Minimising your exposure to financial risk through KYC

Performing KYC checks when completing acquisitions is crucial both from a regulatory standpoint, to avoid sanctions, fines or reputational damage and from a risk standpoint to avoid financial losses. Recent high-profile cases, such as the merger between JP Morgan Chase and Washington Mutual where subsequent regulatory issues came to light, have illustrated the consequences of not carrying out adequate due diligence, including KYC checks, before completing company acquisitions. 

Regulatory crackdown on KYC/AML breaches

Regulators have cracked down heavily on AML breaches in the past few years – recent research suggests that 2019 will be a record year for AML fines, with USD7.7 billion’s worth handed out to financial services firms globally in Q1 2019. To complicate matters further, the Fifth Anti-Money Laundering Directive (5AMLD) is due to come into force in January 2020. 5AMLD features a new ‘blacklist’ of high-risk countries, a call for enhanced due diligence and the necessity to verify beneficial ownership among other changes. Post-Brexit, AML law could be even more complex in the UK, as the FCA have stated that Brexit may present an opportunity for the UK to rethink its laws, which might mean some fast-paced changes in the regulatory sphere.

RegTech, like Lawson Conner’s Max Comply, can handle regulatory nuances across different jurisdictions, updating new directives regularly, which is essential as part of the ongoing compliance requirements of an acquisition.

Essential components of KYC checks

M&A activity has an overall success rate of only 50 per cent. Reasons for failure often include unidentified risks within the target, which could be identified earlier in the process with effective and systematic KYC checks.

Regulators across jurisdictions have tightened up regulatory requirements around mergers and acquisitions, with the implementation of directives such as the Dodd-Frank Act demanding more detailed financial statement information from target companies.

Carrying out such a high level of due diligence can be a time-consuming and onerous task, traditionally weighed down by manual processes. It can also be costly, with some major financial institutions spending up to USD500 million annually on KYC and due diligence, according to recent research from Thomson Reuters.

How technology can transform the process

Robotic process automation (RPA) is the simplest way to automate some of the manual tasks and make KYC and due diligence faster and more cost-effective. Through RPA, rule-based functions are executed, based on data from internal and external sources and the results are directly inserted into workflows. RPA and AI have started to revolutionise the financial services industry – recent research from Deloitte, for example, reveals that 64 per cent of organisations have started to use RPA but its value is not always recognised in acquisitions.

The due diligence process can also be transformed by transactional analytics, by combining and manipulating data and rapidly examining financial and operational metrics. A recent survey from Raconteur of UK-based dealmakers found that 50 per cent desired closing twice as many deals a year as they did, and that due diligence was a key factor in transaction delays.

At Lawson Conner (part of the IQ-EQ group), we have developed our own regulatory compliance platform, Max Comply, which incorporates RPA, AI and analytics. The award-winning software platform has been proven to reduce cost and processing time significantly and can make a dramatic difference to the speed and efficiency with which acquisitions are successfully completed.