutions spend on their AML screening alone has risen at an average rate of 53%.
KYC is no longer about verifying and monitoring customers of the financial institution (FI) but also suppliers that provide IT solutions that touch the FI’s infrastructure (and thus their customers) called know-your-suppliers (KYS).
Entity and Name Match Duplication
False positives are cited as a major concern. For example, in a typical financial institution conducting know your customer (KYC) screening, typically 30% of the alerts that they remediate are false positives. Controlling for this can minimize the hassle of checking. Does the entity name match the location listed? How about cross checking it with the listed named officer? Data aggregation helps to iron out false positives. The higher the number of quality sources linking to the same entity result, the higher the probability of quality.
Businesses set up entities all the time in different jurisdictions to take advantage of opportunities. And appropriately, in a recent KPMG survey, the no 1 issue cited in maintaining a risk based approach was identifying complex ownership structures.
The problem is that sometimes these entities are not listed as a subsidiary of a parent company. Thus it can be difficult to connect branches to the headquarter. For example, take Apple Inc. It is listed as a Delaware Inc, yet operates in California under a foreign entity. Nest Lab Inc, while listed under its Delaware headquarters and with a foreign entity in California, has many state branches but no references in the registry to Google Inc, its parent company. These scenarios are just as common with private and smaller companies usually with even less of an obvious connection between entities.
Unique Entity Name, Same Board Member(s) Owners
The nature of private companies and their unconventional market entry and growth path, mean that newly set up branches may involve a different entity, a new market proposition and a completely unique name. Often opportunities occur through a non-listed acquisition. This causes issues of linking a company to the parent. Non-disruptive market entry may be easier to spot if there is a news event. Another issue is when the new entity is legally completely unrelated but connected through similar board members. Such deviations from capital market norms mean that KYC or KYS in this case is onerous especially in the absence of predictive analytics technology support.