Businesses typically keep their compliance team while outsourcing AML transaction monitoring or biometric checks to automated KYC solutions. However, as businesses grow, they will need to delegate increasingly more of their user verification operations. But which due diligence techniques should businesses keep in-house? Which should be outsourced to a service provider, KYC outsourcing or in-house systems?
Difference Between KYC Outsourcing and In-House Systems
In-house KYC is when a company creates and manages its own KYC department to manually onboard new consumers (including document checks, watchlist screening, etc.).
The law requires businesses to design and execute policies, controls, and procedures to reduce and control the dangers of money laundering and terrorist funding. This includes the following:
- Customer due diligence
- Risk management
- Constant monitoring
- Record keeping
- Reporting of questionable activities
Furthermore, an AML-regulated organization must select an MLRO (Money Laundering Reporting Officer) who is accountable for the company's anti-money laundering compliance.
KYC outsourcing refers to KYC solutions provided by third parties. When determining which procedures to outsource, the typical rule of thumb is to outsource those that are repetitive or labor-demanding while keeping those that require further research, sensitive data, or contact with authorities. Companies should maintain control over KYC outsourcing processes in any case. This is especially true for regulated businesses that must comply with reporting standards.
Businesses must establish an appropriate balance between in-house and KYC outsourcing solutions. The following things influence how this equilibrium is achieved:
- Whether the business is regulated
- The size of the company and its requirements
- Whether the company intends to or has already entered the international market
For example, if a firm is not regulated (for example, vehicle sharing services, e-commerce, peer-to-peer services, and many others), it is exempt from AML, PEP, and adverse media screening.
Furthermore, non-regulated firms are exempt from statutory verification procedures. However, knowing their clients is still crucial in order to avoid financial losses and reputational problems.
The Pros And Cons of In-house KYC
Every regulated company must appoint an MLRO and provide AML training to their employees. However, because a small business cannot afford a full-fledged compliance department, it must handle KYC requirements in-house. This is especially true for small businesses or those that cannot afford a third-party verification provider.
| Pros | Cons |
|---|---|
| Ability to adjust the team to the needs of the organization. | Manual labor is tedious and time-consuming. |
| Complete control over procedures. | Management expenses and difficulties. |
| No time is lost on communications outside the company. | Constructing your own IT infrastructure. |
| Direct interaction with users. | Errors caused by humans. |
| There is no need to incorporate third-party solutions. | Employee churn. |
The Pros And Cons of Outsourcing KYC
Most businesses want to expand their consumer base, introduce new goods, and boost their revenue. Growth, on the other hand, might impose an undue burden on in-house compliance teams at a certain point. This is frequently where third-party KYC providers enter the picture. These KYC outsourcing solutions take complete control of compliance routing, allowing businesses to concentrate on their core competencies.
| Pros | Cons |
|---|---|
| Analytics for Scalability and customization. | The requirement for integration and customization. |
| An approach that saves time. | Third-party participation. |
| Expertise with big data. | |
| Cost-cutting measures. |
In-house KYC Measures
Global AML standards, such as those established by the Paris-based financial watchdog FATF (Financial Action Task Force), require firms to create and monitor effective AML policies and processes. These safeguards are designed to detect and reduce the risks connected with financial crimes.
Because these dangers are typically caused by a lack of effective identity verification, businesses develop and monitor their customers' activity using in-house KYC solutions. Customer due diligence, document verification checks, and AML screening against global sanction lists, watchlists, and PEP lists are all part of the process. The in-house KYC mechanism enables financial institutions to conduct risk analyses, monitor their customers' ongoing transactions for anomalies, and report suspicious activity to the appropriate authorities.
In addition to creating an efficient AML program, organizations subject to AML requirements must hire MLRO in the case of in-house systems. The MLRO's responsibility is to guarantee that the company's processes are in accordance with AML requirements.
Outsourcing KYC Procedures
Firms that are too large to create their KYC outsourcing procedures to process vast amounts of client data, on the other hand, choose to outsource their KYC outsourcing processes to third parties. Businesses determine which, if any, of their KYC processes to outsource based on their individual needs. The most typical processes that organizations outsource are those that need repetitive, labor-intensive tasks to be completed manually. Firms give research and development work to in-house teams at the same time to ensure optimum attention.
Having said that, businesses should always maintain control over their KYC operations, even if they are outsourced. Financial regulators, for example, require businesses to file activity reports on a regular basis and to understand what is going on in the organization. When deciding between in-house and outsourced KYC processes, various aspects must be considered, including the size of the organization, its requirements, whether or not it is regulated by financial authorities, and its international market recognition.
If a business is not regulated, such as banks and insurance companies, it is not subject to the same AML compliance, Enhanced Due Diligence (EDD), and PEP screening requirements. Furthermore, businesses that are not subject to AML regulations do not implement identity verification measures, so there is no need to worry about outsourcing. To minimize reputational and financial losses, they should still seek a solid identity verification solution.
Issues with In-house KYC Processes
Manual identification verification checks take more than 10 minutes on average. This is the first and most obvious downside of in-house KYC methods, which necessitate a significant amount of labor. Furthermore, employing and supervising teams of KYC personnel necessitates effective internal procedures, which add to the company's expenditure. Even when firms opt for automated solutions, in-house operations necessitate the construction of a comprehensive IT infrastructure capable of dealing with data privacy and cybersecurity risks.
In-house teams are also more likely to make mistakes if they do not rely on automated methods. Criminals can exploit even the smallest flaw in banking operations. This means that criminals can use the systems to successfully carry out their illicit motives, causing irreversible damage to the business.
Why is KYC outsourcing the Solution?
Businesses that outsource their KYC operations can drastically reduce the time spent on verification while also boosting their client interactions. Adhering to the severe KYC/AML criteria imposed by financial regulators is a difficult endeavor. The majority of businesses want to improve their customer base and revenue by offering new services. However, fast expansion places strain on in-house staff responsible for KYC processes. Companies can streamline both KYC compliance and the rest of their operations if the same processes are handled by a third-party service provider.
Furthermore, in-house KYC processes pull teams' attention away from other vital responsibilities that might propel the company forward. KYC outsourcing enables businesses to focus their resources on progress by ensuring the security of their customers' information and accounts. The complex AML regulations of today are tough to convey to new consumers, who find it difficult to provide their information without understanding why such checks are performed. If the organization chooses KYC outsourcing, the time spent giving such information can be put to better use.
Then there are the challenges posed by new regions when businesses build offices in other countries. It is initially difficult to fully comprehend what the financial regulators in that region require, as well as how to establish a KYC compliance team in accordance. Because third-party service providers have experience and availability to databases from all around the world, KYC outsourcing is the best answer in this instance.
