Don’t sleepwalk into a KYC arms race - Part 3: Risk based approach

This is the third in our series of blogs looking at why now the time has come to opt-out of the Know Your Customer (KYC) arms race.

Risk based approach (RBA) simply means that banks should perform the standard of KYC on each risk class of client that is appropriate. Nothing more and nothing less.  

Due to regulatory pressure, banks have tended to default to labelling too much of their correspondent bank (CB) portfolio as high risk. As this is a high risk classification of an already inherently high risk client group, this has led to a distortion in the amount of KYC resources applied.  

There is no point labelling everything as ‘high risk’ as it results in effort wasted where it isn’t needed. Banks need to apply a RBA to their CB portfolio so that they can direct their financial crime resources to those CB clients that pose the highest risk.  

The other part of this story is that the banks are then able to apply a lower level of KYC on medium and low risk CB clients. Banks must be confident that their CB clients have been segmented into the correct risk categories.  

All too often we find the distinction between medium and high risk classification to be negligible or the client portfolio to be steered towards the higher risk end of the scale.

We have had the opportunity to review many banks’ financial crime control frameworks so we know what good looks like and can give our clients the confidence that they are adopting the right RBA.  

We will take a break for Christmas now and be back in the new year where we’ll get back to basics when it comes to the KYC arms race. Keep. It. Simple!

Missed the previous blogs about KYC? Catch-up on the series below:

Don’t sleepwalk into a KYC arms race

Don’t sleepwalk into a KYC arms race - Part 2: Time is money

Imran Farooqi | Partner
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