6 Events That Changed The Way We Do KYC in Banking

Know Your Customer (KYC) practices have undergone significant transformations due to various recent events. Learn more about the ever-evolving world of banking.

In the dynamic banking landscape, Know Your Customer (KYC) practices have undergone major transformations as a result of recent global events. We'll explore six transformative occurrences that reshaped KYC in finance. These events highlight KYC's vital role in mitigating associated risks. Join us in navigating KYC's evolution in a rapidly changing world.

What recent events have changed the way we do KYC in finance?

We’ll take a closer look at the following events to uncover the impact they have had on KYC in the financial sector:

  1. The fall of Credit Suisse
  2. The collapse of Silicon Valley Bank
  3. The war in Ukraine and Russia
  4. CEO Alison Rose resignation from NatWest Group amid scandal
  5. The rising rate of inflation
  6. Advancements in machine learning (ML) and artificial intelligence (AI)

1. The fall of Credit Suisse

The fall of Credit Suisse can be largely attributed to a series of damning scandals that have severely shaken its reputation and standing within the financial realm. These controversies, ranging from a disconcerting spying scandal to extensive cases of money laundering and tax evasion, have collectively eroded the institution. Credit Suisse Group AG has merged into UBS Group AG and will now operate as a consolidated banking group.

Of particular concern are leaks that have brought to light a staggering revelation: a significant cohort of the bank's clientele involved in heinous activities such as torture, drug trafficking, corruption, and pervasive money laundering. These revelations point to systemic failures in conducting proper due diligence, despite Credit Suisse's repeated assurances over the years to weed out questionable clients and illicit financial flows.

These distressing events act as a stark reminder to financial institutions worldwide, emphasising the pivotal role of meticulous due diligence in safeguarding against such risks. As the global financial sector navigates an era of heightened scrutiny and accountability, the need for comprehensive due diligence remains an essential cornerstone for preserving not only individual institutions' integrity but also the stability of the broader economic landscape.

2. The collapse of Silicon Valley Bank

The collapse of Silicon Valley Bank (SVB) sent shockwaves around the world, ranking as the second-largest bank failure in U.S. history, trailing only the notorious downfall of Washington Mutual in 2008. This dramatic event marked a significant turning point that underscored the inherent vulnerabilities lurking within the banking industry.

A crucial catalyst behind SVB's demise was its heavily concentrated customer base, predominantly comprising tech startups. While this focus initially appeared advantageous, it exposed the bank to an unprecedented level of risk. As the tech industry faced turbulence and disruptions, many of these startups encountered substantial challenges in securing additional financing from venture capital sources. The symbiotic relationship between startups and SVB turned adversarial, as a wave of withdrawals ensued, compounding the bank's financial woes.

A salient lesson emerged from this experience: the imperative to cultivate a more diversified and resilient customer portfolio, adopting a more circumspect approach and meticulously evaluating the risks inherent in each customer relationship. In particular, the assessment of liquidity risks comes to light as a means of insulating financial institutions against similar volatility that had wreaked havoc on SVB’s operations.

3. The war in Ukraine and Russia

In 2022, the beginning of the war in Ukraine led to unprecedented economic sanctions against Russia and its associates, which created a new regulatory landscape that challenged governments, enforcement agencies, and banks. Amid this turbulence, financial crime risk and compliance teams played a pivotal role in safeguarding banking operations and compliance processes. The strategic importance of Know Your Customer (KYC) protocols and adept risk management emerged, serving as protection against regulatory scrutiny and upholding banks' reputations.

Concerns about cryptocurrency enabling sanctioned oligarchs to move assets outside traditional systems led to stern warnings and sanctions from the US, UK, and EU. The intricate web of oligarchic shell companies, intertwined with crypto assets, exacerbated compliance challenges, compelling institutions to recalibrate strategies. The interplay of geopolitical dynamics, economic sanctions, and cryptocurrency stood as a reminder for banks to be proactive in their KYC practices and risk management.

4. CEO Alison Rose resignation from NatWest Group amid scandal

In July 2023, the CEO of NatWest Group Alison Rose resigned from her position after having admitted to discussing details about Nigel Farage’s bank account with a BBC reporter. The news was released that NatWest’s sister lender Coutts was to cut ties with Farage based on his political views, including his allyship with Trump and support for Putin, which go against the inclusive ethos of the banking group.

The breach of trust resulting from her discussion of sensitive customer information with a journalist marked a profound error, making Rose's decision to step down the only viable recourse in light of this breach.

Britain's Financial Conduct Authority (FCA) expressed concerns regarding NatWest Group and Coutts in response to allegations of account closures and breaches of customer confidentiality. NatWest initiated an independent review of the events, supported by the FCA, which underlines the importance of a comprehensive investigation. The FCA has emphasised that adequate resources and information are required to ensure a swift and thorough review.

Moreover, this debacle highlights a broader issue at hand, which is balancing customer transparency and fair treatment. The government, in a meeting with banking leaders, emphasised the significance of freedom of expression and condemned account termination due to political views. As British banking faces increased scrutiny and potential regulatory actions, it reinforces the role of robust KYC processes in maintaining compliance, transparency, and fair treatment of customers, while protecting banks from reputational and regulatory risks.

5. The rising rate of inflation

The year 2022 bore witness to a global phenomenon: central banks responding to spiralling inflation rates by implementing interest rate hikes. However, this manoeuvre triggered a domino effect, casting a shadow of economic hardship that both financial institutions and consumers found themselves grappling with. In this atmosphere of fragility, the propensity for criminal activity surged, exploiting vulnerabilities on multiple fronts.

The euro area stood as a vivid testament to these challenges, its economy profoundly impacted by the energy crisis arising from the Ukraine conflict. This nexus of factors precipitated a marked economic deceleration, leaving financial institutions to navigate treacherous terrain.

Interestingly, despite the complexities, banks discovered a potential silver lining within the realm of profit margins. Inflation typically augments these margins, yet the concomitant economic volatility led to a paradoxical need for cost-cutting measures. Amid this delicate balancing act, the enduring value of investment in Regulatory Technology (RegTech) emerged as a solution Banks strategically embraced digitalisation to streamline their compliance processes, effectively bolstering their defences against mounting cost pressures and intricate geopolitical circumstances.

6. Advancements in machine learning (ML) and artificial intelligence (AI)

According to recent data, for every dollar of KYC budget spent on expanding headcount, two were invested in technology for automation. This pivotal trend reflects a strategic transition towards precision and efficacy in KYC with automation emerging as the potential solution. Such an approach not only addresses challenges like cost savings, backlogs, and talent shortages but also emphasises the industry's commitment to harnessing innovative tools for navigating the evolving landscape of financial compliance.

What can financial institutions learn from these events?

In a rapidly evolving regulatory landscape, comprehending these transformative shifts is imperative for financial institutions to thrive. Adapting to these changes not only ensures compliance but also paves the way for seamless customer interactions.

The FDM AML-KYC PODs services are an effective solution to helping your financial institution mitigate financial risk and crime, and tackle the changing landscape head-on. Our clients gain access to a diverse team of highly-trained consultants who are agile and adaptive, ready to provide a long-term solution to your business challenges and keep on top of all regulatory changes as and when they occur.

Are you ready to future-proof your KYC  processes and mitigate financial risk for your institution? Get in touch for more information about FDM’s AML-KYC PODs.

About AML KYC Team

The AML KYC Team offers expertise in relationship management, client lifecycle management, AML/KYC/CTF/Sanctions and Financial Crime Risk to help our customers address and mitigate the risks associated with projects such as operational excellence, sustainability, and retention. Our 4 S capability combines Skills, Scale, Speed-to-Market, Surge. Our client approach is flexible and adaptive to current and future needs. Our expertise covers all types of business segmentation from Investment Banking to Wealth Management, Commercial to Retail, across all industry sectors (Financial proper, Insurance, Government, Not-for-Profit, Gambling, High-Value) for remediation, reviews, mergers and acquisitions, backlogs and data management. 

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