Striking the balance between efficiency and thoroughness in risk-based KYC

The security checkpoint

Imagine, that instead of working in compliance, you’re overseeing security protocols at a large international airport.

Your team cannot scrutinise everybody equally. It’s simply too busy. Some passengers will only go through a scanner, and others get a more thorough check. Your staff is trained to know what to watch for. They know who needs more of their attention:

• a nervous businessman with a one-way ticket to a high risk country
• a tourist with unusually heavy suitcase
• a frequent flyer, whose travel plans suddenly change

Any disruption to common patterns is potentially a red flag. The tiered screening system, where everyone goes through a basic screening, but more resources are allocated to those flagged by risk indicators, allows for thorough security - while maintaining operational efficiency.

There’s no chaos.

In any AML- regulated industry, you’re facing an almost identical challenge: how to vet customers without bogging down operations. Everybody gets baseline checks, and then you start looking deeper:

• a small business suddenly transferring large sums internationally?
• a politician from a country known for corruption?
• a small business suddenly transferring large sums outside of the country?
• a long time customer whose transaction patterns change for seemingly no reason?

This part isn’t just about ticking off boxes anymore. You’re building a detailed picture of each customer, adjusting the level of scrutiny based on the risk they can potentially pose.

This is a dynamic process, and a customer who started off as a low-risk can climb the risk ladder as their behaviour changes.

Striking the balance between the efficiency and thoroughness is at the heart of risk-based KYC. Maintaining strong security requires managing your resources well and this approach allows you to allocate them where the risk level demands it.

The future of KYC is automated

Of course, compliance officers must be extremely adept at identifying potential financial risks, just as airport security are trained to spot suspicious behaviour. Robust systems and well trained staff are the backbone of the implementation of risk-based KYC.

But there’s one more thing that can play a significant role and greatly improve the efficiency of the process, where the challenge lies in being both thorough and efficient.

Technology.

What if the security at the airport had a super-intelligent assistant, that could process information about every single passenger in a blink of an eye?

That's essentially what automated KYC systems are doing for AML-regulated entities.

They’re compliance experts working continuously around the clock. They're analysing large amounts of data, cross-referencing information, and identifying potential risks much faster than any manual process.

When a new customer begins the onboarding process, the automated KYC system starts working. It's not just verifying basic information, but it’s searching databases, examining documents, and in some cases, analysing biometric data. It's creating a comprehensive profile of the customer in a matter of moments. The system doesn't stop after the initial check. It's monitoring for any changes in your customer's behaviour or circumstances that might increase their risk level.

It can verify identities, check against sanctions lists, and analyse transaction patterns in a fraction of the time it would take a human operator.

This speed can significantly reduce onboarding times and improve the customer experience.

Efficiency however doesn’t come at the cost of thoroughness.

Automated KYC systems use advanced algorithms to comprehensively assess the risk. Human reviewers - being human - might miss some very subtle risk indicators, that a system that’s analysing a wide range of data points won’t. The system can continually monitor customer behaviour, flagging changes that could indicate increased risk. This ongoing assessment ensures thoroughness isn't sacrificed for speed.

Refining the balance

Can the automation replace the human oversight then? Despite the leverage it gives to the compliance teams, it’s unlikely this would happen anytime soon.

What it most definitely can do, is to help allocate human resources more effectively. Low-risk cases can be processed quickly, freeing up compliance officers to focus their expertise on complex, high-risk cases that require the level of judgement that only comes with professional experience.

This approach, of a tiered system of due diligence, it’s similar to our airport security analogy: most customers, like most passengers, can pass through the basic process. When the system flags a potential risk, it triggers a more through review.

What is the key to maintain the balance between efficiency and thoroughness then?

Refinement.

• Risk assessment criteria need regular updating to reflect new threats and regulatory changes. The financial world is not static, and neither should be the rules that govern it.
• System performance requires constant monitoring. False positives and false negatives should be carefully analysed to improve accuracy. This feedback loop helps the system learn and adapt over time.
• Data quality must be maintained- any system can only be as good as the information it processes. Ensuring data accuracy and completeness is important for both efficiency and thoroughness.
• Staff training is crucial. The compliance team needs to stay updated on how to interpret and act on the information it provides.
• Also audits and reviews of the entire process help identify areas for improvement. This includes assessing how well the automated system integrates with human decision-making processes.

At the gate

Airports aim to keep passengers safe without causing excessive delays, and in the same way, compliance officers aim to prevent financial crime while providing smooth service to legitimate customers.

Advanced scanning technology at airports quickly processes most travellers, flagging only potential risks for closer inspection - AML-regulated companies can now use comparable smart systems to simplify and enhance customer onboarding and monitoring.

Both systems require ongoing refinement to remain effective.

The airport security has to constantly adapt to new risks - financial threats and regulations change, so the KYC process must also be fine-tuned.

This ongoing improvement and refinement is a balancing act between speed and thoroughness.

You’re reaching your departure gate after passing through security.

If the process was smooth, you're relaxed and on time.

This is the goal of efficient KYC - customers clearing checks swiftly can access financial services without stress.

However, just as airport security must catch real threats, KYC must thoroughly identify high-risk cases.

Automated KYC systems help strike this balance.

When done right, this balanced approach creates a financial system that's secure yet accessible - much like an airport that's safe but still gets you to your gate on time.

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