Increasingly stringent regulations are putting greater demands on companies to have a deep understanding of those they do business with. For those active in the financial services sector, it is essential to carry out due diligence on clients to verify their identity, fraud, money laundering and terrorist financing.
Besides local obligations, there are international regulations such as Anti-Money Laundering (AML), the Alternative Investment Fund Managers Directive, the Foreign Account Tax Compliance Act and the Common Reporting Standard.
It's not enough to conduct a few cursory checks before you on-board a new client. A comprehensive knowledge of the customer is essential, especially in identifying people who are the subject of sanctions, or Politically Exposed Persons, or those who may be high risk to customers and stakeholders.
There can be several consequences for not doing this. If a local or international government regulator suspects a company of not meeting its Know Your Client (KYC) obligations, it will investigate. This is usually because a company's monitoring procedure highlights a suspicious activity, which is then reported, or because a whistle-blower contacts the appropriate regulator with concerns. This could mean a lengthy and time-consuming study of internal documentation, archiving and procedures – risking disruption to business as usual.
If a company is in breach of complying with appropriate regulation, it could be subject to fines and even prohibited from selling specific products or services. At the extreme end of the scale, those responsible for fraud or money laundering could be imprisoned.
Once a company is fined, it will be watched even more closely by the regulatory authorities. The onus will be on the company to demonstrate robust procedures and 100% compliance with KYC requirements.
Image can be damaged
If the regulatory authorities are carrying out an investigation for non-compliance, fraud or other matters, the company's reputation can be damaged. Investors, customers, and suppliers may no longer wish to work with such an organisation.
Proven breaches of non-compliance could be even more harmful. Nobody wants to do business with a company which funds terrorists or launders money for personal gain. It doesn't take long for a company to flounder if it is losing sales, financial backers, and reputable suppliers.
While criminal actions are intentional, money laundering facilitated by financial institutions is not always a deliberate act. But where's the benefit in proving naivety? The threat of a fine or imprisonment should not be the main motivation behind a company maintaining a clean KYC record.
Corporate integrity is key
Consumers and clients expect a high ethical standard and demonstration of good moral behaviour from their banks and other financial institutions. The standard for corporate integrity is being continually raised – both by regulatory authorities and the public at large. Financial institutions must ensure that the transactions that they process are all legitimate.
To counter terrorism and money-laundering frauds, country-specific requirements combine with international regulations to minimise risk and regulate doing business around the world. In today's economy and in an environment increasingly vulnerable to sophisticated criminal and terrorist money-laundering techniques, regulations are becoming necessarily rigid.
Taking the European Union as example:
The EU Anti-Money Laundering (AML) Fourth Directive, enacted on 25 June 2015, will be implemented by all EU countries into their national law two years later, on 25 June 2017. It replaces the third such directive with an emphasis on ultimate beneficial ownership and enhanced customer due diligence (CDD). The new measures require institutions to become more risk-focused in the way they manage their due diligence programmes. Not surprisingly, each time a fresh directive is issued, the scope of businesses affected widens. The new directive has expanded to include the entire gambling sector beyond just casinos. Debate around a fifth directive speculates including the motor trade, boat brokers, estate agents and jewellery firms, to name but a few.
Widening the scope for compliance
As mentioned in the above example, the list of companies that will be regulated is growing and will expose those new to KYC obligations. These companies must quickly grasp the new regulatory parameters in which they must operate, to avoid risks.
Companies in scope are expected to screen new clients according to a range of criteria, and for those operating in different countries, the responsibility and workload can be challenging. A European company wishing to do business with a Middle Eastern or Asian company about which it knows very little can face an onerous and complex schedule of KYC checks and requirements.
It is important for companies to constantly invest in training their in-house compliance departments, but all too often these are under-resourced and unable to cope with the ever-changing regulatory environment. Internal processes, many of them manual, may be inefficient and risky.
Get expert help
If you're facing an ever-challenging regulatory environment with finite in-house resources, then it makes sense to consider a specialist provider to supplement or manage your company's KYC requirements. It is very challenging for a company to keep up with every regulatory change but with global reach and local knowledge, a specialist will provide a deep understanding of country-specific and international laws and guidelines which enable you to do business openly and in compliance around the world.
It is also important not just to source a robust on-boarding due diligence procedure tailored to the needs of your business, but to engage a specialist who can also continuously monitor the process to maintain KYC standards and meet local and international regulatory obligations on a continuous basis. On-boarding is simply the first stage. Ongoing due diligence is just as important, to avoid any breach of compliance and risk of investigation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.