Digital Customer Due Diligence is the way forward

Capital V #8 | by Tim Andrews, Director of Ipes

Customer Due Diligence is going digital

Anti Money Laundering (“AML”) measures in the financial sector have been at the forefront of European and US regulators. In addition, to combat tax evasion, the US Treasury and the OECD have imposed similar due diligence and reporting requirements on financial services firms, namely the Foreign Account Tax Compliance Act (“FATCA”) and Common Reporting Standard (“CRS”). In April 2016 the UK, Germany, France, Italy, and Spain agreed to share data on beneficial–ownership of companies and trusts between their tax and law enforcement agencies. Compliance with AML, Know Your Customer (“KYC”) and sanctions requirements continues to be a key focus area for management and firms must ensure that they demonstrate a robust compliance framework, ensuring that regulatory requirements are being adhered to at both a local and global level.

Contracting with a lawyer, investing in a trust or a Private Equity fund or even holding a bank account will often mean completing lengthy forms to prove that you are neither a terrorist (under Customer Due Diligence) nor a tax evader (under FATCA and CRS).

Paper Problems

Know Your Client (KYC), Customer Due Diligence (“CDD”), Anti Money Laundering (“AML”), FATCA, these are all terms associated for most of us with a myriad of complicated forms. Firms who receive them have to bear the cost of deciphering handwriting, asking for evidence and transposing data onto systems or, more commonly, a spreadsheet. Unsurprisingly, few wish to jeopardise their client relationships by repeatedly asking for the information to be updated. It is common practice for multiple certified copies of passports and utility bills to be stored in paper and PDF formats across different firms. This makes it difficult for firms in one jurisdiction to correctly identify the true ownership of their corporate clients who may be scattered worldwide and may result in regulatory sanction, fines or reputational damage. There has got to be a better way.

Radical Regulation

Regulators are recognising these practical problems. The UK Financial Conduct Authority (FCA) has stated “In order to enable effective competition and promote innovation, it is important that technologies that help firms better manage regulatory requirements and reduce compliance costs are supported.”

Spectrum of Solutions

A number of technology solutions are emerging from both governments and industry. The “Verify project” from Gov.uk aims to link UK consumers’ financial records across multiple major institutions in order to allow them to view and switch their investments more easily.

A number of accountancy firms offer advice and technology based solution for global firms whose CDD problems require industrial solutions. Various data aggregators access disparate publically available information to create an automatic profile of any given individual or entity. Central due diligence document sharing apps and websites allow firms to post their certified documents in one place, where others may access them. Despite this, the vast majority of CDD continues to use paper and pen, especially for corporate vehicles with complex ownership structures. Supported by regulators world wide, paper CDD will be a thing of the past. Whichever solution you use, Customer Due Diligence is going digital, to the benefit of everyone in financial services.

Tim Andrews

Director, Ipes