Know Your Customer regulations: Why pesky paperwork is a necessary evil
Written by Duncan Taylor on December 13, 2018.
Sometimes clients wonder why banks and financial institutions ask for so much personal information before opening accounts or carrying out transactions on their behalf. It can very often be a cause of annoyance or anger but rest assured we really don’t do it for fun. In a world where offshore accounts, life insurance policies, real estate purchases and ‘shell’ companies are widely used to filter money obtained from illegal activities such as drug trafficking, smuggling and counterfeiting, it is important that checks are put in place to make it difficult for criminals to do this.
It is notoriously difficult to put figures on illegal activites but the best estimate from the United Nations Office on Drugs and Crime (UNODC) was that criminal proceeds in 2009 equalled 2.7% of global GDP, or around $1.6 trillion dollars! It’s a massive problem and one which ultimately affects us all.
Anti-money laundering legislation has been on the radar since the late 1980s when the Financial Action Task Force (FATF) was set up by the G7 countries specifically to tackle this issue. It produced a report containing forty recommendations to more effectively fight money laundering. In 2001, post 9/11, efforts were ramped up even more, including the introduction of stricter Know Your Customer (KYC) laws, and the momentum has been building ever since.
KYC requirements fall into two broad categories: the Customer Identification Programme (CID) and Customer Due Diligence (CDD). CID requirements mean that we, along with all financial institutions, have to check that our customers are who they say they are when we start a business relationship with them. This means carrying out a basic identity check to obtain their full name, date of birth and residential address and keep official evidence of those details on file in the form of a copy of a government-issued document featuring a photo such as a passport, identity card or driver’s licence. We also cross check the address against a recent utility bill. This is the case across the board for all clients and does not indicate any personal suspicion.
CDD is less straightforward. It is an ongoing process by which we seek to understand the activities of our customers and the types of transactions that they make in order to assess their risk profile and detect any behaviour which doesn’t fit with it. Each financial institution will have different procedures for conducting due diligence.
Any unexpected behaviour will be a red flag signalling possible fraudulent activity that requires further investigation. Red flags could be anything from paying for a policy via a third party or frequent wire transfers to taking out products which don’t fit with a client’s income, employment or age.
Of course the vast majority of customers are low risk but any that aren’t require closer monitoring. For example politically exposed persons (PEPs) present a higher risk of bribery and corruption due to their positions of influence that they hold. In such a case, additional identity checks and other enhanced due diligence procedures may be required.
We are also obliged to report any activity considered to be suspicious to the relevant authorities and the number of reports has increased in recent years. While this may give the impression that crime has increased, in reality it is a reflection of better detection as a direct result of obligatory KYC measures. So that is ultimately a good thing.
Failure to adhere to KYC and AML (anti-money laundering) legislation can be costly for financial institutions. Earlier this year a report was published indicating that over the past ten years, regulators across the North American, European and APAC regions have issued nearly $26 billion dollars in AML/KYC and sanctions-related fines. Infinity has invested in a groundbreaking data management system called Wealthcraft, designed to deliver a better service to our clients, but also to aid compliance. It has been an investment worth making.
We do understand that it can be frustrating for clients when we ask for ID and other paperwork but we are doing our utmost to strike a balance between complying with KYC requirements while making life as easy as possible for our customers. I hope by explaining to you the reasons why we work as we do, you will see how, in the long run, KYC benefits us all by helping to prevent criminals from using our products and services and reducing the risk of illegal activities such as money laundering and terrorist financing.