Wealth management institutions are running grave risks in their 'politically-exposed persons' procedures due to fuzzy lines of responsibility and light-touch screening, according to experts at a recent WealthBriefing panel discussion in Geneva.

Against a backdrop of a rapidly-changing geopolitical environment and with global tensions running high, wealth managers find themselves carrying out ever-more exhaustive checks on prospective clients, their businesses and associates. With compliance expertise commanding ever-higher remuneration and data sources ranging from official watch-lists down to social media, the improvement of PEP-screening is a top priority for all institutions, but particularly those dealing with clients from certain jurisdictions.

The anti-business department

The first strong theme to have come out from this PEP panel discussion (hosted by WealthBriefing, our sister-site) was the need for relationship managers and compliance officers to be united in treading a careful line between protecting their businesses' reputations and allowing them to grow. Xavier Isaac, the managing director at Salamanca Group (a company that provides in-depth reports on high-risk PEPs), said: “Your relationship manager or trust manager has to be a commercial person, but they are also your first line of defence in risk management. Equally, the compliance guy shouldn’t just be the 'no' man. Within the boundaries of regulations, policies and procedures, he should be working in partnership with the relationship manager and not ruling by fear, but instead having a can-do attitude.”

Changing attitudes

According to Jonathan Kirby, the Swiss managing director at the private client consultancy of JTC, the required shift in attitudes is already well underway, with relationship managers now focusing very much more on the “risk implications” their clients might represent. This process of alignment is being accelerated by “risk considerations” becoming increasingly embedded in remuneration policies and also by a greater appreciation of the damage that a failure to handle PEPs properly can engender in general.

“There’s been a traditional view that relationship managers get the business in and compliance protect it but, as we’ve seen, when an institution’s reputation is tarnished internationally the impact on everyone, including the front office, is very, very significant.”

In this light, it is unsurprising that firms now want to screen PEPs to a high standard in 'near time' (if not 'real time') where resources allow. René Hürlimann, the EMEA and APAC director at the software vendor-firm of Appway, said: “We now see clients wanting to screen overnight as there might have been a change they need to be aware of straight away. They want to move beyond the initial report to active case management where they can see where things stand at any time – who is responsible for moving the process forward or if there are any red flags, for example.”

Practicalities and ethics

People at the conference seemed to believe that there was an ethical dimension to know-your-customer (KYC) controls. Isaac opined: “This isn’t just about hard things like technology, politics and processes, it’s also about softer things like value systems and business culture. It’s fundamental for relationship managers and compliance to share the same values and be dedicated to the same sustainable business model.”

The panel members were clear that the process of fostering a good business culture must be an active one, where certain values and types of behaviour are promoted and rewarded. According to Isaac, this meant “good intent and integrity coming from the top” and executives feeling obliged to challenge each other in the decision-making process.

When power-politics get in the way

“The ability to say no is a big challenge to a business. These are big clients and it’s difficult to say, ‘This is a big risk and we don’t want to go ahead, even if it’s a million-fee-a-year client.'”

As David Ford, a counsel at Reymond, Ulmann and Fischele, pointed out, difficulties in saying ‘no’ are often exacerbated by the dynamics of power: “A junior compliance officer might have a tough time interacting with a very senior relationship manager with a strong personality, so the issue must be escalated to a senior compliance officer who can more effectively interact with him.”

Lack of proper training and supervision of junior compliance staff can also cause massive monitoring failures. Ford continued: “You might have a fantastic system but the alerts generated might be 'closed' based on inadequate information from relationship managers that the junior person just writes down; the junior staff member may accept documents that are inadequate, lack credibility or are very opaque as justification for closing an alert.”

Due diligence committees and client acceptance committees exist at institutions, but they do not always guarantee good decision-making when firms are mulling over whether to 'onboard' PEPs. Ford said: “The process whereby the most senior executives make the 'onboarding' decision for PEPs may look perfect on paper but may be flawed in practice. Executives may be travelling or otherwise unavailable and the 'onboarding' decisions might actually be made by delegates or the delegates of delegates.”

The panel thought that decisions to 'onboard' PEPs made by more junior staff could lead to charges that the bank was not meeting its responsibilities.

The compliance job market

In view of the personal liability that compliance officers bear for the risks their institutions take on, it is perhaps difficult to envy their position, despite the fact that remuneration levels in this function are skyrocketing. As David Ford pointed out, they have to work with shifting political situations and standards. They always, he said, had to worry about the client’s original source of wealth and the current source of funds evolving significantly over time. Ford invoked UHNW Russian clients as a case in point: an individual may pop up with proceeds from a business that is legitimate today, yet adverse media could well reveal that the original source of wealth was obtained in an unscrupulous manner.

“Maybe some of the methods used to get control over business in the 1990s were not technically illegal, but nevertheless would be unacceptable today. If the owner now decides to sell the company to a well-known Western corporation, the funds received by the bank from the sale may be legitimate, but the reputational risk from the owner’s behaviour in establishing the company remains. The question is: where do you draw the line? How far back do you go in determining the legitimacy of wealth today?”

The question of how far back in time to go when examining negative news is a crucial one, Ford continued, since it is likely that UHNW PEPs will have some negative news whether it is justified or not.

“At any event, if the bank 'onboards' a client who has some negative news it runs the risk of being second-guessed at some time in the future. It is crucial that good documents should exist to record the decision-making process [and they especially have to show] why the bank was comfortable 'onboarding' a client, especially a PEP, in spite of the existence of negative news.”

This comment illustrates very well why wealth managers are investing so heavily in technological client screening solutions today. They sometimes have to scour media reports that go back decades and face problems created by the various spellings for a prospect’s name (and all potentially in a non-Western alphabet). Then, having sifted and assessed all this information, they have to record evidence for every step of the decision-making process in case someone wants to persecute them in future.

Information overload!

The job of sifting through media records is of course just one element of screening clients, but one that cannot be neglected, despite the huge amount of heavy lifting and missteps that a thorough job entails. Alessandro Tonchia, founder of fintech firm Finantix, said that some processes at even very reputable banks were dangerously cursory: “We see people doing searches on Google or Factiva and reading the first ten to fifty documents before giving up. Reading the first ten is good, but it might be the 101st or the 999th that you absolutely need to read. Technology gives us better risk coverage because we can ‘read’ all of those documents to find that this person was accused of X or is a close associate of Y.”

Institutions need to sort through a massive amount of information, traversing databases, watch-lists and media sources. Only if they do this efficiently can they make well-informed decisions about clients' risk levels. This has led to the proliferation of software products such as Tonchia’s SmartKYC semantic search tool, which can apparently process 10,000 documents in ten minutes or less. He noted: “You still have to do the due diligence on those pieces of information before making a decision or it’s at your peril”.

With multi-billion dollar fines for transgressions relating to money-laundering and sanction lists continuing to come thick and fast, financial firms face very real peril if they fail to screen existing HNW clients and applicants for business properly. However, the very richness of information now available on clients makes it extremely difficult to handle. In an area where lines of responsibility can be confused and internal agendas often slightly at odds, the relevance and reliability of dossiers' contents is ever-more important. As the panel pointed out several times, it is impossible to “do” wealth management at all without taking on some degree of client-related risk.