A recent conference hosted by this news organisation in Switzerland examined the issue of how to handle politically-exposed persons - and whether the wealth industry is adopting strong practice, or must improve.

The dilemma wealth managers face in formulating robust yet cost-effective client screening processes is a hot industry topic. Here, we summarise the main takeaways from one of our recent Swiss thought-leadership events on this issue.

Wealth management institutions are running grave risks in their politically-exposed persons (PEP) procedures due to a lack of clear lines of responsibility and light-touch screening, experts told attendees of a recent WealthBriefing panel discussion in Geneva.

Against a backdrop of a rapidly-changing geopolitical environment and with global tensions running high, wealth managers find themselves tasked with carrying out more exhaustive checks on prospective clients, their businesses and associates than ever before if they are to avoid regulatory censure. This is not to mention all the reputational damage that comes along with a potentially multi-billion dollar fine. And, with compliance expertise commanding ever-higher remuneration and data sources ranging from official watch lists down to social media, improving PEP screening from an efficiency, as well as accuracy, perspective is a top priority for all institutions, but particularly those dealing with clients from certain jurisdictions.

The first strong theme to have come out from this PEP panel discussion (and indeed others recently convened by this publication on the same topic) was the need for relationship managers and compliance officers to be united in treading a careful line between growing the business and protecting it. “Your relationship manager or trust manager has to be a commercial person, but they are also your first line of defence in risk management,” said Xavier Isaac, managing director at Salamanca Group (a company which provides in-depth reports on high-risk PEPs). “Equally, the compliance guy shouldn’t just be the ‘no man’. Within the boundaries of regulations, policies and procedures, they should be working in partnership with the relationship manager and not ruling by fear, but instead having a can-do attitude.”

Changing attitudes
According to Jonathan Kirby, Swiss managing director of private client consultancy JTC, the required shift in attitudes is already well underway, with relationship managers now focusing very much more on the risk implications their clients might represent. This process of alignment is being accelerated by risk considerations becoming increasingly embedded in remuneration policies, but also by heightened appreciation of the damage that can be done generally. “There’s been a traditional view that relationship managers get the business in and compliance protect it,” he said. “But as we’ve seen, when an institution’s reputation is tarnished internationally the impact on everyone, including the front office, is very, very significant.”

In this light, it is unsurprising that PEP screening – which has never been a “once and done” task – has come to be something many firms are wanting to keep on top of in near (if not real) time where resources allow. “We now see clients wanting to screen overnight as there might have been a change they need to be aware of straight away,” said René Hürlimann, EMEA and APAC director at Appway. “They want to move beyond the initial report to active case management where they can see where things stand at any time – who is responsible for moving the process forward or if there are any red flags, for example.”

Practicalities vs ethics
Given that PEP screening and broader KYC checks are about rooting out corruption and preventing financial crime that facilitates global ills like terrorism and drug trafficking, the discussion naturally turned to the fact that for all the industry’s focus on the practicalities of meeting regulatory requirements this is actually fundamentally about ethics. “This isn’t just about hard things like technology, politics and processes, it’s also about softer things like value systems and business culture,” said Isaac. “It’s fundamental for relationship managers and compliance to share the same values and be dedicated to the same sustainable business model.”

The panel were clear that fostering a good business culture must be an active process, where certain values and behaviours are powerfully promoted and rewarded. According to Isaac, this means “good intent and integrity coming from the top” and executives seeing challenging each other in the decision-making process as an obligation. “The ability to say no is a big challenge to a business,” he said. “These are big clients and it’s difficult to say, ‘This is a big risk and we don’t want to go ahead, even if it’s a million-fee-a-year client’.”

As David Ford, of counsel at Reymond, Ulmann and Fischele, pointed out, difficulties in saying "no" are often exacerbated by power dynamics. “A junior compliance officer might have a tough time interacting with a very senior relationship manager with a strong personality, so the issue must be escalated to a senior compliance officer who can more effectively interact with the relationship manager,” he said.

Lack of proper training and supervision of junior compliance staff can also cause monitoring failures. “You might have a fantastic system but the alerts generated might be closed based on inadequate information from relationship managers that the junior person just writes down; the junior staff member may accept documents that are inadequate, lack credibility or are very opaque as justification for closing an alert,” Ford continued.

Nor are decisions taken at a senior level without certain challenges. Who ultimately decides whether a PEP may be onboarded can be more complex than the existence of a due diligence or client acceptance committee within an institution might imply. “The process whereby the most senior executives make the onboarding decision for PEPs may look perfect on paper but may be flawed in practice,” said Ford. "Executives may be on travel or otherwise unavailable and the onboarding decisions are actually made by delegates or delegates of delegates.” Decisions to onboard PEPs made by more junior staff could lead to charges that the bank was not meeting its responsibilities, it was said.