Saturday, June 6, 2009

KYC - Global Regulatory Conflict

On June 4, GoldTier, a KYC software company hosted a speaker panel to discuss the impact of a changing global political and economic environment on the Know Your Customer (KYC) function at financial institutions. One of the discussion points exposed a great deal of frustration amongst the participants which included representatives from North American and European financial institutions.

As a KYC professional at a global financial institution, it is incumbent upon you to ensure that the head office of your firm is aware of their global exposure to any and all customers. This requires transmission of what some consider to be "sensitive" data across international borders. Countries including Singapore, Switzerland and Korea are asserted to have in place data privacy regulations that prevent such data from being sent across their borders. By definition, this would make it legally impossible for firms located outside of those countries to do business there.

This is clearly not the business reality. The problem as I see it is that compliance officers are paid to be ultra conservative and risk averse. This results in overly conservative interpretations of international regulations governing, amongst other things, data protection. This puts them and their firms in an awkward position of having to rely on the opinion of their locally based compliance function to make judgements without having the ability to regularly audit the process and data from a foreign head office. So ironically the risk averse compliance function is introducing a significant risk to their firm by not sending what is typically generic company information between geographies.

We have international clients who have realized this and have engaged with regulators in countries like Singapore to get clarity. Indeed Avox has been involved in some of these discussions directly. In most cases, there is actually no restriction on sending company information outside of these countries. How on earth would firms in these countries do business internationally if this was the case?

It's time for the business to work closely with compliance and have frank discussions with any regulatory body they believe is hampering transparency. Any country that truly prohibits communication of important decision support information outside of their borders needs to be prepared to suffer a drastic reduction in international trade. I think you will find that the reality is most regulators will not stand in the way of legitimate commerce.


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