Validating identity key for digital: Build a KYC database to prevent fraud

MD for risk & supply chain at Thomson Reuters, Cotter says simply collecting documents won't cut it

PHIL COTTER, managing director, risk & supply chain, Thomson Reuters, has important advice for Indian policy makers. In a conversation with Rajesh Bhayani, he spoke about actions required to tackle money laundering and how central banks and other government entities are scaling up regulations worldwide.

India is giving a big push to digital transactions after demonetisation. What issues need to be addressed to achieve success?

As digital transactions pick up, there must be an increased focus on validating the identity of customers. Therefore, know your customer (KYC) becomes a very critical process for all financial institutions. Most financial institutions may argue that they presently carry out stringent KYC checks, however, their process is limited to the collection of documents without much validation of their authenticity. For truly effective and in-depth KYC checks, financial institutions must carry out enhanced due diligence on customers and focus on ultimate beneficiary ownership.

What can banks do to address these challenges?

Moving from KYD (know your customers' documents) to KYC will be imperative for banks if they want to provide digital services, such as payments, to their customers. Failure to do so will expose them to increased risk of fraud and money laundering.

For Indian Banks that are financing cross-border trade, there is also an increased risk of money laundering and sanction breaches. Banks must have a comprehensive risk management mechanism to ensure that there are no gaps in the ‘digital economy’ and develop a better understanding of their customers — such as understanding the ultimate beneficial owner of the company they are providing finance to. This will go a long way in facilitating that.

How can such frauds be traced?

We need a comprehensive mechanism, not just to trace frauds but also to pre-empt and flag them off in time. At Thomson Reuters, our propositions help identify and track both companies as well as individuals for any probable risk. For example, if a company is not performing according to expectations or has a history of payment defaults, it is flagged off on a real-time basis. A similar mechanism is in place for tracking an individual as well. Individual risks such as a low credit score, evidence of past corruption cases or PEP (politically exposed people) are tracked effectively. In fact, as part of our Global Trade Management proposition, we also track shipping routes to ensure that the shipments only traverse the designated routes. We also have the world’s largest database of commodity prices which can be used to see if the pricing of commodities is in sync with prevailing market prices and the receivers’ (recipients’) identities.

Could you tell us about the practices used globally for checking cross-border transactions to prevent frauds?

In the US, we recently entered into an agreement with six large US-based banks, including Goldman Sachs, J P Morgan, Barclays and Credit Suisse, to help build and maintain a KYC data base. This helps us to check KYC identities of clients for whichever bank or company comes to us. This is similar to a tie-up that we have entered into with three banking players in Southern Africa, and we are also in talks with banks in other regions for similar tie-ups. This really helps the banks to lower the cost of their KYC operations and manage the risk of doing business with third parties more effectively.

The US has started adopting protectionist trade policies and reversing previous policies. Last year, President Obama implemented the US Trade Enforcement Act which empowers US Customs to stop any shipment or transaction of imported goods if it does not comply with US laws and regulations. Do you think this law, which protects US industry, may be used more emphatically?

I personally believe that this law will be emphatically used for any goods entering US territory and hence exporters to the US, and there are plenty of them in India, have to be compliant. On the other hand, it is possible that the US authorities may take a lenient approach towards US-based manufacturers.