Sanjiv Sanghvi, Board Member – Avalo Holdings
Jul 21, 2025
Primary failure in the current compliance model is "derivative compliance"
Executive Summary
Despite banks investing billions in compliance, financial crime continues to escalate. Traditional due diligence practices—rooted in institutional-level assessments—have proven insufficient in curbing illicit financial activity. The Federal Trade Commission reports that consumer fraud losses exceeded $12.5 billion in 2024, up 25% from the previous year (FTC Consumer Sentinel Network Data Book, 2024). Meanwhile, global financial institutions incurred over $26 billion in AML, KYC, and sanctions-related fines between 2008–2018 (Fenergo Global Regulatory Fines Analysis), with penalties continuing to mount—exceeding $6 billion in 2023 alone.
The primary failure in the current compliance model is "derivative compliance"—where banks rely on their institutional partners' KYC processes rather than verifying individuals and businesses behind transactions. This misalignment of accountability and control leaves financial institutions legally responsible for compliance failures but blind to transactional risks.
Know Your Client's Customer (KYCC) offers a transaction-based due diligence model that enhances financial transparency, aligns with emerging regulatory trends, and integrates with existing systems. By shifting from solely institutional trust to transaction-level verification, banks can reduce costs, strengthen fraud detection, and gain a competitive edge in an evolving regulatory landscape.
I. Introduction: A System Designed to Fail
In 2006, Mexican authorities seized a DC-9 aircraft carrying 5.5 tons of cocaine, linked to clients of a major U.S. bank. Despite compliance checks, illicit transactions continued to flow. This failure highlights a flawed compliance approach focused on verifying institutional programs rather than transaction visibility.
For decades, due diligence has emphasized verifying that a partner institution has a program, and then relying on it to identify potential risky transactions at the transactional level. This model invites abuse and has contributed to a compliance landscape where large banks spend an average of $1 billion per year on AML compliance (LexisNexis Risk Solutions 2023 True Cost of Financial Crime Compliance Study), yet 95–99% of AML alerts are false positives (ACAMS industry reports, 2023), creating massive inefficiencies.
II. The Core Problem: Derivative Compliance
The Trust Paradox
"Derivative compliance" represents the fundamental flaw in traditional due diligence: banks rely excessively on foreign institutions' KYC processes while remaining legally liable for compliance failures. This approach disconnects responsibility from control, leaving U.S. banks accountable for customers they haven't verified.
The model assumes that if a foreign bank has sound KYC policies, then its customers must be legitimate. But policies don't catch criminals—thorough scrutiny does. Currently, that scrutiny happens too many steps removed from the actual transaction, creating three critical vulnerabilities:
1. Documentation Without Insight: Major financial institutions invest hundreds of thousands of dollars per institutional relationship in due diligence efforts, yet critical risks remain undetected due to policy-based rather than transaction-focused reviews.
2. The Cost of De-Risking: Large banks cut ties with smaller banks due to compliance costs, leading to financial exclusion. The World Bank estimates that correspondent banking relationships have declined by approximately 20% globally over the past decade. This "de-risking" pushes transactions through additional intermediaries, ironically making the system more opaque rather than secure.
3. Fragmented Data, Fragmented Risk: Banks lack unified systems to track beneficial ownership across transactions. Small and large institutions alike struggle to track ultimate beneficial ownership across systems. Without a unified view, transaction patterns across different channels, products, and relationships remain invisible.
III. The KYCC Solution: Transaction-Based Due Diligence
1. Shifting Focus to Where Risk Lives
KYCC moves accountability to where the risk lies—at the transaction level. Unlike derivative compliance, which trusts institutional programs, KYCC implements:
Automated monitoring and customer-level risk assessment;
Direct visibility into actual senders and recipients;
Transparency that aligns with modern regulatory expectations;
Liability alignment at the transaction level.
2. Technology as the Enabler: Rebuilding Trust at the Transaction Level
Modern tools support KYCC adoption without requiring full-scale system overhauls:
API-driven integration: Capturing enhanced transaction data from existing systems;
Unified data repositories: Eliminating data fragmentation while ensuring audit-ready visibility;
AML-Risk-based models: Flagging high-risk transactions while aligning with regulatory standards such as OFAC screening;
Cost efficiency: Enhancing visibility through advanced automation.
This isn't about technology for its own sake—it's about creating visibility where it matters. Automated KYCC solutions can reduce false positives by up to 80% and improve compliance efficiency significantly (Gartner Market Guide for KYC Solutions, 2024).
IV. Implementation Roadmap and Business Case
Financial and Operational Benefits
KYCC delivers tangible, data-supported advantages that align with both regulatory demands and business performance goals:
Cost Efficiency: Industry benchmarks show that automating KYC and KYCC processes reduce onboarding costs by over 70% and cut processing times by up to 90%, while improving risk assessment and data information management, along with stronger audit trails.
Reduced False Positives: Research from leading compliance institutes (e.g., ACAMS, Gartner) indicates that 95–99% of AML alerts generated by traditional systems are false positives. KYCC's transaction-level focus dramatically improves accuracy, translating to leaner operations.
Enhanced Risk Management: Transaction-level visibility enables targeted scrutiny of genuinely high-risk activities rather than blanket monitoring.
Revenue Opportunities: Lower compliance costs enable banks to compete more effectively for correspondent banking business, attract new partners, and potentially regain market share lost to de-risking
Implementation Strategy
KYCC implementation doesn't require a system overhaul. Banks can:
Leverage API-driven enhancements to Integrate KYCC capabilities gradually into current systems, avoiding costly overhauls and minimizing disruption.
Automate key compliance processes to reduce manual workloads, improve accuracy, and enhance transparency.
Prioritize in high-impact areas where enhanced due-diligence delivers the greatest value and risk reduction.
Engage Regulators Early by demonstrating KYCC’s alignment with regulatory requirements like FinCEN's Beneficial Ownership Transparency rules and others.
Proven Results
According to vendor case studies and industry analyst reports (Refinitiv, McKinsey, Deloitte, and Gartner reports), financial institutions implementing transaction-level due diligence report:
40% reduction in compliance costs through automation
80% fewer false positives in transaction monitoring
Improved regulator relationships and reduced scrutiny
V. KYCC as Strategic Differentiator
As regulatory expectations evolve, early KYCC adopters gain significant advantages:
Regulatory Alignment: KYCC directly addresses recent regulatory developments including the 2024 Corporate Transparency Act and FATF's risk-based approach guidelines.
Competitive Edge: Transaction-level transparency becomes a differentiator in attracting high-quality correspondent banking clients.
Risk Mitigation: In an environment where AML fines exceeded $6 billion globally in 2023 (Fenergo, 2023 Global Regulatory Fines Analysis), reduced exposure to reputational and regulatory risk is crucial.
Avalo: Enabling the KYCC Transformation
As a recent addition to Avalo's board, I've been impressed by their comprehensive KYCC implementation approach:
Automated transaction monitoring that streamlines compliance workflows.
Risk-based due diligence models that dynamically tailor scrutiny to transaction profiles.
Interoperable technology that integrates seamlessly with existing banking infrastructure.
These capabilities demonstrate how technology can effectively bridge the gap between regulatory requirements and practical risk management, helping financial institutions shift from defensive compliance to strategic risk management.
VI. Conclusion
Traditional due diligence relies too heavily on proxy trust—on the assumption that a partner's compliance program is sufficient. But paperwork doesn't stop financial crime. Visibility does.
KYCC brings the due diligence conversation to where it belongs: the transaction. With the right tools, banks can see what's really happening—not just what they're told. Technology has finally caught up to the compliance challenge, enabling banks to shift from blind trust to auditable verification.
Today, KYCC is no longer a “nice-to-have”—it’s a strategic imperative. Early adopters are already seeing the benefits: 40% reductions in compliance costs, 80% fewer false positives, and stronger regulatory trust. These advantages will only grow as global standards tighten and enforcement becomes more aggressive.
Banks that delay implementing transaction-level due diligence risk far more than just inefficiency. They face rising compliance costs, increased regulatory exposure, and potential loss of critical correspondent relationships. As competitors move swiftly to modernize, the cost of inaction becomes increasingly severe.
But the opportunity is just as great. By integrating KYCC into existing systems, focusing on high-risk corridors, and engaging proactively with regulators, banks can lead—not lag—in the next era of financial compliance. KYCC doesn’t just reduce risk; it builds trust, enables growth, and strengthens resilience.
The question is no longer if KYCC becomes the new standard—it’s who will lead the transition. The institutions that embrace transaction-level visibility today will define the future of transparent, secure, and competitive banking tomorrow.
Sanjiv Sanghvi brings over 30 years of expertise in commercial banking, treasury management, and international finance to Avalo Holdings' board. As a former EVP and Regional Head of Commercial Banking at Wells Fargo, he has led global banking strategies, risk management initiatives, and regulatory compliance efforts, strengthening Avalo's mission to drive innovation in compliance-driven payment solutions.