Blockchain technology has a wide range of applications that extend beyond the use of cryptocurrencies. It turns out that blockchain applications for KYC and AML can also assist with compliance efforts.
Current KYC/AML Compliance Issues
A single financial institution spends about $60 million to $500 million per year on KYC and AML compliance. And it doesn’t look like the burden will get any lighter. In fact, things may get even harder.
Regulations are becoming more complicated while penalties for failing to comply become harsher. This will only add to the costs associated with KYC and AML compliance.
So why are those costs so high? Part of the blame falls on how inefficient current compliance programs are. They require human effort and time. Plus, compliance tasks are frequently duplicated by employees within and outside of an individual organization.
Currently, financial institutions are not giving KYC and AML data to other financial institutions. This means that each organization needs to follow its own data validation system in order for transactions to be completed. This slows down the transaction process when it involves more than one financial institution.
It seems that financial organizations are being pulled in two directions. On the one hand, there is the need to follow strict, complicated regulations. Failing to do so could result in unwanted consequences.
But on the other hand, clients are demanding faster transactions. Speeding up those transactions isn’t easy to do when much of the compliance process is done manually.
It’s almost as though these institutions are being faced with the impossible choice between following regulations and satisfying their clients. Either way, they lose.
How Blockchain Applications for KYC/AML Helps
Distributed ledger technology (DLT) may remedy the problems associated with KYC and AML compliance.
We’ve already seen this technology being applied in real-life situations. For instance, Synechron and R3 tried utilizing DLT in June 2018 to carry out 300 KYC transactions.
So why would blockchain applications for KYC and AML be so helpful? Keep reading to find out!
There are five main reasons why blockchain would make the entire KYC and AML compliance process more efficient. These reasons are listed below.
- It decreases the amount of paperwork required.
- Less time will be spent on manual reconciliations.
- KYC data can be verified at a quicker rate.
- Fewer errors will occur.
- It allows financial institutions to share KYC and AML data with one another, so long as their clients have agreed to this.
As it stands now, financial companies must go through a process that involves preparing and submitting reports in order to demonstrate compliance. Using DLT would greatly diminish the time and money required for that process.
Reduces Compliance Costs
It’s been estimated that financial institutions use about 80% of their KYC and AML budgets on reconciliation tasks. This leaves a measly 20% for analyzing KYC data.
But if BIS Research is right, a company that relies on DLT for KYC and AML purposes will notice a 90% decrease in compliance costs.
According to Deltec Bank, Bahamas- “DLT has the ability to automate reconciliation tasks.” Not only would this reduce costs but it would also make it possible for human employees to put more time and energy into reviewing and analyzing data.
DLT would give regulators access to compliance systems, meaning those regulators could simply obtain compliance reports directly from financial institutions. This would give regulators accurate, up to date information on how well financial organizations are complying with KYC and AML standards.
Keeping Data Private
Data privacy is incredibly important, which is why financial organizations need to ensure their clients’ privacy rights will not be violated by their systems. Clients can be certain their data will be secure in a blockchain system because they get to decide who can view the data.
Blockchain applications for KYC and AML hold the potential to make compliance easier, quicker, and more cost-effective. These benefits would be appreciated by any financial institution that is feeling crushed by the burdens of KYC and AML compliance.
Disclaimer: The author of this text, Robin Trehan, has an Undergraduate degree in economics, Masters in international business and finance and MBA in electronic business. Trehan is Senior VP at Deltec International www.deltecbank.com. The views, thoughts, and opinions expressed in this text are solely the views of the author, and not necessarily reflecting the views of Deltec International Group, its subsidiaries and/or employees.
About Deltec Bank
Headquartered in The Bahamas, Deltec is an independent financial services group that delivers bespoke solutions to meet clients’ unique needs. The Deltec group of companies includes Deltec Bank & Trust Limited, Deltec Fund Services Limited, and Deltec Investment Advisers Limited, Deltec Securities Ltd. and Long Cay Captive Management.