What is perpetual KYC (pKYC)?

Perpetual KYC, or pKYC, is a best practice for approaching the know-your-customer (KYC) process. It’s seen by many innovative financial institutions and regulatory technology (regtech) providers as the answer to an increasingly complicated compliance landscape and high expectations from regulators. 

What is perpetual KYC?

Perpetual KYC (pKYC) is the ongoing process of updating and verifying customer information instead of conducting periodical KYC checks. Usually, pKYC requires implementing automated systems and processes powered by artificial intelligence (AI) and machine learning (ML).

Interest in pKYC has been growing following the Financial Crimes Enforcement Network (FinCEN) Files, the 6th Anti-Money Laundering Directive (6AMLD), and a surge in regulatory anti-money laundering (AML) fines globally. In this environment, firms are keen to find an approach that reduces customer risk and increases compliance.

The difference between perpetual and traditional KYC?

Traditional KYC happens at set intervals in the customer relationship, whereas perpetual KYC is an ongoing approach to due diligence that occurs in real-time. 

As part of compliance and AML obligations, financial institutions must regularly review the information they hold on their customers. Traditional KYC happens at the customer onboarding stage and again every few years – usually after one, three, or five years, depending on perceived customer risk. This is commonly referred to as the ‘one and done’ KYC refresh process. 

An obvious flaw with traditional KYC is that, in between these scheduled reviews, customer information may go out of date. The information would then stay inaccurate until the next KYC review took place. This means financial crime may go undetected for a significant period, risking reputational damage and regulatory fines.

Although a customer check can be brought forward if a risk is identified, manual checks require more time and resources than AI-powered solutions. Across the financial services industry, it’s accepted that traditional KYC is becoming outdated and is no longer fit for purpose. 

How does pKYC work?

Also known as event-driven KYC or continuous KYC, perpetual KYC transforms customer due diligence (CDD) by dynamically monitoring changes to customer data in real-time. It helps to give a 360-degree view and bring the customer to life, beyond the individual transactions they make. 

Rather than an analyst manually checking a customer when it is time for their next KYC review, pKYC software utilizes cloud technology, AI, and ML to monitor customer data. If a profile needs additional scrutiny, a ‘trigger’ or ‘alert’ sets off the CDD process. This alert may be initiated by suspicious behavior, a new entity designation, or a customer amending identifying information. Individual firms can adjust their pKYC parameters based on their internal policies and procedures.

Perpetual KYC has great potential for saving financial institutions time and resources. Global auditors PricewaterhouseCoopers (PwC) found that the average time to manually conduct a KYC due diligence check on a corporate customer is 40.3 hours. The average is even higher for a retail customer. PwC estimated that by moving to pKYC, a firm could save 60-80 percent, or $14.4m, per year. 

While KYC is sometimes viewed as a burdensome part of banking, customers subject to pKYC may develop a greater sense of trust toward their bank. In turn, this can increase brand loyalty and improve the institution’s reputation.

What are the benefits and drawbacks of perpetual KYC?

The benefits of perpetual KYC include:

• Helps firms meet legal and compliance obligations.
• Reduces the risk of incurring fines.
• Helps spot financial crime earlier.
• Increases efficiencies and reduces silos and overheads.
• Offers firms upselling opportunities due to improved customer insights.
• Can enhance user experience and reduce customer frustration.
• May help to boost brand reputation and customer retention.

The drawbacks of perpetual KYC include:

• pKYC is an evolving practice – there is no standardized model yet.
• Data needs to be rich, consolidated, and of high quality for pKYC to succeed.
• Firms need resources, in-house advocates, and robust management to bring about a culture change from traditional KYC to pKYC.

pKYC in AML compliance

pKYC is considered the upgrade the financial industry sorely needs regarding CDD. It’s the next step in regulatory compliance and an essential component in the fight against financial crime, including fraud and money laundering. Many firms are already making the switch and finding that pKYC can be transformational.

Before shifting to pKYC, firms need a clear roadmap and an agile approach – some organizations have found it helpful to start with a use case, perhaps on a discrete segment. Others advise developing a culture of pKYC and learning from peers who have already incorporated this innovative new approach to CDD. 

ComplyAdvantage is perfectly placed to help firms achieve perpetual KYC. Our customer screening software combines leading AI and cutting-edge API integration with automated data generation that is constantly in a live state. This allows firms to keep up with important changes and prioritize pKYC alerts into low, medium, and high-risk with tools such as Smart Alerts.