Establishing robust validation and standardisation in entity verification to enhance growth and innovation

By Henry Balani, Global Head of Industry & Regulatory Affairs at Encompass Corporation

Financial institutions and banks are actively seeking ways to improve their corporate ‘Know Your Customer’ (KYC) processes to enhance customer experiences. Nonetheless, banks face challenges due to the absence of corporate digital identities (CDI), which complicates the effort to streamline corporate KYC and fulfil regulatory requirements.

Establishing verification of business entities and CDI is fundamental to the KYC procedures that financial institutions use to assess the potential risks associated with a business profile and respond appropriately. Consequently, there has been an increase in entity verification services, and banks, along with financial institutions, acknowledging the necessity of employing technological solutions to create strong verification and standardisation processes that comply with regulatory standards.

However, experts are sounding the alarm on a critical oversight: verification must be supported by  comprehensive validation and industry-wide standardisation. As businesses increasingly depend on these processes to safeguard transactions and data, the failure to integrate robust validation measures and adhere to standardised practices leaves systems vulnerable, undermining the very security they aim to ensure. This gap exposes them to significant risks, necessitating an urgent call for a more comprehensive approach to entity verification.

There is an inherent risk associated when financial institutions verify customers using manual KYC procedures and any exposed weaknesses could be exploited by criminals looking to launder illicit funds, leaving banks vulnerable to financial crime, fines, and reputational damage. In the age of the dark web, criminals can, and do, share knowledge of which banks have weaker validation processes. However, with CDI, banks can rely on a robust level of identity verification which, in turn, will elevate industry processes to tackle financial crime collectively.

With this comprehensive approach, industry coalitions, such as the Financial Services and Markets Board (FSMB) and Centre for Finance, Innovation and Technology (CFIT) are calling for further standardisation of business entity verification attributes and processes to ensure adaptable industry standards are created to align with key KYC procedures, regulations,  and compliance laws.

Entity verification vs entity validation

There are differences to note between the term ‘entity verification’ and ‘entity validation’. These terms are often conflated, but they serve distinct purposes in business authentication. Entity verification refers to the process of confirming the identity of an entity —be it an individual, organisation, or business— this process checks that the entity is who or what it claims to be.

This process typically involves checking company registration records, organisation charts, and other official data sources. The goal is to ensure that the entity exists and is legally recognised, but it does not dive deeply into the accuracy or legitimacy of an entity based on the sources used.

In contrast to this, entity validation goes a step further by assessing the authenticity, accuracy, and credibility of the information provided during the verification process. Validation involves cross-referencing data across multiple sources, checking for consistency, ensuring source documents are authentic and legitimate, and ensuring that the entity’s claims hold up under scrutiny. This process helps identify discrepancies, such as inaccurate or outdated information, which could pose risks to businesses.

While verification confirms identity, validation ensures that the identity is both legitimate and trustworthy. For this reason, entity verification is not enough without validation. CDI addresses this.

Standardising the framework

After establishing the differences between verification and validation, experts are continuing to call for industry standardisation of these processes, but what does this mean?

The standardisation called for refer to the required data elements/attributes that need to be gathered and analysed as part of both the verification and validation processes. The consequent lack of standardisation is resulting in inconsistent KYC procedures, both within financial institutions and subsequent interactions with their corporate customers.

With a lack of industry standards, client onboarding processes can be unnecessarily complex and costly with multiple requests for data and documents from customers, leading to time delays and incomplete data coverage, often leaving the customer frustrated during time-consuming processes. This also results in banks needing to hire expensive experts to interpret regulations and develop policies, but industry-wide standardisation would create clarity for this process and drive down compliance costs for banks.

Regulatory compliance requirements may also be at risk, given that data collected from a corporate customer in a specific jurisdiction may differ from another region’s jurisdiction, adding an extra layer of complexity for banks to navigate. While regulatory requirements may differ across authorities, the establishment of common standards, with specific requirements on top of these common standards, will allow for the identification of potential gaps in coverage even before the KYC processes are initiated.

This standardisation is critical for ensuring consistency, reliability, and compliance across industries. A unified framework helps establish clear guidelines that all organisations can follow, ensuring that the same criteria and procedures are applied universally. This consistency not only enhances the accuracy and trustworthiness of entity verification and validation but also streamlines operations and client onboarding, reducing the burden on businesses to navigate varying protocols.

In an ever-changing regulatory environment, as regulations evolve to address new challenges, including cybercrime, financial institutions must adapt both their verification and validation processes to remain compliant. A standardised approach ensures that these processes are aligned with legal and regulatory requirements, mitigating the risk of non-compliance and the potential penalties that accompany it.

Looking ahead at future of the financial service industry

The future of standardisation, entity verification and validation supported through the use of CDI is poised to be shaped by several emerging technologies and trends that promise to revolutionise the way financial institutions operate.

The industry will see a greater reliance on automation and AI, enabling more sophisticated analysis of vast datasets to detect fraud, anomalies, and patterns that traditional methods might miss. These technologies, such as intelligent document processing, can enhance the accuracy and efficiency of both verification and validation processes, reducing manual errors and accelerating decision-making. Standardisation will also make the processes more transparent and predictable, allowing for auditability and efficient oversight from regulators.

Blockchain technology is also gaining traction as a tool for creating immutable, transparent records of transactions and identities, which could significantly bolster trust and security in CDI practices.

The advancement in technology will significantly affect the financial services sector. As these innovations become increasingly integrated, they will change the way financial institutions handle risk, regulatory compliance, and client interactions. Banks that integrate automation, AI, and blockchain into their customer data integration strategies will be in a stronger position to comply with stricter regulatory demands while also improving the customer experience through quicker and more secure onboarding processes.

That said, embracing these technologies will necessitate careful attention to data privacy, ethical issues, and the requirement for systems to work together effectively. For banks developing their customer data integration strategy, the key challenge will be to balance innovation with adherence to regulations, ensuring they remain nimble and competitive in an ever-changing financial environment.

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