KYC and DD - How to prevent Massive Fines, Prosecution and Jail - Part 1 

The big issue this year other than Covid has been the volume of fines given out to regulated firms, primarily banks. $36bn to end 2019 and $6bn alone to June 2020. It’s thought that the final 2020 tally will exceed $10bn and may near $15bn. Yes, that's $15,000,000,000 in fines this year alone!

This of course is a real headache for corporate executives, compliance heads and MLRO’s. It is compounded by the fact that this December, the 6th Anti-Money Laundering Directive (6AMLD) comes into effect; giving a minimum Jail term of 4 (to 14) years for failings in Money Laundering prevention and Terrorist Financing (TF).

Regulators have become far more diligent and aware of their powers as well as almost competing in handing out fines. However, they have all voiced their determination to bring prosecutions of individuals. The fear for individuals is that AML and TF laws turn the concept of innocence on its head. You are guilty and have to prove your innocence. You must prove that you did everything in your power to prevent the law being broken. This goes from the board down to the front-end salesperson.

I have been in the regulated industry for many years, my company Armadillo is a global tech firm based in the UK and specialising in KYC & DD for on-boarding and has been awarded a place on the prestigious Regtech100. 100 of the most innovative firms in the regulated and compliance market globally. Our universe of Regtech data and solutions consist of 380 million companies and 5 billion individuals.

I also have in my group, a compliance assistance business and 3 regulated businesses including a UK law firm. So I have been through inspections (successfully!) myself, worked with regulators and advised individuals and businesses. With hand on heart, I can say, I understand your pain and your fears.

Anchor TFhe raft of regulation that has come out of the EU and adopted by many countries actually started as far back as 1990. On top of the EU regulations there are now increasing local laws that cross borders and allow for the prosecution of companies and individuals for ML and TF transgressions in jurisdictions other than their own.

So, how do you do it, how do you avoid prosecution?

It’s all about prevention as ultimately we're trying to prevent money laundering, terrorist financing and crime. It's all about your company and it's all about you. How do you not get prosecuted? How does your company not get those massive fines?

Be prepared for the inspections.

Inspectors usually give notice of some weeks or months but they have powers for spot inspections. You have to ask yourself, are you ready for it? Is your business ready for it? Is your department ready for it? Those nice inspectors can go back seven years.

That’s client companies, individuals and files from seven years ago, even if your client stopped working with you then. They don’t have to be a current client.

Your first inspection may be a five-hour meeting. You really need them to go away happy so that they then just ask you for everything electronically. You need them to do that otherwise they can come back with their memory sticks and sit down by members of your staff, asking them questions, listening to their phone calls, see files and emails and take copies. You must prepare for the inspections. If you don’t know and don’t feel ready for it, ask a firm like Armadillo, we have specialists that can assist and guide you.

Go back to basics.

Look at your AML policy. Inspectors will ask for it. Make sure that you've got really detailed information of every part of the process. Don't leave anything ambiguous, leave it completely in a position where no one has a choice. Staff have to follow the process and have to make the decision. 

Try and prepare for the unforeseen, easy with hindsight. Think scenarios through and keep detailed risk registers, make sure every single client of yours has a risk rating. Make sure ALL your products carry an internal risk rating create a marker based on a traffic light system making sure your process is right.

Certain countries may carry a higher risk rating, or HNWI’s and beneficial owners with certain nationalities increase or lower the risk ratings. It's up to you to define, though check if your regulator has issued some kind of edict or guide, and follow it.

Have a complete and clear document on how you arrive at the ratings and keep it as part of your policy as well as how the rating was arrived at for that specific client.

In the next issue, I’ll be talking about checking, tech, training and your required reactions to events.

Stay Safe.

Manny Cohen is Founder & CEO of Armadillo,

a Global Regtech & Compliance business based in the UK

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