Managing any financial services company can be fraught with risk. Many FIs require close to constant risk analysis to make sure the company is remaining compliant and proper, as well as looking out for being targeted by criminals.
All of this is the reason why financial institutions are required to perform strict due diligence on corporate clients, in order to identify who is actually running a firm or who is financially benefitting from a transaction.
A recent post by PassFort has provided a deeper explanation on the necessity of checks on corporate clients – part of a process known as Know Your Business – which relates to identifying and understanding the Ultimate Beneficial Owners (UBO) of a company.
For many FIs, the process of corporate onboarding can be time consuming, cumbersome and heavily complicated, due to the vast reams of risks, checks and data sources that need to be covered in order to meet compliance standards. Despite this, these checks are more than vital. The world of finance is a hotbed for criminals, meaning KYB and AML need to be able to keep up with these crime waves and KYB looks to find and address unwanted or disreputable claims before they scam, steal or launder funds.
What are UBOs? An Ultimate Beneficial Owner defines the legal entity or individual that financial institutions will be doing business and is a cornerstone of KYB activity as is key to understand what financial transactions are going where and who profits from them. Finding and mapping UBOs is part of customer due diligence.
PassFort detailed, “A financial institution will perform a risk assessment on their corporate client to build a picture of potential risk. In the process of CDD, the financial institution carries out investigations involving numerous data checks to identify the UBO(s) and verify they are legitimate to have as a customer.”
The company mentioned that KYB, finding UBOs and creating an accurate picture of a corporate structure is not straightforward for a number of reasons. These include that a UBO might sit outside the published organisation structure, an owner may live anywhere in the world, AML regulations vary globally, beneficiaries may have interests in lots of different firms and that accessing up-to-date KYB data can be tricky. The way to help resolve some of these challenges, PassFort claims, is digital compliance solutions.
PassFort remarked, “By its nature, working with business or corporate clients is more complicated than dealing with individuals. There is more digging, investigation, difficultly, and decision-making involved in finding and thoroughly vetting a UBO. Added to this is the fact that in most instances there will be more than one UBO. This multiples the complexity of KYB and tasks to be undertaken during due diligence. It is vital banks perform due diligence on any and all UBOs they will be working with, otherwise the door is left open for illegal activity and for the institution to be fined for non-compliance.”
The rapid digitalisation of financial services has been spotted by financial criminals, who have been quick to exploit it. However, financial services have adapted. This adaptation includes changes to AML regulation across global jurisdictions as well as the adoption of compliance solutions or RegTech by FIs. Digital transformation can often mean FIs do not have to rely on shared databases to match UBOs to a company, and when new regulations are put into place or renewed checks are required on a corporate client, this is easier to manage.
PassFort said, “The reality for banks and financial institutions is they need to perform CDD at pace in a global, digital world. Automated compliance solutions are the only sensible option. But compliance people will always be needed in a KYB process. They review documentation. Assess discrepancies around income sources. Check bank records and other assets in a portfolio. The compliance professional cannot be replaced when it comes to the “sniff test” i.e. does this organisation feel right?”
Therefore, an automated solution can help present the data quickly, while humans can analyse it and create a fuller picture of risks – a case in where the human-automation hybrid really adds value.
The company concluded, “KYB is a vital part of risk management and of combating financial crime. The intensity of due diligence in corporate onboarding relates to regulation and the amount of money at stake. A robust KYB process, automated with RegTech and controlled by professionals, is a key way to tackle this knotty compliance challenge.”
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Copyright © 2018 RegTech Analyst