New Regulatory Impacts on KYC and Onboarding

How Are Companies Responding to Pressures from Expanding Regulations?

The financial collapse of 2008 spurred many countries to introduce regulations aimed at moderating risks that they feared could compromise both national security and the performance of their economies. In the past few years, the United States has seen a surge of this regulatory activity expanding beyond financial regulation into sectors such as environmental, social, and governance (ESG) and cybersecurity. European countries, in contrast, often lead the way on “softer” regulations around sustainable finance and data privacy as well as ESG. 

The two regions have created a broad, interlocked regulatory web requiring compliance from international firms in areas including supply chain, ESG and climate, forced labor, and corruption. But new geopolitical pressures are making the future of these regulations, and the direction of regulation in general, less certain. This in turn creates new pressures for businesses, leaving them unsure how to respond effectively.

Corporates Try to Follow Financial Firms’ Lead

Historically, the responsibility for compliance with expanding regulatory requirements lay primarily with financial institutions. In recent years, however, financialized large corporations have been taking on similar regulatory obligations. This has created particular challenges in the area of onboarding. Companies not only need to verify client identities and comply with anti-money laundering (AML) and know-your-customer (KYC) standards, but also ensure that they’re meeting industry-specific regulatory demands. And as regulatory frameworks continue to evolve, so has the onboarding process evolved from an initial client assessment to an ongoing activity, where best practices include continuous monitoring and real-time risk detection.

The effort to keep up with new regulations and establish “always-on” compliance pushed financial institutions to build out their compliance teams with dedicated resources to meet these requirements. For corporates, however, constraints in budget and staffing have made it difficult to follow the financial firms’ lead. Many corporate compliance teams have turned to technology-driven solutions to help them efficiently manage regulatory complexity and streamline compliance with sanctions and other due diligence obligations.   

Balancing Regulatory Adherence and Operational Efficiency

The advanced tools and automation included in these solutions are often accompanied by sophisticated data analytics to help businesses predict common compliance issues. Integrated compliance platforms are allowing more varied data sources to be ingested and processed, but one inescapable characteristic of data is that it’s dynamic — the business attributes of customers and third parties are constantly changing, as are regulatory requirements. Companies need to develop the capability to adapt to these shifts and assimilate the ongoing changes in customer and market information. Otherwise, they risk having onboarding and other compliance efforts compromised by outdated or irrelevant data.

What does the future direction of the regulatory landscape look like? In a word: uncertain. The U.S. elections to some degree may signal conflicts in regulatory prioritization, but other complex factors such as trade policy can mix in and make it harder for companies to navigate the global economy. 

Our white paper with Chartis, “Beyond KYC: The Expansion of the Onboarding Universe,” contains a more detailed discussion of the regulatory changes that may impact compliance teams, as well as these topics: 

• Recent changes in U.S. and European regulations
• Regulatory risk impacts on other risk types, such as strategic and financial
• Next steps and recommendations for helping address key challenges in onboarding and monitoring