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Turning KYC into a Strategic Advantage – by Lain Ehmann

Know Your Customer (KYC) is more important in 2018 than ever before. Several business trends are driving the push for businesses of all sizes to crack down on illegal activities. But as the need for KYC rises, so do the costs. In fact, the average bank spends $56 million a year on KYC compliance, according to a Thomson Reuters survey. And these costs aren’t likely to drop anytime soon.

So how can companies of all sizes comply with regulations while also creating a quality user experience? Blockchain may be the answer. 

Why KYC?

KYC and anti-money laundering (AML) compliance are efforts businesses take to identify and verify the identity of their customers and clients, in order to pinpoint funds associated with illegal activities such as terrorism, the drug trade, bribery and human trafficking. Companies of all sizes are under pressure to verify and ensure that their agents, distributors, and other partners are anti-bribery and anti-corruption.

Depending on the regulations and associated laws, businesses involved – knowingly or unknowingly – with illegal activities can face a host of penalties. These include seizure of assets, substantial fines, and criminal prosecution leading to jail time.

Much of the worldwide efforts in KYC/AML stem from regulations in the United States and Europe. As the U.S., U.K. and EU crack down and up their AML regulations, the rest of the world must follow suit.

What’s new?

Put simply, criminals are getting cleverer and stepping up their activities. The United Nations Office on Drugs and Crime estimates that illegal organizations laundered over $1.6 trillion in 2009, a number that some say is ridiculously low. John Walker, CEO of Crime Trends Analysis in Australia, said the number was closer to $3 trillion.

Not only are organized crime groups widening their activities, they also are able to operate more effectively due to technology.

The mobile communications revolution has offered new opportunities to traffickers. They no longer need personal contact with clients; instead, low-level “runners” can collect cash and dealers can let the customer know where to collect their drugs using messages sent over encrypted networks. The darknet allows users to buy drugs with a cryptocurrency, such as bitcoin, and have their purchases delivered to them in a concealed manner,” explains the 2017 World Drug Report from the United Nations Office on Drugs and Crime.

Governments, regulatory agencies and ultimately businesses must respond.

As money laundering schemes are getting more and more sophisticated, the detection and mitigation strategy has to get smarter and faster,” writes Frank Holzenthal for the FICO blog. Holzenthal, managing director for FICO TONBELLER, a division of FICO specializing in financial crime compliance solutions, says businesses will need to step up their game to incorporate real-time searches, artificial intelligence, and integrated approaches to fight money laundering schemes.

What’s the cost?

All of this compliance comes at a cost. Financial institutions and other businesses must implement ever-more stringent efforts to adhere to increasingly strict regulations. The global AML software market alone is expected to grow to $1.4 billion by 2023. Investment in hardware and manpower will also add to compliance cost.

LexisNexis reports that over 80 percent of its survey respondents say they expect overall AML compliance costs to increase, with one-third projecting that costs will rise by 20 percent or more. The growth is attributed to factors such as the need to monitor more transactions and to meet increased compliance regulations for more jurisdictions.

And let’s not forget the cost of noncompliance. Fines add up fast. In 2017, “financial regulators around the world imposed more than $2 billion in fines related to anti-money laundering (“AML”) compliance failures,” reports law firm Debevoise & Plimpton.

Is there an easier way?

Growth in illegal activities, regulations and costs have businesses wondering, “Is there a better way?” Fortunately, signs point to yes.

Historically, KYC/AML regulations have been largely reactive, with governments and regulatory bodies only plugging holes after vulnerabilities have been exploited. It was a case of being one step behind the bad guys. But now, the same technologies that have enabled criminals to cloak their identities are powering initiatives that may finally get the good guys a step ahead. Here’s how.

Artificial intelligence and machine learning

Machine learning (ML), a subset of artificial intelligence (AI), is a field of computer science where statistical techniques are used to power sophisticated computer systems, giving them the ability to “learn” with data.

ML could be used to monitor transactions and suspicious activities, two areas that have traditionally been labor-intensive. “Institutions leveraging ML can reduce their dependency on human operators to perform routine tasks, reduce the total time it takes to triage alerts, and allow personnel to focus on more valuable and complex activities,” explains Steve Culp in Forbes.

Leading fintech firms such as SAP, Gartner and McKinsey are exploring ML/AI solutions for their enterprise clients.


The distributed ledger of the blockchain boosts businesses’ ability to comply with KYC/AML on several fronts. First, it breaks down many of the current silos in larger organizations, allowing data to be shared concurrently with all parties. “Any updates and changes in a client’s status or a potential scam or fraudulent transaction could be communicated and updated in near real-time,” says Breana Patel in Finextra.

Next, the blockchain can make identity verification and management much easier. Blockchain startup KYC-Chain, for instance, has developed compliance software that helps businesses meet the highest compliance regulatory standards with minimum effort. In addition, through its not-for-profit arm, the SelfKey Foundation, it’s working on an identity wallet to help consumers securely manage their identities and easily apply for financial services. KYC-Chain and SelfKey allow companies to comply with KYC/AML, counter-terrorism financing and data protection laws, and to onboard new customers with more efficiency, while individuals can preserve control of their own identity.

What’s next?

Technology is a tool that can be employed for positive or negative results, depending on the intent of the user. Legitimate businesses are realizing the power of technologies like machine learning, artificial intelligence and the blockchain to put their KYC/AML efforts on steroids and hit criminals where they’ll feel it the most – all while reducing costs and working to serve their own clients more effectively.

About the author:

Lain Ehmann is a Stanford-educated, Silicon Valley-trained communications strategist focusing in emerging technologies. She’s written for the Boston Globe, the San Jose Mercury News,, the Huffington Post, and dozens more. Find out more on her website at

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