Cutting bank documentation down to size

Discussions with clients regularly reveal that a big source of frustration from bank account management is bank documentation and the requirements that come with this. Clients complain about the time and effort it cost them to prepare bank documentation.

This frustration shouldn’t come as a surprise for anyone that has been working on bank account management. Know-your-customer (KYC) requirements have been stepped up across the globe, in response to fraud and increased threats of terrorism, with banks being penalised on non-compliance. Rigidity puts the relationship between banks and their clients to the test. While companies understand the importance of KYC, they do not always understand – or perhaps want to – why in the current age of digitalisation that hardcopy documents with “wet signatures” are still required. They neither have high tolerance for deadlock situations in certain documentation processes, such as one the authors came across when opening a bank account in Japan – where the Japanese bank requested a passport copy, including the domicile address of a Dutch employee, although this particular information isn’t captured in a Dutch passport.

This article discusses three layers that define a client’s bank documentation experience. Combined together, they represent the root causes for the burden that bank documentation puts on both treasurers and bankers. While doing so, we hope to provide clues as to how to the burden might be reduced.

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Legal framework

The (national) legal framework is the background against which documentation requirements are defined. It consists of several interacting aspects.

Ever since the mid-Nineties – when it was triggered by the Irangate affair – legislators have stepped up the bank document requirements. Since the KYC regulations and legal requirements are designed to protect the public against fraudulent behaviour and other threats, few people oppose the idea of the KYC and anti-money laundering (AML) measures put in place. However there is a tendency for legislators to come up with ever-more demanding client information requirements.

Legislations and regulations governing KYC and AML can be highly detailed. Banks are expected to track much detail about the business whereabouts of their clients – or risk severe penalties, which can extend to the loss of their bank licence in a country. Based on recent cases, one could even arrive at the belief that governments try to use KYC and AML regulation as a means for outsourcing extra-jurisdictional enforcement.

Moreover KYC regulations interfere with other parts of the civil code; for example when it comes to legal documents and other evidence that has to be submitted. Sometimes this interference defines that documents has to be written or translated in the official local language. In other cases, national civil codes are not well adapted to the digital age. In a number of countries a digital signature has no legal status and thus “wet signatures” have to be presented, which results in unwanted delays and is logistically onerous.

A bank’s approach to compliance

Typically legislation and regulations leave some room for interpretation. Hence the bank’s general approach to interpretation and compliance is key to understanding. This interpretation and approach is typically defined at group level and driven by the bank’s legal and compliance department. While legal departments tend to be risk-averse, given the severe penalties and consequential reputational damage in the case of KYC, they tend to be extremely risk adverse and enforce a rigid “better-safe-than-sorry” approach, with little consideration or sympathy for the difficulty imposed on their clients.

Lately, the authors have worked with a company with substantial family ownership. Although the family had little or no involvement in the management – and despite the fact that the bank had longstanding business relationships with both company and families – the bank still has to request detailed personal information such as proof of residence and the origin of the main source of wealth. However, when challenged on some arbitrary documents, the bank was not always able to justify the necessity for the request.

Many banks attempt standardising requirements across jurisdictions and therefore typically prefer the most rigid local requirements as a baseline for documentation and contracts. Consequently their global or regional documentation requirements tend to be dependent on their footprint and the location of their legal and compliance department. The result is that clients can be confronted with different documentation requirements when they open similar bank accounts with multiple banks in the same jurisdiction. Differences can be as “trivial” as apostilisation and notarisation of certified copies, or the need for an official translation. There may also be instances when one bank requires a board resolution, including the authentication of directors.

Another dimension of the banks’ approach to compliance is that entities wishing to establish bank accounts at different local bank branches – or with multiple banks in different jurisdictions – may need to provide multiple and different packages of documentation to open all these accounts.

Execution and implementation

Given the severe consequences of non-compliance, banks have adopted rather rigid and detailed processes for KYC documentation. The complexity of applicable legislations and regulations, especially in an international business environment in combination with the severe consequences of non-compliance KYC processes involve many people within banks and therefore are very time consuming. Banks have increasingly become bureaucratic and more often than not turn a deaf ear on client complaints.

It is not uncommon for banks to decline a document on formal grounds, such as when they cannot confirm a signature with that of a specimen of the same person they have on file. When fed back only after weeks of internal processing, it can frustrate the staff involved and also complicate the project timelines and effort. Sometimes banks are pragmatic about the additional signing of a copy of said document, but when they require a new original it typically involves many different people having to re-sign the document too! In both cases, the outcome is yet another document at the bottom of the stack to manage.

Formal grounds of rejections may be excusable, because files have to be perfect if only for when regulators like to audit compliance. Most treasury professionals show sympathy and – albeit sometimes reluctantly – are prepared to do what it takes to satisfy the requirements. Most treasury professionals, however, find it inexcusable when banks reject documents very late in the process for reasons not communicated in the same detail before.

Finding the common denominator

To be fair, banks were not the inventor of KYC or ALM regulations; nor do they have control over legislators. However, their clients report that the approach to compliance is often not customer-centric. Clients believe that a bank’s fear for penalties is far greater than their love for clients’ business.

Client frustration is about the rigidness of processes and the effort this imposes on them. A further energy drain is the time that it takes for banks to process documents and the non-transparent way in which they can decide to reject documents that have been collected and processed internally; for example on the basis of requirements not previously mentioned. Treasurers can feel they are being penalised, given the delay and extra effort incurred in their treasury project for reasons beyond their control.

Both bankers and their corporate clients are struggling with the mandatory documentation requirements. The upcoming 2016 edition of the PwC Global Treasury Benchmark Survey – which will be released later this month at the EuroFinance international treasury and cash management conference in Vienna on 12-14 October – echoes this observation and lists KYC as a top-3 project hot topic on the treasurer’s agenda.

Where next from here?

Given the fact that KYC is a compliance issue, let’s agree that it impacts the non-competitive space of bank services. What options do banks and corporates have to reduce the cost of compliance and eliminate the energy drain around this process? If banks and treasurers can agree that KYC and ALM compliance is an nuisance pre-requisite for banks, the obvious route to reducing the cost of KYC documentation for banks and their clients  is a combination of standardisation and transparency that equals predictability.

A potential solution to the problem could be that banks and corporates collaborate and share experiences to standardise interpretation and work jointly on breaking down barriers. This would be very similar to how they have collaborated within the Corporate Reference Group (CRG) and European Payment Council (EPC) on harmonising the technical interpretation of the XML ISO20022 standard and the introduction of the single euro payments area (SEPA) payment methods. This approach is not a quick fix for today’s issues, but given the non-competitiveness of KYC processes, it provides upside potential in the longer term.

Such collaboration on KYC may at first aim for a common interpretation of the legislative and regulatory requirements on a country-by-country basis. By doing so, it makes the KYC process more transparent for both banks and their clients. In this process of harmonisation, the body will gain deep understanding of best practices and unnecessary red tape. Any legislator and regulator should be interested in this information, as it offers valuable input for updating and streamlining the governing law and regulations to make their business environment more competitive.

Call to action

Bank documentation has increased the cost of bank relationships. Few will challenge its necessity, but it is a growing source of tension. As KYC compliance could be seen as a non-competitive aspect of financial services, both banks and their customers may benefit from collaboration aimed at the standardisation of interpretation and processing. Such collaboration may provide valuable feedback to legislators and regulators as to how they could reduce red tape without necessarily undermining the key objective of KYC.

We urge banks and treasury organisations to come together and work together, similar to their collaboration in the CRG and EPC.

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