The Swiss have come up with 'know your customer' software to preserve the tangled skein of correspondent relationships that exists between private banks in 'highly risky' jurisdictions, notably in Eastern Europe.

One would never guess from the advertising bumf that KYC Exchange Net has been publishing about its 'know your customer' communication platform that this new, stress-tested software is not designed to contain any information at all about actual bank customers. Its aim is far more commercial: to preserve the tangled skein of correspondent relationships that exists between tiny private banks in 'highly risky' jurisdictions (notably in Eastern Europe) on the one hand and the massive onshore banks of New York, Hong Kong, the City of London et cetera on the other by keeping bureaucratic costs down in the face of higher and higher regulatory hurdles. 

These days, it takes a good deal of effort for banks to establish correspondent relationships with each other in the correct regulatory way. They not only have to swap identifying documents such as articles of incorporation, regulatory status, information about board-members and proof of ownership; they also have to look into each others' KYC policies and procedures to ensure that they are adequate and that the relationships are worth commencing - or continuing. KYC now stands for 'know your counterparty' as well as 'know your customer'.

Cheap periodic reviews 

The way the software works is simple yet, until now, nobody seems to have constructed a secure platform for the purpose. Private bank A uploads all the information it might wish to reveal about itself, plus supporting documents, onto the platform, which keeps it confidential for as long as the bank wants. Private bank B, with which it is trying to form a relationship (or with which it already has one but the time for renewal has arrived) wants to access some or all of its documents to see whether its home regulators and/or Bank A's regulators will approve of the relationship if it comes to their attention. It receives only as much information as Bank A allows. Bank A decides whether to yield up this-or-that document for inspection at the moment of Bank B's request and not before.

Joachim von Hänisch, one of KYC Exchange's two founders, commented: "We're talking about periodic reviews here. They have to reconfirm all the AML policies and take another look at existing board members. This process was fairly easy until a couple of years ago, when the requirements became more onerous and the fines for non-compliance went much higher. Another of the issues of today is that the Financial Conduct Authority and other regulators don't publish very clear rules."

When asked whether the platform adhered to the Wolfsberg principles of anti-money-laundering best practice for banks (named after UBS's training centre in Switzerland), von Hänisch said: "We are going beyond it. A while ago Wolfsberg published a questionnaire containing 25 questions that banks ought to ask each other about their AML policies, but they were vague ones such as 'do you take a risk-based approach to due diligence?' and regulators grew dissatisfied with them. What we did to improve on that was to ask a dozen or so big European banks what they wanted to know from their counterparties. As a result, we compiled a list of 150-200 questions and asked Protiviti, the compliance consultancy, to vet them and make further suggestions. The result was about 450 questions, all contextual depending on the banks' answers, i.e. the questioning process resembled a set of 'decision trees' [tree-like graphs in which one answer leads the reader on to a particular set of other questions].

Correspondent relationships at stake 

"We did a survey recently and found that when a Western bank goes through a KYC process once a year, it costs perhaps £15,000 - £20,000 for it to look at a bank in a high-risk jurisdiction. Very often, it finds that it does very little business with that bank throughout the year, so the KYC process - and therefore the relationship - isn't worth it! Many small banks do not do it, preferring to cut the other banks off. It is these small banks - very many of which are private banks - that form our main audience. The whole tenor of our platform is to stop KYC from being a barrier to correspondent banking. Without it, a lot of Tier 3 and Tier 4 banks will be cut off. At the moment, the whole correspondent banking network is under threat." 

Von Hänisch was the regional head of bank business at Standard Chartered for Eastern Europe until last year. In this capacity, he became aware of a PriceWaterhouseCoopers survey of 2011 which suggested that 20% of banks thought that they ought to be doing 'KYC' in a competitive way instead of co-operating with other banks over it. Their hope was that other banks would liquidate their relationships because of the aforementioned costs and then they would hoover those broken relationships up for their own use. Von Hänisch thought that this attitude was extremely wasteful to the banking industry and commented further. 

"When you look at existing KYC solutions, the most important thing to look at is shared utilities. These cause problems because the requirements of a shared utility are the same for every bank and all banks' internal procedures are different but no bank will change its internal procedures to fit in with a shared utility. You can't expect them to change policies but you can standardise the format and leave it at that. The banks are able to upload their documents (e.g. their articles of incorporation of association) on our system.

"We are merely allowing two banks to talk to each other. There is a live link between you and your counterparties - it's a bit like LinkedIn."

KYC Exchange Net AG was incorporated in Zurich in June 2013.