The U.K.’s Money Laundering Regulations 2019 require (among other things) that cryptocurrencies and their exchanges be treated as “obliged entities” for the purposes of customer due diligence (CDD). Further, records on beneficial ownership for corporate clients also need to be updated.
The International Compliance Association (ICA) is a professional membership and awarding body. ICA is the leading global provider of professional, certificated qualifications in anti-money laundering; governance, risk, and compliance; and financial crime prevention. ICA members are recognized globally for their commitment to best compliance practice and an enhanced professional reputation. To find out more, visit the ICA Website.
The amendments, which came into force in January, prompt further thoughts on CDD. Individuals working in compliance may know what they are required to do in respect of CDD—and know how to do it—but might be unsure or confused as to why.
Below are four questions those working in compliance and conducting CDD might be asking themselves on a regular basis.
Why for why?
As mentioned, compliance practitioners might know how to undertake CDD, but may never ask themselves why and might have limited knowledge of other anti-money laundering (AML) areas. This is perfectly understandable given some roles require this compartmentalized approach. The larger the firm, the more likely this is. Those in smaller firms may have wider responsibilities requiring more extensive AML knowledge. In roles large or small, however, it’s reasonable to assume it is of huge benefit to know why.
Why is so important. Why provides context, it offers purpose, and has knock-on effects that extend beyond even CDD. Employees who know why they are doing what they do are more engaged, switched on, and operate at work with more purpose because they understand the reasons behind their actions. Mistakes or omissions are less likely to occur due to employee engagement. It is obvious that why is important, but in larger firms the why can be obscured given the sheer volume of transactions that have to be dealt with.
Do I really want to ask the customer again?
Nobody likes having to ask twice for something. But for compliance, asking twice can be a necessity. The skill is in knowing when to do so. To avoid repeatedly going back to the customer, compliance must think carefully about what they need to know when asking for the first time. Asking more effective questions will make sure the relationship with a client is professional, transparent, and thorough and avoids jeopardizing the relationship by repeatedly going back and asking unnecessary questions.
When you do ask questions, you want to be tactful and adopt the right tone. You’re not a detective, but nor are you a bureaucrat; you want to come across as diligent but not intrusive, calm but firm. In other words, you want to ask specific questions, receive specific answers, and be a professional as you do so. Often, compliance practitioners will recognize it is their duty to ask questions but forget the second part: listening. Developing your active listening skills will help bring listening into balance with asking.
How do I unravel corporate structures?
Knowing how to unravel the threads of complex corporate and legal structures will make CDD both easier and more effective. You may be looking to identify the ultimate beneficial owner. To do this you need to know what tools to reach for. You’ll also want to have unraveled corporate structures before and to understand how to do it. Remember that complex corporate structures do not operate outside of the law. But be aware they are absolutely ripe for exploitation by those who want to misuse them.
Companies that look simple on first inspection can quickly turn into something oblique and confusing. It is not enough to settle for surface-level explanations for structures that are willfully complicated. Learning how to delineate between different ownership levels is fundamental to conducting proper CDD.
When is enough, enough?
When should compliance practitioners know when to stop peeling back the layers in their bid to identify beneficial owners? An area that can cause confusion when carrying out CDD in this regard is state-owned entities. The idea whittled down can be summarized as follows: You want to know how to look and when to stop. The issue centers on politically exposed persons and the level of risk that such individuals can expose a firm to.
The Joint Money Laundering Steering Group (JMLSG) Guidance specifies, somewhat vaguely, that firms should “take appropriate” steps to know the ownership of the customer and how it is related to its “home state authority.” It is not easy to work out how many steps you need to take to before you can qualify them as “appropriate.” Some of this will come with experience, of course, but it is invaluably useful to learn about this topic and make sure you know what you’re doing.
There are plenty of reasons why those in compliance should occasionally ask themselves the above questions. Two reasons are bigger than others, though. The first is that compliance officers who know why they are doing what they are doing are better placed to make wise decisions, as they recognize patterns and know what they’re looking for. The second is it helps career progression. Articulating why you have reached a decision will be of benefit when being interviewed by potential employers, as it demonstrates competence, forethought, and comprehension—attributes that are valuable in any role and at any time.
The International Compliance Association is a sister company to Compliance Week. Both organizations are under the umbrella of Wilmington plc.