Ongoing KYB and in-life monitoring blog - RegTech Associates

This guest blog is written by Denis Dorval, Chief Operating Officer of DueDil, for our joint webinar Solving the challenges of KYB and in-life monitoring in the SME sector. Denis highlights the pandemic fallout for SMEs, what the FinCEN leaks taught us, why ongoing KYB is so important and how in-life monitoring is a game-changer.

In the UK, over 500,000 new businesses are incorporated and a similar number dissolved on an annual basis1. And in a world where the FCA is paying more attention than ever to financial firms’ ongoing monitoring of customer compliance, keeping up with this volume of change under this level of scrutiny is an enormous challenge.

Often the processes and tools put in place to manage these changes, such as periodic customer reviews, do not cope well with the dynamics of the SME economy. 

Two recent events illustrate this point perfectly.  

Firstly, the economic downturn resulting from the coronavirus pandemic is hitting the SME sector hard.

Secondly, the revelations from the leak of suspicious activity reports from the US Financial Intelligence Unit, FinCEN. The leak illustrated the sheer scale of the shell company problem where fraudulent businesses disguised as legitimate SMEs are used for laundering illicit funds.

Pandemic fallout for SMEs

The Federation of Small Businesses reports that up to 250,00 SMEs may close over the next twelve months2

According to Sage UK, to get by, over half of SMEs have taken out a coronavirus-related loan3, storing up a ticking time bomb of debt. 

Sage UK also reported that 37% of those SMEs that have taken on additional debt as a result of the pandemic are not confident about their ability to repay. 

HIgh levels of indebtedness can significantly alter the risk SME customers pose. Lenders need to make sure they have an almost real-time view so they can manage this risk appropriately. 

FinCEN Leaks and Shell Companies

In 2020, the leak of thousands of suspicious activity reports from the US Financial Intelligence Unit, FinCEN shed light on how criminals have made use of shell companies set up in the UK to launder illicit funds, all of which would have been treated as SME customers. 

3,200 UK-based shell companies were exposed as part of these leaks, over 1,000 of which had the same registered address4.  

Strict Know Your Customer or, more accurately, Know Your Business processes help to avoid such companies opening accounts but sadly, as the FinCEN leaks showed, they do sometimes slip through the net. 

Initial registration of companies may look totally above board but if changes happen down the line – perhaps a new Director is added or the registered address changes – this could materially impact the financial crime risk of that customer. 

KYB – Keeping Up with the Changes

To accurately capture and manage the risk of an SME customer, financial firms must monitor that risk throughout the life of that business – not just at the beginning. 

In reality, this is a lot harder to do than it first appears. 

According to our data, on an average day, there are changes to 12,000 SME businesses in the UK and Ireland company registries. 

These changes range from an update in the registered address, filing of accounts or other information through to changes in shareholders. 

On one hand, these sorts of changes can have a material impact on that customer’s compliance risk profile. On the other, being up to date with these changes presents relationship managers with further insights and opportunities to grow these accounts.  

Typically, financial firms conduct periodic reviews of all the required KYB information in their customer files. The length of time between these reviews depends on the risk of that customer. 

High-risk customers tend to be reviewed on an annual basis with those at the lowest end of the risk scale being addressed every five years or so. 

A lot can happen in the intervening period and material changes that could affect the customer’s risk profile can be missed.

As well as the time that elapses between reviews, the updates themselves are often time-consuming and inefficient, especially when conducted manually. 

The majority of SMEs are privately owned companies, making information and insights about them hard to come by. 

Analysts have to manually source data from multiple places, including the customer themselves, which can be tricky, especially if dealing with very small businesses run by very busy people. 

Multiply this by the huge volume of SME customers and it becomes a lengthy and expensive exercise, prone to human error. But there is another way.

In-life KYB is a game changer

Switching to continuous monitoring can significantly improve customer risk management and selection, allowing better alignment with your firms’ overall risk appetite. 

At a time where high levels of economic uncertainty are increasing the likelihood of defaults, it has never been more important for relationship managers, credit risk managers and those in financial crime compliance to fully understand what is happening with their SME customers.

If your firm has significant backlogs of customer files to review, continuous KYB updates can help reduce the time spent remediating files, allowing firms to catch up and start as they mean to go on. 

Regulators can be satisfied that you have an accurate picture of your risk at all times – something that is likely to come under increasing scrutiny as we deal with the aftermath of the pandemic.

Don’t just believe our word for it though – watch the DueDil and RegTech Associates webinar on demand now. 

Our expert panel discussed the current challenges facing SME banking customers, why in-life KYB is hard to do and how tools and technologies such as DueDil can help.


1 https://www.gov.uk/government/statistics/companies-register-activities-statistical-release-2019-to-2020/companies-register-activities-2019-to-2020
2 https://www.fsb.org.uk/resources-page/at-least-250-000-uk-small-businesses-set-to-fold-without-further-help-new-study-warns.html
3  https://www.sage.com/en-gb/news/press-releases/2021/02/impact-of-covid-burdens-average-sme-with-over-170k-gbp-additional-debt/
4  https://www.bbc.co.uk/news/uk-54204053


Denis Dorval
Chief Operating Officer, DueDil

Denis Dorval is Chief Operating Officer at DueDil, where he leads all Go-To-Market & Customer Success teams as well as Business Operations. Prior to DueDil, Denis held senior executive positions at Apigee (acquired by Google) and Alfresco (Acquired by THL Partners)

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