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The FCA is “Waving the White Flag” Over AML, KYC Processes

"Regulations stopped short of making Electronic Verification compulsory. This was, in our view, a missed opportunity..."

By CBR Staff Writer

The last pandemic to reach such deadly proportions was the Spanish Flu at the end of World War One, writes John Dobson, chief executive, SmartSearch.


John Dobson, CEO, SmartSearch

Although experts have long warned that such a global outbreak was overdue, there is a strong sense that businesses and regulators have not fully factored in how much Covid-19 – and the measures taken to combat its spread – would change our everyday lives.

It’s beginning to become clear that, even if and when the coronavirus can be effectively subdued, a lot of things are going to need to change in the longer term, too.

We can’t count on the next pandemic taking another 100 years to strike. When it does, we all need to be better prepared.

Part of this will of course be provision for many staff to work remotely. We have been able to adapt our working practices so that our entire workforce is now working at home and it’s business as usual – if not quite the same. Many other firms have done likewise, with varying degrees of difficulty.

Restrictions on Movement

There is some suggestion that the current restrictions on movement will accelerate the existing trend toward home-working and that we will never go back to a world where people congregate in large numbers in the same place five days a week. Whether or not that proves to be the case, it is clear that in preparing for similar emergencies in the future, firms will need to be ready to send their staff home while still carrying on with business as far as possible.

A number of important business processes will be affected by this, as the current crisis is demonstrating very clearly. Identity verification and money laundering checks are among these.

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With restrictions on movement in place in the UK and across large parts of the world, it is not possible for prospective clients to present in person at a firm’s offices and, with most staff working remotely, few will be willing to send sensitive personal documents through the post to locations other than a registered business address.

Even if this were possible, staff would need to be set up at home to process these documents appropriately and store them securely, to say nothing of the risk, however slight, that the documents themselves might carry contamination. As a business owner, I would not wish to expose my staff to the risk of infection in the course of their duties.

For firms that are reliant on manual document checks for their Know Your Customer (KYC) and anti-money-laundering (AML) processes, this presents a major problem. Banks and other financial institutions – along with others affected by money laundering regulations (MLRs), such as lawyers, accountants and estate agents – all need to find a way to carry on performing these checks.

As a result, the Financial Conduct Authority has felt the need to issue a ‘Dear CEO’ letter setting out ‘flexibility’ in its approach to KYC and AML for the duration of the current crisis.

The letter states that identity verification needs to continue but at the same time, offers firms a number of suggested workarounds if they are unable to operate their normal processes. Incredibly, this includes allowing firms to accept ‘selfies’ and scanned PDF documents in place of originals.

Frankly, this is not good enough.

In a world where fraudsters are already adept at producing extremely convincing fake documents, PDF scans should play no part in a firm’s defences against money laundering. It should be obvious that criminals and would-be money-launderers are going to be on the lookout for any sign that defences are being lowered – ‘never let a good crisis go to waste’ is their motto. The FCA’s letter amounts to waving the white flag.

Regulation and Enforcement

In the longer run, with regulation and enforcement measures getting ever more stringent across jurisdictions, it seems highly unlikely that regulators will be content with this as a fallback option. And in fact, there is no need to tolerate such a watering down of the regulations even now with ‘social distancing’ restrictions in place.

Fully digital KYC solutions are available that allow firms to continue with ‘business as usual’ in the event of key staff being forced to work remotely. Electronic verification (EV) has in any case been shown to be more secure than traditional document-based checks, but in the current situation the case for a digital solution is unanswerable.

There is absolutely no requirement for documents to be presented, still less scanned, and the full suite of AML checks can be performed regardless of location. Clients can be screened against global sanctions and Politically Exposed Persons (PEP) immediately, with any matches automatically triggering enhanced due diligence. Our database also includes Special Interest Persons (SIPs) and Relatives and Close Associates (RCAs).

Read this: Technology Has Already Disrupted Stock Markets: Can it Help Democratise Them Too?

Whether working from a laptop, tablet or just a mobile phone, all these checks can be carried out quickly and easily wherever there is an internet connection.

If firms and regulators are serious about developing viable business continuity plans, that fully reflect the nature of the challenge posed by a pandemic such as Covid-19, they need to move to embrace this technological shift.

Nor does this need to be an expensive move. When the UK government was consulting on the latest amendments to the Money Laundering Regulations – around this time last year, as it happens – the Treasury was actively looking for ways to encourage the use of electronic verification (EV), precisely on the grounds that it would bring an overall cost saving to the financial services system.

Although it is now strongly preferred, the regulations stopped short on this occasion of making EV compulsory. This was, in our view, a missed opportunity. No doubt the Government was worried that they would face a backlash from firms unwilling to change their processes. Those chickens have now come home to roost. The post-coronavirus world will require businesses to have some way to maintain full AML functionality. They cannot do this while continuing to rely solely on manual document checks. Only a fully digital solution will pass muster.

See Also: How the Internet Keeps Pace with the Surge of Traffic During a Pandemic

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