COSTS OF KNOWING WHO YOUR CLIENTS ARE
Trulioo hopes to profit from anti-money laundering laws
Move over fintech: Startups using technology to solve compliance challenges for heavily-regulated financial services firms are on the rise. And one area generating interest among entrepreneurs is automation of the time-consuming process of verifying clients for banks and payment companies.
Banks invest a lot of time and effort to prove their clients really are who they say, and that they are not tied to criminal or terrorist organizations. The “know your client,” or KYC, process is a crucial part of the anti-money laundering, or AML, practices all banks must follow.
But it’s a process that can drive up costs and create compliance risks, and the penalties can be heavy when the banks get it wrong. In April, authorities fined an unnamed Canadian bank $1.1 million for not reporting a suspicious transaction. HSBC, which had already paid $1.9 billion to resolve a drug cartel money laundering investigation in 2012, was sued again this past February by families of the cartel’s victims.
Watch list and KYC checks are becoming big businesses for small firms, Neil Katkov, senior vicepresident of the global Asian financial services group at financial technology advisory firm Celent, said.
Vancouver-based Trulioo, which has had nearly $25 million in funding, created GlobalGateway, a service that aims to verify the identities of financial services clients by querying data sources around the world. Verification is typically a requirement when opening an account, said Stephen Ufford, cofounder of Trulioo.
“In a lot of banks, we expect that we’ll be replacing a lot of manual process,” he said.
In August, Trulioo also launched a service that queries a range of global AML watch lists for flagged names. There are dozens of these lists covering everything from politically exposed persons, or PEPs, through to lists of terrorist affiliates and narcotics dealers.
The way it works is financial services firms send an electronic request about an individual to Trulioo’s computers, the company then queries the appropriate global data vendor from among 200 partners in more than 50 countries. These partnerships allow Trulioo to verify the identities of as many as four billion people, Ufford said.
The information typically comes back as a “yes or no” verification message, eliminating privacy issues involved with transferring information about individuals between countries, he added.
“What we try to do is aggregate all of these different providers while also subscribing to a lot of the manual services in different countries,” he said. “That combination of being able to globally search KYC data and a watch list for an AML check is our core competency, and that’s very unique in the market.”
In addition to real-time electronic checks, Trulioo lets financial customers submit lists of names manually for a watch-list check, which it processes in batches. Ufford argued that every company should be doing this “one-two punch,” at some point in their life cycle.
London-based Trunomi and Paycasso, and Atlanta’s IDology and AuthenticID, all take their own approaches to ID verification, including facial recognition and automated document verification to ease the vetting process for clients.
Regtech firms work in a constantly shifting regulatory landscape with many regional variations. Canada’s Anti-Money Laundering and Anti-Terrorist Financing (AML/ATF) regime is supported by the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. “Canada’s AML/ATF Regime is continually reviewed to ensure that it remains effective and addresses the changing financial landscape, including the development of financial technology,” Paul Duchesne, deputy spokesperson at Canada’s Department of Finance, said.
Jacqueline Shinfield, partner at legal firm Blake, Cassels & Graydon LLP, who specializes in financial compliance agrees the regulations keep evolving. For example, “There are changes coming in June next year that deal with the requirement to determine whether or not the account holder is a politically exposed domestic person, as opposed to a politically exposed foreign person,” she noted.
As well, the Financial Transactions Reports Analysis Centre of Canada (FINTRAC), which enforces compliance with the AML/ATF, is looking into the growing number of financial technology startups to figure out which qualify as money services businesses.
This environment is creating a growing market for startups such as Trulioo, which includes among its first clients payments companies, and numbers firms such as nTrust, PayPal and GE Money. It also serves Dutch multinational Rabobank and Australia’s ANZ.
Ufford hopes a recent funding round will help Trulioo expand further into banking.
The company received $300,000 in seed funding in 2010, and got an injection of $2 million from Blumberg Capital in 2012, and another $6 million from Tenfore Holdings in 2014. Blumberg and Tenfore came back to participate in its biggest round, $15 million, in December 2015 along with BDC and a fourth investor.
That investor was particularly significant.
“Last year, we took an investment from American Express, which does a lot of cross-border money movement and really is a global bank in addition to a credit card. So that launched us into the foray of banks,” Ufford said.
He hopes Trulioo’s GlobalGateway will appeal to “challenger” banks that want to create accounts for customers online. At the end of June, amendments to the AML/ ATF come into force expanding the definition of a signature to include electronic signatures. That enables regulated institutions to open accounts without meeting the customer in person.
“There are a whole bunch of new models emerging and our goal is to allow big banks, like these fintech startups that we’re powering now to do account openings, to also allow me to open up an account exclusively from my iPhone,” Ufford said.
Another area Ufford hopes will yield extra business is in dealing with virtual currency.
“Today, I look at the blockchain phenomenon and cryptocurrencies as a bit of a sizzle. I look at global KYC check as the steak,” says Ufford.
Today, I look at the blockchain phenomenon and cryptocurrencies as a bit of a sizzle. I look at global KYC check as the steak.