Inadequate onboarding procedures have led to incomplete know your customer (KYC) compliance, and resulted in ongoing remediation projects to deal with the back log of accounts, according to Phil Masterson, senior vice president and managing director of SEI’s Investment Manager Services division.
“We are aware of several remediation projects across Europe and the US on anti-money laundering KYC matters, so it is ongoing,” he says.
“Whether they are wealth management accounts, or commercial accounts, they have to go back and do appropriate paperwork, verification, and documentation associated with these individual and corporate clients,” he says.
“A commercial bank [in the UK] when they were onboarding clients – when they were opening a commercial account for an SME – they weren’t getting what they needed for that point in time from AML KYC perspective,” says Masterson.
“So, when they were having an internal audit done, or regulator audit, they would determine that ‘you didn’t have enough information for this KYC requirements, and then you have to block the account.’ Once you block the account you have a real problem because you have these SMEs that are trying to make payroll and pay other expenses and they can’t actually access the account.”
Inconsistent onboarding has also been visible in the US, and the wealth management space, according to Masterson.
“We about five years ago had built a digitised platform for one of our wealth management clients in the US, specifically for private funds – private equity or hedge funds. When you are in that world of investing and these are clients of a private bank, they have a very cumbersome process.
“What we found from our own experience processing those transactions in a manual environment, which we validated with several data points in the industry, it’s roughly 80% of those processes have errors in them, or the phrase is ‘not in good order.’
“I’m not saying that in the retail or commercial banking space there is the same level of 'not in good order' rate, but certainly they have the same challenge where a lot of these account openings are just missing information, or frankly if they are hard copy it is just illegible,” he says.
In a report on UK AML and counter-terrorist financing measures published in December, the Financial Action Task Force (FATF) said that the People with Significant Control (PSC) register, which financial institutions use as one aspect of customer due diligence is sometimes inaccurate, and that there is not yet an obligation for inaccuracies to be reported. And that “while the information in the register is subject to basic checks it remains largely unverified.”
The increasing focus of regulators on AML has resulted in firms looking retrospectively into their onboarding processes.
“Firstly, the regulatory environment is putting pressure on people to say, ‘look, did we do what we needed to do back in the day?’ So, there are a lot of remediation projects that are ongoing, either because the regulators identified issues, or some very smart people in the compliance or legal departments have said, ‘we need to get ahead of this,’” says Masterson.
The report went on to say that although the UK had only recently put significant focus on pursuing high-end ML, “because such cases are complex and generally take years to complete and statistics in this area are not comprehensive, the UK is not yet able to demonstrate that its level of prosecutions and convictions of high-end ML is fully consistent with its threats, risk profile and national AML/CFT policies.”
For Masterson, effective communication and convenience remain primary concerns regarding accurate AML KYC processes.
“Communication from compliance to the front line, what a lot of people call operational compliance, that communication has not been ideal in many cases. People on the front lines are doing their best and may have all the best intentions but they may not have all the information,” says Masterson.
“And the third part is convenience. People are saying, ‘look my job is to get this account open to do business, and so there is maybe some urgency to open accounts, and there is not a good process to go back, on the backend quickly, or immediately thereafter and get information you need.”