Citizenship by Investment 2014

Customer
Due Diligence
What is behind the lights at night?
We can see the storm, are the winds favoriable?
I
know – you already know all about KYC
and due diligence and your brain could not
possibly store any more information on KYC
and customer due diligence. I understand, but
please read on.
It’s been said that the requirements of KYC
and due diligence come from over taxed and
regulated nations making international banking
difficult to so these nations can better tax their
citizen’s incomes. This is correct, but it is also, now
more than ever, about protecting our nations
economies, to promote fiscal stability, and to
do this by denying evildoers profits through the
involvement of our institutions or ultimately the
control of our financial institutions.
HSBC was fined 1.9 billion USD for money
laundering. BNP Paribas will pay 8 billion USD
for sanctions violations. These large banks are
paying enormous fines because they utterly
failed in their KYC, AML, sanctions, and due
diligence responsibilities. So why are the large
banks with, what appear to be infinite resources,
failing? How can you hope to do any better?
The smaller financial institutions have an
advantage. They actually know their customers.
The key to compliance is getting closer to your
customers and actually knowing your customers.
If you are the chief of compliance in Dubai, what
do you know about business conditions in
Doha, or Khartoum? You may have some ideas
– but you are not saturated in the deeds of living
and working in those markets. It is the eyes, the
ears, and the minds of those who live in those
markets that are needed for comprehensive
KYC. Your local representatives are part of the
key to your success. It is an immutable fact of
risk management, the more remote from the
risk the less likely we understand the risk.
A compliance officer wanted to know how a paint
company was selling 1.5 million USD in cash for
paint in Harare, Zimbabwe. Her comment to me
was “That is a lot of paint, and the neighborhood
where this store operates could use a fresh coat
of paint.” The compliance officer reviewed the
company’s accounts and the activity did not
support 1.4 million USD in sales, let alone cash
sales. The compliance officer filed a Suspicious
Activity Report. One month later the paint
shop owners and a Chinese businessman were
detained for trafficking in illegal animal parts. That
is the power of local knowledge.
So what do we face for the future?
The EU’s 4th AML directive seeks transparency
on all structures. The directive’s aim is that all
persons with powers of dominion and benefit
are disclosed down to the 5% level. The UK tried
to anticipate the directive and proposed a 25%
level of benefit / dominion to blunt the EU’s goal
of 5%. The UK’s regulators were met with a firm
“no” from all sectors. If this is the case in the
UK – what is the likelihood this directive will be
as encompassing EU’s 4th directive proposes?
Unknown, but this drive to disclose must be
closely monitored.
Stale due diligence is being addressed by the
BIS and OECD. Once an account is opened that
is usually the last we ever look at the KYC and
due diligence information. This provides an
excellent way to hide money is in plain sight.
Many fraudsters know that if they have an
account in a company’s name and the company
has been struck off years ago – no one will
look for any assets in that company’s name. I
found this to be the case in a multi-national
fraud where over £700 million flowed through
accounts of a UK company struck off 10 years
ago. We scrub our clients against lists of bad
people, however we do not otherwise regularly
update our customer due diligence. Criminals
now use multiple morphing transmutations of
companies – by changing their names, boards
of directors, and purposes. These morphing
companies can be exposed as they often use the
same addresses, web sites, phone numbers and
Even with a beautiful face, we must
dig deeper.
email accounts. This morphing of companies
targets the weakness of stale KYC and due
diligence processes. If compliance professionals
just search by a person’s company, address,
emails and contact persons the morphing can
often be revealed. Stale customer due diligence
is a real problem.
We must be diligent to prevent customers from
mis-using our services. Sloppy or stale KYC
and customer due diligence allows criminals
to transmit and deploy the profits from the
misery they peddle; frauds, drugs, weapons,
human smuggling, corruption, - through your
firm. When an institution’s poor compliance
becomes known – known within the criminal
fraternity – more criminals will seek to establish
relationships with your institution. Criminals are
good at networking and will share an intuition’s
weaknesses with other criminals. When the
institution’s poor compliance and list of criminal
clients surfaces, legitimate customers will move
their business and the institution will face the
loss of correspondent relationships, the expense
of fines, and criminal prosecution.
It is my 25 years of experience, that over 95%
of all compliance issues with would have been
prevented with good initial KYC and customer
due diligence. Good KYC and customer due
diligence is an investment in the defense of
your brand and against the costs of customer
due diligence failures. Do for your company and
your country. Prevention is easier and cheaper
than cures.
Citizenship by Investment / 18
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