KYC Remediation: Essential to track the money laundering exposure
Know Your Customer, or what we all know as “KYC”, is an essential part of the overall Anti-Money Laundering (AML) program for any regulated entity subject to AML laws worldwide. Even in India, the Prevention of the Money Laundering Act, 2002, and the IFSCA (AML, CFT, and KYC) Guidelines, 2022, mandate the regulated entities to identify the customers, verify their identity, and maintain their data accurately. This process of ensuring that the customer’s identification information is up-to-date and relevant is more so known as “KYC remediation”.
This article will explore the KYC remediation process and its significance to the AML Compliance Program.
What is KYC Remediation?
Customer Due Diligence is one of the key measures of the AML Program, aimed at customer identification and assessing the risk each customer poses to the business. This CDD process involves KYC – intended to obtain customer information and verify the same using reliable sources. KYC Remediation is an extension of the KYC process and a part of the ongoing monitoring of the customer’s profile. It involves reviewing the customer’s existing information, verifying its accuracy and relevance, and updating the same, if required, to ensure consistency with the business relationship, transactions, and the entrusted AML compliance obligations.
KYC remediation is integral to the Customer Due Diligence measures, completing the circle of customer identification and risk assessment and maintaining the customer records updated at all times.
Why is KYC Remediation so significant?
The potential risk exposure of the business keeps changing, and so is the profile of the customers. The person’s identification details may not hold good after 7 months of onboarding; there may be changes in the customer’s place of business, or the person may get involved in politics. This periodic review and validation of the customer’s information allows the regulated entities to identify the revised risk exposure and timely take actions to manage the risks.
Thus, the KYC remediation process focuses on enhancing the entities’ AML measures by tracking whether there is any change in the customer’s identification details based on which the customer’s original risk profile was determined and, if so, how the changes would impact the level of risk, the customer poses to the business. This would enable the regulated entity to adopt a proactive approach to revisiting the customer’s risk categorization and deploying any additional risk mitigation measures required in line with the customer’s updated information. The KYC remediation process provides a window for the regulated entities to identify if any existing customers warrant the performance of the Enhanced Due Diligence process, with increased financial crime exposure of the business.
With a robust KYC remediation process, regulated entities can detect gaps or flaws in customer identification details in terms of completeness or accuracy.
Further, KYC remediation instills more trust in the regulated entity’s operations. When the entity ensures that the customer’s information is checked and validated periodically, the regulatory authorities and the customers feel confident about the entity’s commitment to fighting financial crimes and maintaining the system’s integrity. It builds a strong brand image of the entity.
What are the best practices to implement the KYC Remediation process in regulated entities in India?
KYC Remediation is a complex and essential element of the AML Compliance Program of every AML-regulated entity in India, necessary to stay PMLA compliant and safeguard the business against potential financial crimes.
To ensure the effectiveness of the process of KYC remediation, the regulated entities must follow the following approach:
Reviewing the Existing Information
The KYC remediation starts with monitoring and reviewing the existing information about the customers, their business, their beneficial owners, etc., available with the regulated entity.
Obtaining and Validating the Additional/Revised Information
Once the existing information is reviewed and gaps are identified, the entity must obtain the required additional details, documents, etc., from the customer or any other reliable sources. The legitimacy and the accuracy of the information sought must be established.
The revision of the customer information must be well documented, with the date and time stamp and the reason that required modification of the customer profile. This must also include a reference to the sources used for such additional information.
Updating the Customer’s Risk Profile
Once the revised information about the customer is obtained and validated, the same must be mapped with the customer’s existing risk categorization and evaluated as to whether these revised details require updating the customer’s overall risk profile. This is essential for determining if the level of financial crime risk the customer poses varies or whether the existing risk classification holds good.
Performing Additional Risk Mitigation measures
If there is a change in the customer’s risk profiling, the regulated entities must assess the need to deploy the increased due diligence and risk mitigation measures. This may involve adopting the Enhanced Due Diligence process or subjecting the customer to a frequent, ongoing transaction monitoring program.
Further, the regulated entity must ensure that the KYC remediation process is conducted keeping the relevant stakeholders in the loop, i.e., the AML Compliance Officer, the customer relationship managers to handle the communication with the customers transparently, and the overall compliance team to process the data and customer information timely.
How can technology boost the KYC Remediation efforts?
With manual intervention in performing KYC remediation, there is a possibility of missing out on key information or delaying the process of validating the customer’s information, which is outdated. Without technology or adequate automation, KYC remediation may be time-consuming and prone to human errors.
Deploying the emerging tools and technologies can help regulated entities analyze the large volume of customer data within seconds, generating smart analytics and dashboards that the compliance team can use to enhance AML efforts. Advanced technologies like Artificial Intelligence (AI) and Machine Learning generate alerts in case suspicious or unusual activities are observed. These tools also flag the customers where the identification card is about to expire, inconsistencies between the set customer profile and the nature of transactions the customer has been undertaking lately, etc. With solutions and tools at the service, the customer risk profile can be maintained up-to-date, changing and aligning with every transaction, reflecting the actual risk exposure relevant each day.
Automating the KYC process and its remediation saves a lot of resources and time, enabling the entities to focus more on mitigating the risks and leaving the job of identifying potential risks to the tools and solutions.
By implementing the right automation and technology, the effectiveness and efficiency of the KYC remediation measures will be enhanced, ensuring adequate and timely management of the risks and compliance with the AML regulations.
What are the key challenges in implementing KYC Remediation measures?
Maintaining a comprehensive KYC remediation process can be a little cumbersome and challenging for regulated entities. These problems may revolve around customer cooperation and the associated costs and resources involved.
Validating the customer information and obtaining revised data, including customer confirmation, may be an intricate task involving various personnel from the entity and the customer side. Sometimes, going back to the customers seeking additional information may create frustration on the part of the customer, creating conflict between compliance and customer relationship management. KYC remediation must be handled carefully, without disturbing the business relationship, while ensuring timely AML compliance.
The KYC remediation process involves cost in terms of time, human involvement, technology, and related training. The regulated entity must strike the right balance between KYC remediation, compliance with regulatory requirements, and the detection and mitigation of financial crime risks.
To manage these challenges, the regulated entities must document and implement the KYC remediation process effectively, integrating the business operations with customer relationship management and AML compliance function. Only with thoughtful planning and support from relevant teams across the organization can the AML Compliance Officer ensure proper KYC remediation.
How can AML India help you implement the robust KYC remediation process?
KYC remediation is essential and integral to the AML Program to ensure compliance with India’s AML regulatory landscape and shield the business from the customer’s changing risk profile. To help the regulated entities in such a crucial aspect of the AML framework, let AML India be at your service. With our years of experience working on different AML regimes, we help you develop a comprehensive KYC remediation process to ensure your customer database is accurate and relevant from an AML compliance perspective. We can also assist you in identifying and implementing the right AML software to raise the AML KYC remediation task, ensuring your customer’s risk profile is up-to-date, and your AML measures are adequate to manage these risks.
Let’s partner to fight financial crimes.
About the Author
Pathik Shah
FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)
Pathik is a Chartered Accountant with more than 25 years of experience in compliance management, Anti-Money Laundering, tax consultancy, risk management, accounting, system audits, IT consultancy, and digital marketing.
He has extensive knowledge of local and international Anti-Money Laundering rules and regulations. He helps companies with end-to-end AML compliance services, from understanding the AML business-specific risk to implementing the robust AML Compliance framework.
