The Swiss have come up with 'know your customer' software to preserve the tangled skein of correspondent relationships that exists between private banks in 'highly risky' jurisdictions, notably in Eastern Europe.

One would never guess
from the advertising bumf that KYC Exchange Net has been publishing
about its 'know your customer' communication platform that this new,
stress-tested software is not designed to contain any information at
all about actual bank customers. Its aim is far more commercial: to
preserve the tangled skein of correspondent relationships that exists
between tiny private banks in 'highly risky' jurisdictions (notably
in Eastern Europe) on the one hand and the massive onshore banks of
New York, Hong Kong, the City of London et cetera on the other
by keeping bureaucratic costs down in the face of higher and higher
regulatory hurdles. 

These days, it takes a
good deal of effort for banks to establish correspondent
relationships with each other in the correct regulatory way. They not
only have to swap identifying documents such as articles of
incorporation, regulatory status, information about board-members and
proof of ownership; they also have to look into each others' KYC
policies and procedures to ensure that they are adequate and that the
relationships are worth commencing - or continuing. KYC now stands
for 'know your counterparty' as well as 'know your customer'.

Cheap periodic reviews 

The way the software
works is simple yet, until now, nobody seems to have constructed a
secure platform for the purpose. Private bank A uploads all the
information it might wish to reveal about itself, plus supporting
documents, onto the platform, which keeps it confidential for as long
as the bank wants. Private bank B, with which it is trying to form a
relationship (or with which it already has one but the time for
renewal has arrived) wants to access some or all of its documents to
see whether its home regulators and/or Bank A's regulators will
approve of the relationship if it comes to their attention. It
receives only as much information as Bank A allows. Bank A decides
whether to yield up this-or-that document for inspection at the
moment of Bank B's request and not before.

Joachim von Hänisch,
one of KYC Exchange's two founders, commented: "We're talking
about periodic reviews here. They have to reconfirm all the AML
policies and take another look at existing board members. This
process was fairly easy until a couple of years ago, when the
requirements became more onerous and the fines for non-compliance
went much higher. Another of the issues of today is that the
Financial Conduct Authority and other regulators don't publish very
clear rules."

When asked whether the
platform adhered to the Wolfsberg principles of anti-money-laundering
best practice for banks (named after UBS's training centre in
Switzerland), von Hänisch said: "We are going beyond it. A
while ago Wolfsberg published a questionnaire containing 25 questions
that banks ought to ask each other about their AML policies, but they
were vague ones such as 'do you take a risk-based approach to due
diligence?' and regulators grew dissatisfied with them. What we did
to improve on that was to ask a dozen or so big European banks what
they wanted to know from their counterparties. As a result, we
compiled a list of 150-200 questions and asked Protiviti, the
compliance consultancy, to vet them and make further suggestions. The
result was about 450 questions, all contextual depending on the
banks' answers, i.e. the questioning process resembled a set of
'decision trees' [tree-like graphs in which one answer leads the
reader on to a particular set of other questions].

Correspondent relationships at stake 

"We did a survey
recently and found that when a Western bank goes through a KYC
process once a year, it costs perhaps £15,000 - £20,000 for it to
look at a bank in a high-risk jurisdiction. Very often, it finds that
it does very little business with that bank throughout the year, so
the KYC process - and therefore the relationship - isn't worth it!
Many small banks do not do it, preferring to cut the other banks off.
It is these small banks - very many of which are private banks - that
form our main audience. The whole tenor of our platform is to stop
KYC from being a barrier to correspondent banking. Without it, a lot
of Tier 3 and Tier 4 banks will be cut off. At the moment, the whole
correspondent banking network is under threat." 

Von Hänisch was the
regional head of bank business at Standard Chartered for Eastern
Europe until last year. In this capacity, he became aware of a
PriceWaterhouseCoopers survey of 2011 which suggested that 20% of
banks thought that they ought to be doing 'KYC' in a competitive way
instead of co-operating with other banks over it. Their hope was that
other banks would liquidate their relationships because of the
aforementioned costs and then they would hoover those broken
relationships up for their own use. Von Hänisch thought that this
attitude was extremely wasteful to the banking industry and commented
further. 

"When you look at
existing KYC solutions, the most important thing to look at is shared
utilities. These cause problems because the requirements of a shared
utility are the same for every bank and all banks' internal
procedures are different but no bank will change its internal
procedures to fit in with a shared utility. You can't expect them to
change policies but you can standardise the format and leave it at
that. The banks are able to upload their documents (e.g. their
articles of incorporation of association) on our system.

"We are
merely allowing two banks to talk to each other. There is a live link
between you and your counterparties - it's a bit like LinkedIn."

KYC
Exchange Net AG was incorporated in Zurich in June 2013.