Calculating the Cost of Compliance
Remediation projects seem to be a fixture of the current regulatory environment in KYC.
These projects get kicked off when a firm determines, or a regulator determines, that the process it has used to on-board customers and counterparties in the past is not adequate for the current environment. These relationships — and there may be tens of thousands of them — must be re-examined with a new standard of due diligence.
Some firms are also tackling their periodic review backlog on a project basis – and these look very similar to remediation projects.
The Alacra KYC Remediation Calculator was designed to assist in the planning of a remediation project.
How to Structure a KYC Remediation Project
Over the course of several client projects we have observed a number of common elements across these remediation efforts:
There is generally a distinct team set up for a remediation project. In large projects, there may be several teams set up drawing upon different types of resources – FTEs (Full Time Equivalents) vs. Contractors and Onshore vs. Offshore.
The Remediation Calculator models four types of resources:
- FTE, Onshore. These will generally be the most experienced, most productive workers on the project. They have experience in KYC/AML and in your process. You will generally assign the most complicated cases to these resources.
- Contractor, Onshore. These are often workers you have brought on for the duration of the project. While they may have some KYC/AML experience, they are probably not as familiar with your specific process.
- FTE, Offshore. As with their onshore colleagues, these resources may have KYC/AML experience with your specific process.
- Contractor, Offshore. These are ad-hoc resources – often brought on through outsourcing firms to work on a project basis. In many cases, these are the least skilled and least experienced resources working on a remediate project.
These categories are important because:
- They have different cost structures.
- They have different skill levels, thus different productivity levels.
- Their geographic location and contractual relationship may limit contractors’ ability to work with sensitive client data.
Tasks to be Completed
Remediation projects involve performing additional diligence tasks on your counterparties. The Remediation Calculator groups these into three categories:
- Databases to be searched: including searching PEPs databases or adverse news.
- Documents that must be collected: there may be a certain type of document you need to obtain on clients which was not collected in the past. Generally, these documents need to be obtained directly from the client.
- Analysis that must be done: for example, you may need to determine the proper MiFid or FATCA classification for your existing clients.
Before You Begin: Prepare Your Assumptions
Using the KYC Remediation Calculator is easy. You fill your assumptions into the yellow cells in the spreadsheet and the calculator gives you an estimate of the cost and duration of the project. But, like any estimator, the quality of output is dependent on the quality of your assumptions. So you will need to spend some time first gathering information on your project. The types of details you will need for a quality estimate include:
How many counterparty relationships (the Calculator refers to these as “cases”) you need to remediate and which tasks you need to perform to complete the remediation.
I wrote earlier about the four types of resources the model supports. You will need to determine how many of each type of resource you will assign to the project team. Some of this will probably be predetermined – for example, you may have a constraint that you cannot take on any new FTEs. If you have flexibility in how you staff your project, you can use the Remediation Calculator to run “what-if”scenarios to determine the optimal mix.
You will also need to determine the fully loaded cost (or” burdened” as accountants say) of each resource type.
Case Completion or Case Performance Metrics
You will need statistics or estimates on the amount of time each of the remediation tasks take your resources to complete. If you don’t have good stats on this from your business-as-usual (BAU) process, the Calculator provides a reasonable starting point.
Savings through Automation
Many of our clients have found that the process they use for BAU is not efficient enough for large remediation efforts – leading to long and expensive projects. Using compliance workflow automation, firms have dramatically reduced both cost and duration of remediation projects. We provide an“Automation Savings” calculation and chart that estimates the potential for your project given the level of savings other clients have achieved. You are welcome to adjust the efficiency factor.
How to Use the Compliance Remediation Calculator
The Compliance Remediation Calculator has five tabs. Only two require your input, while the others provide information or the resulting charts for your business case presentation.
Step 1: Remediation Planner
On the “Remediation Planner” tab you should enter the metrics (or estimates) for your project into the yellow cells. You will need metrics for:
- Resources: staff and staffing costs.
- Cases to remediate.
- Task metrics for average case completion. You might have to estimate this.
As part of the final cost calculation, we provide several intermediate data points that you may find useful in understanding the cost drivers of your project. The key results: “How Long”? and “How Much?” are displayed in the red cells in the lower right hand corner.
Step 2: Automation Savings
On the “Automation Savings” tab you will provide an estimate of the time saved for case tasks when automation is added to your processes. Again, we have provided a starting point based on our experience with other firms.
Your key results of Time Savings and Cost Savings will appear on the lower right side.
Step 3: Copy Your Charts
Two extra tabs provide bar charts to demonstrate the time and cost savings of completing your remediation project Without Automation and With Automation. You will no doubt find these helpful additions to any presentation on your project.
Ready to calculate the time, costs, and staffing you need?
What’s Not Included:
The KYC Remediation Calculator does not include the cost of outside databases. Like many compliance pros, you probably use World-Check in your KYC process – but this may only be for a limited set of users carrying out business as usual. You may find you need to add licensed users for additional staff brought on to the remediation team.
I hope you find the Calculator to be a useful tool. If you have any comments or questions on the calculator, you can reach me at Michael.Angle [at ] alacra.com. We have a series of useful calculators and data on remediation, so be sure to sign up to receive future blog posts.
[Updated: 7/16, changed calculator name to add “KYC”]