RegTech Intelligence

KYC compliance: automation and the human

In Megan Butler’s speech on creating a more effective approach to combatting financial crime, she posed the question “can technology help make your compliance processes slicker, more efficient and more effective?”.  For combatting anti-money laundering and developing an effective KYC framework, the answer is a resounding yes.

Firms that operate on a global basis will have to demonstrate a robust compliance framework to ensure that they have oversight and AML regulatory compliance in each territory.  But simply knowing which obligations to comply with poses a challenge.  In the US, for example, KYC obligations are scattered across different regulators, including IRS, FINRA, FinCEN, FATF, CFTC, NFA and SEC.  This melting pot of regulators enforcing KYC can be a headache for firms trying to differentiate between obligations.

What’s the solution?  Technology which cuts across wide sets of obligations must be at the forefront of any discussion, but there are fundamental changes to be made for such technology to flourish.  In previous articles, we have highlighted the lack of a common vernacular that is preventing technological solutions and standards.

A potential solution is automated regulation based on a common vernacular.  JWG have recently worked on a project to provide a detailed rule interpretation for KYC obligations across the EU and US.  Using our innovative RegDelta platform, we sifted through thousands of paragraphs of regulatory documents and analysed them in a clear and simple format.

This article will consider the automation process first, before expounding on human involvement in the compliance process after automation.

Is the future automation?

JWG utilised our industry leading platform and crowdsourced regulatory intelligence to undertake a four-step process:

  1. Scope the list of relevant legislative initiatives and source the full content set of documentation
  2. Utilise the semantic capabilities of RegDelta to semi-automate paragraph level analysis of the document set to isolate onboarding related obligations
  3. Develop a logical rule structure across all in-scope initiatives to organise the analysis
  4. Interpret the obligations to provide a digestible rule set that covers all the relevant obligations.

The number of relevant obligations across each regulation that we originally had to trawl through was intimidating.  JWG sourced the full content set of 174 documents across 16 legislative initiatives to isolate 8,488 paragraphs that impact the client onboarding process.  However, leveraging RegDelta expedited the process as the semantic rule base within the platform highlighted and collated paragraphs pertaining to KYC.

Basic research and cleaning up data for processing was much easier to automate than complex cognitive tasks, such as framing problems and making judgments.  It is the latter that will still be required even with an automated process.

Once we used RegDelta to collect and digest the various obligations, we had to make a judgment about which paragraphs were relevant for KYC and financial regulation.

The final stage was to perform an interpretation on the obligations to provide clear rules for KYC compliance.  For prescriptive regulations, this interpretation was simple, but many regulations are still principle based.

What were our key findings?

  • Classification of status as a “Reporting Financial Institution” under CRS involves 15 separate definitions which need to be checked, including defining ‘government entity’, ‘financial asset’ and ‘reportable jurisdiction’
  • Terminology used in UK and EU rules is similar, as the FCA handbook relies on MiFID and EMIR rules; however, US terminology is very different and there is a lack of consistency between rules
  • The US rule framework is more fragmented with boarding rules coming from a much wider range of initiatives.

Where from here?

Regulators are correct to advocate technological solutions to compliance problems, but it is integral to consider the changing role of compliance officers and how automation will increase the role of cognitive tasks and the judging of correct compliance strategies.

With principle-based regulations, there will still be ambiguities within the interpretation of the rules provided.  How do we ensure we get the correct interpretation?  Part of this process will be collaboration, where it must be guided by discussion between regulators, firms and vendors to generate greater understanding.

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