Co-Authors: Kurush Irani, Vice President, Solutioning and Transitions Leader – BFSI & Vaibhav Dubey, Assistant Vice President – BFSI
A rapidly emerging trend in large banks for their AML operations is the trend towards centralization and setting up of global shared service centers for AML. A recent white paper from us has pointed out quite rightly that the first step in the roadmap has to be the design of a global KYC template.
That set us thinking. The idea is very powerful and clearly a key enabler to the success of the centralization initiative. The first step here is listing the norms themselves. In all these years of working in AML operations, we have seen a method that according to us is the best practice in the field.
Some European headquartered banks set global minimum standards that enable KYC due diligence to be conducted across multiple regions based on the FATF or the EU 3rd Directive requirements. They then design add-ons for jurisdictions with specific additional requirements – for example to support the Patriot Act in the US or Asia-specific documentation requirements.
The implementation may pose some unique challenges though – especially in developing countries in Asia and Africa. This is especially critical for large banks as their major growth drivers happen to be the BRIC countries, large parts of which still fall under the developing status. Let’s take the two cornerstones of KYC – verification of the identity and address. While personal identity also has major issues, many countries have taken up national ID projects – most notably by China and South Africa earlier and recently India and Brazil – and there seems to be a way ahead.
Verifying the address though is a different level of challenge altogether. Strict compliance with the requirements would exclude millions of people in developing countries. Simply put the requirement to record and verify a client’s residential address does not match well with the fact that a third of the population do not have formal residential addresses, and that close to half of the population do not have the means to verify whatever address they may have cited. Not just that, the value of recording a residential address is limited in a society with high levels of internal migration.
This implies that banks would need to formulate context-sensitive rules that would still meet the objectives of the international AML standards. In this case, the bank has limited means of expanding its customer base. Here it makes sense for the bank’s AML compliance staff to have clarity on the degree of latitude that each country’s regulations allow within the broader FATF framework – for example – the RBI in India allows the Aadhaar as a KYC both for identity and address for low frills accounts.
Finally to conclude, there is a clear need for appropriate interpretation and enforcement of the FATF recommendations but care should be taken to understand the potentially negative impacts on a large section of the population. Many of them would be socially and financially vulnerable, or dependent on the informal sector. This is especially important as they also happen to be the targets for financial inclusion in developing countries.
Come speak with Genpact about this and other AML issues at our upcoming 2nd Annual Financial Crime & AML Compliance Breakfast Briefing in New York on July 18th.