BL Anna Mazzon 10 mar 14
Financial regulations lead up to a lot of costly documentation. This ironically allows scamsters to slip through
A UK-based NGO that investigates corruption around the world unmasked a massive money-laundering scheme involving the small Central Asian nation of Kyrgyzstan and four UK-based ‘shell’ companies. The risk it exposed is the kind that KYC regulations were created to prevent.
By the time the scheme was discovered in 2010, over a billion dollars had passed through foreign bank accounts set up by entities that were obviously illegal. Oneowner was a Russian who died three years before the company was formed. None of their accounts were properly registered, and one was legally classified as dormant.
Know Your Customer (KYC) anti-money-laundering regulations are becoming increasingly important globally to help businesses protect themselves from identity theft, money laundering and financing terrorism. Nevertheless, episodes like these are all too common and the costs of complying with KYC’s anti-corruption due diligence procedures are high. According to the International Monetary Fund, incidents involving money-laundering, compliance violations of KYC regulations, and other breaches are estimated to cost between two and five per cent of the world’s GDP.
Managing the burden of proof
High-profile money-laundering incidents involving major global banks are not new, although in recent years a number of firms have been fined record sums for laundering and KYC violations. This was seen most recently in January when the Financial Conduct Authority, Britain’s financial regulator, fined a South African bank for failures in anti-money-laundering controls. As a result, firms are becoming more diligent, organised and proactive in managing the risks and compliance, and are now spending more time and money trying to remedy and avoid repetition of damaging incidents and violations. The operating challenges, however, are considerable. The primary obligations with which the industry must comply are known by an array of acronyms: anti-money-laundering (AML) and anti-bribery regulations (ABC), tax transparency initiatives such as the US Foreign account tax compliance act (FATCA), the Dodd-Frank act (DF), markets in financial instruments directive (MiFID), and European market infrastructure regulation (EMIR) just to name a few.
High-profile money-laundering incidents involving major global banks are not new, although in recent years a number of firms have been fined record sums for laundering and KYC violations. This was seen most recently in January when the Financial Conduct Authority, Britain’s financial regulator, fined a South African bank for failures in anti-money-laundering controls. As a result, firms are becoming more diligent, organised and proactive in managing the risks and compliance, and are now spending more time and money trying to remedy and avoid repetition of damaging incidents and violations. The operating challenges, however, are considerable. The primary obligations with which the industry must comply are known by an array of acronyms: anti-money-laundering (AML) and anti-bribery regulations (ABC), tax transparency initiatives such as the US Foreign account tax compliance act (FATCA), the Dodd-Frank act (DF), markets in financial instruments directive (MiFID), and European market infrastructure regulation (EMIR) just to name a few.
We recently researched how financial institutions and their clients view their key challenges around KYC compliance. The challenges most often cited were differing processes for different businesses or jurisdictions, time-consuming documentation and the lack of harmonised document collection systems.
Basic requirements
At a minimum, organisations are required to document clients’ business type, their source of funds and wealth, the purpose of specific transactions and the expected nature and level of transactions. Many of the sources of data, which include certificates of incorporation, lists of company directors, directors’ passports, and cross holdings, can be very difficult to track down; collection and verification can take several months. Because there are no standards for documentation, there is little consistency and a lot of duplication. . In addition, financial institutions often ask for documents from their clients that are not explicitly required under KYC rules. Different regulators in different jurisdictions also require different identity documents. Regulators also expect the financial institutions to review and refresh the data on typically one-, three- and five-year cycles depending on the type of client.
At a minimum, organisations are required to document clients’ business type, their source of funds and wealth, the purpose of specific transactions and the expected nature and level of transactions. Many of the sources of data, which include certificates of incorporation, lists of company directors, directors’ passports, and cross holdings, can be very difficult to track down; collection and verification can take several months. Because there are no standards for documentation, there is little consistency and a lot of duplication. . In addition, financial institutions often ask for documents from their clients that are not explicitly required under KYC rules. Different regulators in different jurisdictions also require different identity documents. Regulators also expect the financial institutions to review and refresh the data on typically one-, three- and five-year cycles depending on the type of client.
Global banks are spending in the hundreds of millions to manage and update information that has to be redone with every new regulation. Demand for professionals to manage KYC compliance is rising but there are not enough individuals with the proper compliance training. Financial industry collaboration will be important in establishing standards to ensure more consistency in KYC documentation requirements.
(The writer is global head of Thomson Reuters KYC Program)
(This article was published on March 10, 2014)
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