Financial Monitoring:  Opportunities for Outsourcing

We live in a world that imposes terms of coexistence on us. In order to become part of that civilized community we should accept these rules.

Currently, the core global development trends are the rise of digital technologies (cryptocurrencies, contactless payments, Apple and
Google Pay), countering illicit enrichment (AML, KYC, OECD, BEPS plan) and, as a result, close attention to ultimate beneficiaries.

These days, companies can be successful only if they try to implement as many modern technologies as possible and not waste resources on irrelevant functions.

One of the most dynamic and fast-changing markets is the financial market. The main criterion for achieving success is the initial cost reduction in relation to the proposed product.

For example, outsourcing transportation of monetary funds or valuables to independent companies led to cost optimization in banks (employees’ salaries, car fleet maintenance, security).

Any activity elicits certain risks. It is due both to the specific features of the banking system and clients. And any activity is inherent to the conditions affecting it, and which are independent from the features of the banking system or clients. This idea reflects one of the essential tasks of management, namely preventing transformation of risks into challenges, let alone into threats.

One of the most “lenient” international control standards is KYC, aka Know Your Client. It is a rule, whose conventional translation into Russian is “Знай своего клиента!” Upon its practical application, the more accurate translation of this principle into Russian should be “Правила отбора клиентов (Rules for selecting clients)”. Its essence can be narrowed down to the requirement towards a potential client of a financial organization to provide a set of documents containing regulated information about his/her personality.

The main threat to banks is the clients themselves. History is full of examples where the reason for a bank leaving the market has been a single transaction performed by a client.

The KYC client identification policy is a kind of protective mechanism both for clients and for business entities supporting the former’s activities. It clearly establishes the acceptability structure in relation to the relevant financial transactions and protects both parties from possible penalties.

In the current survival mode, the compliance system comes first for the bank. Unlike common high-flying talk and official state rhetoric, we would like to note the most important points. Currently, the main compliance objective is to protect a bank (a company) from possible unprofitable transactions due to numerous losses. Of course, by losses we mean not only operational losses, but also the same related to repressive measures, fines, deprivation of license, reputation risks, legal expenses, etc. Therefore, we should develop an effective system for carrying out a rapid risk assessment of each transaction and client, and, accordingly, adopt the right decisions. In other words, a compliance system is a risk assessment system. We have determined our own scale of risks which, in our opinion, meets the challenges of the time in a fuller, more proper and comprehensive way than that described in countless laws and regulations.

1. The risk of non-payment (partial payment) of taxes by a bank (a company) or their clients, the risk of low-income clients.

To begin with, we assess the income these transactions or this client could generate. And this is a basic starting point. If the amount is low, then such transactions or such client is not interesting at all, regardless of the risk exposure under the classical source. As odd as this may sound, any transaction, any client carries risks that are hidden and difficult to evaluate, and that a bank (a company) sees no sense to carry the responsibility for. If the profit is relevant, the following issue arises: whether the transaction is an attempt to legally minimize taxes through completely legal activities. If this is the case, then we begin to increase the risk scale of such transactions, depending on the tricks used by clients. If it is real supply, then the client will be more favorably disposed to the necessary increase in service fees (increase in bank profitability) than a financial intermediary who economically (primarily) will not cut the price increase.

2. Real independence in decision-making is a “standing pat” technique.

Each bank (company) tries to make decisions by compliance as independent as possible. It is structurally independent and reports directly only to its CEO. The law placed personal responsibility on compliance officers for decision-making. Compliance never communicates with a client directly. And the issue here is not even about bribery or anything similar. The main issue is a psychological one. The client can make a good impression during a personal meeting and, therefore, interfere with the independence of the assessment. If the documents were collected by another person, then the compliance officer has only the papers in hand, and can “keep company” exclusively with the documents. The bank compliance officer has no choice but to adopt a cold-hearted decision, weigh the risk acceptability, profitability level, and interim measures. For example, a personal account, frequency of inspections and control, additional procedures like audit reports, etc., that can be regularly requested.

3. Risks from PEP clients (politically exposed persons).

Whatever country a PEP comes from, it is always a black mark. The general recommendation here is not to accept, if only there is such an opportunity. Such a client is always a ticket to a war, and, what is more, to someone else’s war. Even if he/she is a 100% honest politician or an official from the most respectable jurisdiction, the day will come when his/her political opponents will start fighting for power and the bank might find itself on the battleground. While law-enforcement officers and investigators can ignore any other ordinary client, here this is not the case. You could ask, then, what should such clients do? I would say that this is their problem. By and large, PEPs are themselves guilty of what the financial system is like today.

4. Risks from own personnel.

Desperate times call for desperate measures. Business is war, and the army requires a counterintelligence business unit. The HR department, counterintelligence, internal compliance, or any other business unit should constantly analyze lifestyle, personal relationships, work, motivation of the largest possible circle of employees. To put it mildly, it is work, which is unpleasant and despised by everyone, but someone has to it in the interests of shareholders.

5. Risk of money laundering related to terrorism, arms and human trafficking.

I put these risks in second to last place. Such obviously illegal business does not last long if it is not hushed up by the authorities of entire states. But for such a business, the authorities of these countries create specially established banks where they can control everything to the fullest extent. The same applies to arms and human trafficking and, in many cases, money laundering.

6. Risks related to a bank’s assets and its credit policy.

Oddly enough, but we put this risk in last place, and not because of its insignificance, but rather because of the limited ability to control it. Regulatory requirements of central banks, assessment methodologies and the activities of credit committees practically relieve the bank of a significant number of toxic assets. The main problem here is underlying risk like collateral depreciation and solvency fall following state economic policy, wars and cataclysms but, most of all, following a lame judicial system and enforcement system.

To reduce risks and optimize the process of client analysis, it is proposed to consider the possibility of outsourcing this function to AMBER Law Company.

Through the method of study our company applies, we consider the client as a system with a specific set of criteria, and conduct our check in three stages. The level selection at the very initial stage allows us to exclude clients that may cause risks to the bank in future. At the first step, we check the client’s family ties (parents/spouse/children/siblings), education, criminal record, health. At the second step, we assess the client’s assets (work/business, accounts/ insurance/ credits/ deposits, property, courts/fines, business partners, contracts/transfers/payments) for their toxicity. At the third step, we check the client’s participation in social and political life (membership of a party/social movement).

This is important! We should keep a balance: avoiding any abusive checks or causing excessive inconvenience to a client.

Admissibility criteria are regulated by banks based on an individual approach to each client following interest and economic feasibility criteria.

Depending on the goals and objectives the client sets for the bank when opening an account or conducting a transaction, the issue of security collateral in relation to possible unforeseen difficulties will also be considered.

This set of checks is applicable from the moment of establishing business relations with the client and remains due for the next five years after their completion.

Checks are carried out at least once every 3 months, and for clients undergoing significant changes in evaluation tables the frequency is at least once a month.

The necessity to check the client after the completion of cooperation implies reduction in reputation risks.

The company’s employees visit and conduct visual supervision at the client’s place of registration or actual location to confirm the fact of activity being carried out as per the documents filed.

Conclusions about the client and proposed ways of cooperation are drawn up in the form of recommendations. The bank always retains the right to have the last word. We are ready to bear responsibility along with the bank. Therefore, we offer risk insurance when making particularly important decisions.

As rude as it may sound, first of all, it is you who need to have protection against money laundering so that your client does not set you up.