Multi-million dollar settlements for not complying with Anti Money Laundering/Know Your Customer (AML/KYC) regulations are becoming a regular occurrence. In 2020 fines totaled an enormous 2,2 billion USD, almost five times as much as the year before. Dutch banks are also under a magnifying glass. Two of the big Dutch banks have already been fined and a third is currently undergoing inquiries.
The regulatory burden that is placed on banks to prevent money laundering is ever increasing. It is estimated that currently 20% of all bank employees are involved with AML/KYC investigations according to an article in Financieel Dagblad. Aside from the possible fines that the banks risk, the labor and IT costs associated with this growing responsibility are immense. This explains the trend we see whereby banks indirectly or directly pass on these costs to their clients, with the first banks already announcing periodic AML/KYC cost charges to their clients. The question we try to answer in this article is:
“How can a corporate anticipate this trend and which instruments can the Treasurer utilize to minimize the impact of this development?”
There is no one-size-fits-all solution to this topic as it depends on many factors. Broadly, the jurisdictions where an organization is active, the organizational culture and the company structure are general factors that play a role. More specific factors are the maturity of the treasury or cash management function, the current (main) banks’ capabilities and whether a willingness to potentially migrate to another bank is present.
In general, establishing a fully-fledged “in-house bank” is often seen as the ultimate dot on the horizon for a corporate cash management function. Also for this specific (AML/KYC) issue it could offer a solution. Executing (all) payments from a central entity with a Payments-on-Behalf-of and/or Collections-on-Behalf-of structure, where the payments are subsequently settled internally, would substantially reduce the number of external bank accounts required and lower overall banking costs. However a lot of (initial) effort and man hours are required to set up this structure, and every entity in the organization needs to be ready to accept this structure, often requiring a significant amount of organizational political effort.
By setting up an in-house bank the corporate can also capitalize on opportunities offered by SWIFT GPI (Global Payments Innovation) and Instant Payments. Cash managers are also more enabled to centralize cash in an (cost-)efficient manner. With SWIFT GPI the lead time of a cross border payment has not only significantly decreased (to one day maximum), it has also increased the predictability and reliability of cross border payments. Coupled with the possible integration in your ERP/TMS, this could mitigate or limit the necessity of having a (physical or notional) cash pool with non-resident accounts, thereby reducing banking costs.
Furthermore, the increasing KYC/AML requirements placed on banks could also have a positive spillover, if initiatives like the GAINforum (with applications such as IDiN in the Netherlands) become more widespread. This would enable the companies’ employees to be identified using the banking portal login. Other opportunities lie with the use/integration of the Legal Entity Identifier (LEI) in the KYC process.
There are also several (Fintech) solutions available which could support the corporate and help increase efficiency in the (recurring) KYC process
The possibility of KYC/AML costs being forwarded by banks to corporates is already a reality in some cases. This threat of increased costs could however also open up the opportunity for the Treasurer to develop the corporate cash management function to the next level of maturity. Now is the time to take a critical look at your company's bank account infrastructure, to rationalize where possible and to concentrate accounts at carefully selected banks. Furthermore, by assessing whether an in-house bank structure is suitable, potentially a further substantial reduction of external bank accounts could be realized.
How do you see this trend of increased KYC/AML costs and are you already anticipating it within your organization? Please reach out to me if you would like to further discuss or if you have any (specific) questions about your own situation.