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Towards True KYC: Technological Innovations in Client Due Diligence

Wendy Spires, Head of Research , 10 March 2016


There are worrying gaps in the practices used by wealth managers to screen clients, new research from this news organisation shows.

(This item was published yesterday in sister publications of this one and is released here for readers' benefit.)

Resourcing challenges – both human and technological – are exposing wealth managers to grave dangers on the KYC/AML and sanctions screening front, according to new research by WealthBriefing being unveiled at today’s inaugural FinTech Summit presented by sister publication Family Wealth Report.

Towards True KYC: Technological Innovations in Client Due Diligence is based on a survey of wealth management professionals in the UK, EU, Switzerland, Hong Kong, Singapore and the US, with the findings illuminated by in-depth interviews with 20 senior wealth management executives, compliance and technology experts, lawyers and consultants. 

The report continues WealthBriefing’s investigations into client onboarding procedures, and here again significant gaps emerged between what technology-enabled best practice ought to be and what many wealth managers are currently able to do on this front. It is worrying, for example, that in today’s fast-moving environment almost a fifth of firms are fully rescreening high-risk clients only once a year, while at the other end of the spectrum a similar proportion are doing this daily. The good news, however, is that ameliorative action appears to be afoot across the majority of firms.

The report, which was produced in conjunction with EY and technology provider smartKYC, found that almost two-thirds (63 per cent) of wealth managers will increase their CDD spend in the next year, with a third maintaining current levels and just 4 per cent predicting a fall. Of those increasing their budgets, just over a tenth (11 per cent) will focus on outsourcing, such as employing third-party specialists to compile client reports. The majority, however, were evenly split (44 per cent each) between those focused predominantly on recruiting more staff and those investing in technology.

The war for talent has seen remuneration levels in compliance soar, with wage inflation often far outstripping that for revenue-generating staff in fast-growing wealth management centres; even in mature jurisdictions specialists might expect to achieve salary jumps of 20-30 per cent with each new role. As one of the contributors said, it is rapidly becoming “prohibitive to hire”, and just as with other areas of compliance, wealth managers are increasingly turning to new technologies as something of a saviour in response.

As part of examining CDD procedures in the round, the report assesses the biggest pain points facing firms, finding that the challenges of documenting source of wealth/funds and PEP screening are weighing most heavily on the industry. These were tied with 29 per cent of the votes each and the many challenges coming under their auspices merits their clear lead. Yet issues around data capture and document collation (17 per cent), and detriment caused to the client experience/relationship (11 per cent) – particularly because of data security concerns – are also high on the agenda. 

As the expert commentators pointed out, we can also expect difficulties around identifying ultimate beneficial owners to rise as regulations forcing greater transparency in this area - like MLD IV - come into force. Here, recent developments with Iran are a perfect illustration of how the nexus between regulation and rapid shifts in geopolitics may present immense CDD challenges.

In the words of its president, Hassan Rouhani, Iran has opened a “new chapter” after the easing of international sanctions imposed by the West. These have been a major compliance headache for wealth managers, with multi-billion dollar fines for breaches having been meted out in recent years. While Iran’s young and growing population certainly makes it an interesting market for wealth managers, commentators have warned that serious issues remain. We should not forget that there are substantial, ongoing US sanctions against Iran and entities situated there, and against using the US dollar in commerce with Iran. 

Pertinent to this report’s findings, there may also be significant challenges in ascertaining the beneficial owners of Iranian entities due to the fact that many businesses operate as “bonyads” – tax-advantaged, quasi-governmental bodies with little transparency. Crucially, the easing of sanctions does not include entities owned or controlled by the Iranian Revolutionary Guards Corps, said to control up to a third of the country’s economy. Safely writing Iranian business will clearly require wealth managers to have extremely robust controls in place. Having the capabilities to carry out thoroughgoing media searches will be invaluable in carrying out due diligence to the necessary standards, for example.

The overwhelming message to come out of the report is that in client screening matters manual often means minimalist by necessity, and that by not having modern tools in place firms are missing out on both commercial and risk mitigation opportunities. Previous WealthBriefing research has shown that wealth managers are increasingly seeking wide-ranging business benefits from their compliance efforts. With the technological innovations described in this report, firms are already seeing great results from their investments on this front.

Towards True KYC: Technological Innovations in Client Due Diligence is free to access as part of WealthBriefing member benefits; to view/download your copy please fill out the form below.

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