Compliance Matters talked to Dan Le Blancq, the director of Elian Due Diligence, about the latest ways in which non-face-to-face 'know your customer' controls can be automated and outsourced. Such is the pace of change in IT that the tools needed to build the necessary 'apps' are now cheap and available to everyone.

The world is a big place. What sort of 'know your customer' controls should apply when a high-net-worth individual wishes to establish accounts with a financial institution located far away from where he is? Up until now the relevant bank, broker or other financial service-provider asked for documents to be sent to it physically. It typically asked the individual to send it copies of utility bills in the post; the same with letters of introduction from a notary or a lawyer or some other professional who is deemed trustworthy.

The minimum KYC requirement for the UK and many other jurisdictions that follow its lead is still '1+1', that is to say one document that identifies the applicant for business as a person and another that ties him to an address in some way. The most common combination is a passport or perhaps a driving license plus a utility bill or letter from a government department. There were and still are, however, various grades of proof – this is especially variable when, for example, a private bank in London has to verify the identities of foreigners based abroad who are not planning to visit the UK. This leads to cases in which regulators such as the UK's Financial Conduct Authority, whose job it is to uphold the Money Laundering Regulations 2007, expects the institution to conduct additional 'due diligence'.

EDD in general and Elian in particular

Elian, the fund and trust administration firm, has marketed a new app that provides a paperless alternative to certified true copies for individual KYC purposes. Its name is ID Check. Using it as an example of what software can now do, Le Blancq expounded on the use of remote document management in 'extra due diligence' or EDD in general.

“How does Elian conduct EDD? If the financial institution has a predictable client base in the UK, there are good routine directories like the electoral rolls and Yellow Pages. With more dispersed clients, my company ends up asking our clientele to go to a notary and use a courier and, weeks later, an account can be opened. We developed a tool that carries out 10 checks.

“The customer, instead of being asked to engage the services of a lawyer, can use their smartphone and download an app from the Apple Store or Windows/Google equivalent, take a photo of himself, the ID page of his passport, his ID card and a photo of a recent utility bill, in other words take a photograph of all of the documents you would ask of a notary. He then inputs information about himself such as his name and address, and then pays £1 or €1 using a payment gateway hard-based into the app. Then he's done! This is all instead of having to go to a notary and wait for the documents to make their way to the financial institution.”

What does Elian do with that information? Le Blancq continued: “If we take the Money Laundering Regulations and the Joint Money-Laundering Steering Group's guidance notes, which are comparable with other jurisdictions under the Financial Action Task Force, we find that where a regulated person is dealing with customer non-face-to-face, further verification is needed. We need something above and beyond what you would do when sitting in the same room as the customer.”

Le Blancq said that the regulations suggested a menu of extra things.

1. Document notification signed by a regulated professional: “people often take this easy option and then think, that'll do for us. That's where the industry has stopped thinking.”

2. Certification.

3. “Obtain more information than you would in a normal ID check. Like a second ID photo, and look at the name and address in the person's credit or debit account.”

4. The taking of a live photograph – this is what Elian's app does as a matter of course.

5. It is also possible, using an app like Elian's, to register the latitude and longitude of the person.

6. “We hit a second extra option. The second is – the Money Laundering Regulations say another good way of taking this extra measure. Take a payment from an account held with a regulated body in the country. £1 is all you need.

“Once you put all that together the output is a single page report. A screen that's saying this person (giving name, date of birth etc.) paid £1 from this location.”

Verifying pictures of documents

It is important for humans to view documents and pictures showing the applicant for business and his documents. Elian offers multiple levels of service here. Le Blancq said: “We perform standard checks. We get human beings to look at the selfie and decide if it looks like that person. Ultimately, the responsibility rests with the financial institution. We provide a red, amber and green score.

We check the name, date of birth, place of birth, nationality...we check it across the documents for consistency.”

What happens when the KYC process encounters more than one spelling for the customer's name, as is all too common for names originally spelt in other alphabets? Le Blancq said that only the human element could help here: “Going between the spellings, we ask experienced employees to look for inconsistencies.”

Latitude and longitude

Likewise, cultural differences often stand in the way of CDD. One of the most notable is the long-entrenched Middle Eastern habit of using PO boxes to collect mail and keeping addresses private. Le Blancq said that Elian's remedy for this was triangulation: “In the Middle East, you have bills going out to PO boxes even today. We always ask for the address first, but then ask the customer to complete the app in their home. That way, we can ascertain their latitude and longitude. That presupposes in the first instance that they're in their office. You can do it all with freeware. All modern mobile devices with satnav apps, 'find my friend' apps, have latitude and longitude on them. They tell you to press 'OK' to let whoever you're talking to use latitude and longitude.

Font sizes

The last check Elian's app does is to look to see if the credit or debit card was processed. It can enhance that process with passport identification as well. He went on: “With (e.g.) a Russian, we can take a snap of his passport and compare it with our font sizes (and colour, positioning and even watermarks because you can do things with infra-red and ultra-violet) that we have seen on other passports. It [the app] builds a huge library of various passports. This technology is used in Israel. You get on the plane and put your passport in the scanner. These days, the resolution on smartphones is so good that no scanner is needed.

Tools on the market

Le Blancq said that the app looked at driving licences and ID cards but not yet birth certificates: “It's expanding all the time, so it's a learning process. There are algorithms. It learns what a South Sudanese passport looks like. It's third-party software. The apps software is ours.

“There are fantastic tools to help build an app because there is some wonderful software out there to help you build apps. Five years ago, it would involve going to a developer. Now, you don't need an ID technical person. My kids use the same platform.”

Le Blancq thought that the human element of EDD blended into an automated process well: “The checks we are offering here – they're not rocket science. They don't require 10 years in the border forces. We all have efficient facial recognition software – it's been 4 billion years in the making! We express an opinion [about somebody's face or the veracity of his documents]. Ultimately, it is the recipient firm's responsibility to get it right. Also, we're getting humans to look at details expressed in readable language – that requires an expert in the relevant alphabet. Fortunately, Elian has a global network and can send a peculiar document off to the Hong Kong office or the Bahrain office.

“If there's an inconsistency, we raise a red flag. We're not certifying or giving absolute assurance – we're really just providing 'admin'. Our client firms can elect to ask us to do no human checking

Working remotely

The idea of at least semi-automating the process of EDD online or by means of telecommunications is not a new one. After the passage of the USA PATRIOT Act in 2001, State Street dipped its toe in the water with an online system that scanned documents onto the system wherever they were available in first-world countries and contacted private investigators in jurisdictions such as China if those documents could only be acquired by a trip to the local library. Either because the available technology was not yet up to scratch or for other reasons, the initiative foundered. Le Blancq was interested to hear this and said that with the advent of smartphones the job of collecting documents was far faster and more accessible to everyone in every situation.

“When we launched, we thought we'd be mainly catering to the needs of 35-year-old hedge fund managers in Manhattan, but we also had old high-net-worth people. One 86-year-old lady used her phone in the jungles of Brazil [to upload documents] instead of having to trek into town.

“There's a second example of where this helps – we're involved with offshore vehicles. There's always time pressure when someone from one of these structures is applying for business, or a 'blocker' at the end. For example, we were once charged with incorporating a Jersey company with the purpose of owning shares. We couldn't appoint the directors because we didn't have our EDD. Deals often cannot be done because someone hasn't presented one of their documents. Using today's technology, which is not expensive in itself, we can get him even if he's in South Africa inspecting a mine, which is what happened in this case. We just phoned him up and got him to access a smartphone.”