Experts’ view by EY Luxembourg: Drivers for KYC/AML digitisation

Experts’ view by EY Luxembourg: Drivers for KYC/AML digitisation

Patrice Fritsch is a Principal in the Consulting services at EY Luxembourg. He serves clients in the financial industry including Private and Retail Banks, Investment Funds, Private Equity, Insurance companies and Fintech. Recently, Patrice shared with us his expert’s view on the key drivers for KYC/AML digitisation, in particular, digital onboarding.

At the beginning of a new relationship between a financial industry professional and a customer, formal verification of customer’s identity is essential. KYC (know-your-customer) is the foundation for many activities aiming at fighting financial crime, as well as providing a better customer experience. While this process required the handling of paper documents and validation by a natural person of the professional, there is nowadays a growing need for digital registration and validation of customers.

The CSSF Regulation No 20-05 of 14 August 2020 amending the CSSF Regulation No 12-02 clarifies the regulatory basis for the development of digital customer onboarding. The regulation stipulates that “acceptance of a new customer with a low ML/TF (i.e., money laundering / terrorism financing) risk profile, according to the risk-based approach as implemented by the professional, may be carried out based on an automated acceptance process which does not require the intervention of a natural person for the professional, so as to constitute an efficient and reliable alternative to the validation by a natural person of the professional. This process shall be configured and tested beforehand and regularly reviewed by the professional to analyse the robustness of the process. This process shall be in line with the AML/CFT policies and procedures of the professional and with the instructions to be issued by the CSSF.

The stakeholders encouraging digitisation of onboarding processes at financial institutions include the financial institutions themselves, their customers, technology providers and supervisors. Those stakeholders will drive digital transformation in five key areas.

#1 Financial crime controls need to keep the pace with innovation

Whilst individuals and companies moved to digital and interconnected solutions, vetting of customers and ensuring compliance with regulatory requirements need to take these changes into account. Therefore, for many financial sector professionals, there is a need for implementation of new processes and procedures allowing data digitalisation. This will also lead to reduction of risks and to allow for efficiency gains.

#2 Meeting Financial Crime Compliance obligations

Part of the stakeholder struggle stems from the increasing pressure on cost cutting and a legacy of inefficient technology and operations. Systems and documents digitization allowing fast and complex searches is an asset.

To tackle the financial and operational burden of such a transformation, many institutions use external advisors and Fintechs that offer the most up to date solutions.

#3 Ever complex but improving regulations

The incentives also come from the financial supervisors requiring financial sector professionals to review and improve KYC processes, policies, tools and setups, aiming at providing better security and convenience to customers.

The CSSF Regulation No 20-05 of 14 August 2020 amending the CSSF Regulation No 12-02 clarifies that authorized financial services providers may verify the identity of a customer via electronic identification means that are secure, recognised and approved or accepted by the relevant national authorities.

#4 Fragmented information and proper risk assessment and monitoring

Fragmented and unverified information leads to inaccurate risk classification, costly and time-consuming reviews of customer profiles. Consequently, it can also create backlogs of files to be reviewed. Thus, there is a need to increase digitisation, process quality and accuracy with faster controls. More and more financial institutions are eager to shift checks and risk assessment from human to digitally-led processes; whilst keeping a human oversight over the digital process.

#5 Customers demand for an end-to-end user experience

Customers would welcome such a change as well, as paper-driven processes are now just not perceived in a positive way. It would mean fewer forms to be filled in, less physical paperwork and less repetition.

All those drivers are steering towards one direction, which is transformation of the customer onboarding into a digitally-led or assisted process. It would be an excellent first step in an attempt to meet the needs of financial institutions. Not without significance, it also means a more convenient process for the customers themselves.

Patrice Fritsch

Principal, Consulting

EY Luxembourg