As a financial institution, how much does it cost to know your international business partners?
I can bet you’re about to say, ‘SO MUCH.’
To be honest, KYC gets trickier the moment you move beyond your borders.
Most organizations say it costs them a lot of employee hours and money to check and affirm the identity of a foreign-based partner. And even then, they still aren’t absolutely sure that they’ve mitigated all risks involved in dealing with the person.
This post aims to touch on a new concept called Legal Entity Identifiers and how it can help with businesses’ KYC practices.
What is KYC, and why is it so important?
KYC is a short way of saying ‘Know Your Customer’ or ‘Know your Client.’ It is a mandatory measure expected of banks and financial institutions to use in verifying the identity of their customers.
In other words, it is a measure put in place to ensure that a customer is who they claim to be.
In addition, KYC can also be a part of risk management as it helps identify the risk involved in transacting with individual persons and corporate entities.
Do I sound just about right?
Okay, now let’s look at the major challenges that come with traditional KYC practices.
5 biggest challenges faced by KYC Monitoring
- Time and money wasted on false positives
A false positive is when an alert is raised over the legitimacy of a customer. Say a customer’s name appears on the Political Exposed Persons (PEPs) or Sanctions list, a red alert may be raised.
When this happens, the bank is expected to investigate the customer’s KYC compliance. They are expected to screen the customer even deeper than they would a regular customer. Failure to do this may draw sanctions on them from the regulatory bodies.
Now, where the problem comes is that many a time, most alerts end up turning out to be false positives. In fact, in most cases, 75%-85% of the alerts are false positives.” But even at that, banks must still spend time and money investigating these people.
Truly, this is a grave waste of time and quality resources.
HOW CAN LEI NUMBER HELP WITH THIS CHALLENGE?
The legal entity identifier is like a chain that ties a legal entity’s business dealings together. With it, one can quickly verify the legitimacy of a person, their business and every history of transactions that can be traced to both.
Instead of spending weeks and lots of resources investigating a false positive, you can easily check up their LEI registration status on the Global Legal Entity Identifier Foundation (GLEIF) database to know all about them.
- Poor data sources
Financial institutions indeed have access to the best quality of data. But are all their methods infallible? I wouldn’t say YES.
Even when the data comes directly as legal business documents from the customers themselves, what’s the guarantee that they’re the original?
Oftentimes, there could be inaccurate data entry, human error, compromised data sources, and other factors in play.
In the end, this makes having a ‘False negative’ in the KYC monitoring process a great possibility.
Mind you, ‘False negative’ is when a financial institution fails to identify a sanctioned entity. When this happens, the bank faces fines, sanctions, and other disciplinary actions from the regulatory bodies.
HOW CAN LEI NUMBER HELP WITH THIS CHALLENGE?
The LEI code system is an internationally-regulated body, which means it is not controlled by one individual or a group of people in one particular jurisdiction.
Rather, it’s a global registration system, one which is based on the ISO 17442 standard developed by the International Organization for Standardization (ISO).
As such, you can trust the information presented on its database.
- Inadequate information for fraud mitigation
One of the primary aims of KYC monitoring is fraud and money laundering mitigation. Unfortunately, it may be near-impossible to completely cut out these diseases without adequate information on customers.
As stringent as bank policies and mandates are, some customers still find ways to commit fraud and launder money without being caught.
HOW CAN LEI NUMBER HELP WITH THIS CHALLENGE?
The basis of Legal Entity Identifier is in the mitigation of fraud. That is the main reason for which it was designed. And so far, it’s been quite effective at that.
At its core, LEI numbers will provide information including shareholders of entities, history of transactions, history of fraud, or wrongdoings, etc.
- KYC process is cumbersome
It needs mentioning that KYC monitoring is a really cumbersome endeavor. There is just too much to investigate to affirm that a customer is really who they claim to be.
Oftentimes, organizations have to check a customer’s credentials at 4-5 places before they can reach a satisfactory conclusion. And in extreme cases, evaluating multiple data sources may not even be enough to reach the answers you need.
The result of this is time and money wastage – two resources that could be channeled into more profitable endeavors.
HOW CAN LEI NUMBER HELP WITH THIS CHALLENGE?
LEI can be viewed as your one-stop verification check for all things KYC-related. Instead of looking at four or five information sources, you can simply make the LEI code system your benchmark for checks.
You can trust its judgment since it’s internationally backed by the International Organization for Standardization (ISO).
Additionally, since it connects all the records of an organization and provides certainty of identity, it’s almost impossible to be rigged.
- Lack of information on new developments
Suppose a corporate organization appoints a new chief executive officer, the financial institution is expected to be alerted of this change. And thankfully, most organizations do.
However, most organizations don’t provide adequate background information on who the new CEO is. What’s his business history? How reputable or trustworthy is he?
Without this information, financial institutions have to deploy their own resources (time and money) to do the background checks.
HOW CAN LEI NUMBER HELP WITH THIS CHALLENGE?
Banks can solve this challenge by doing their KYC monitoring with a platform that delivers up-to-date information about business ownership. And one such platform is the LEI system.
With an LEI identity inspection, you can find up-to-date information about clients in real-time.
Most companies know the importance of registering their entities on the LEI regulatory systems. So you can bet that your customer will have a presence there, too.