There is a large gap between tech-driven best practice in AML and know-your-client screens and what wealth managers can achieve, a report said, but notes that in certain areas, there is progress.

There is a yawning gap between what many wealth managers can do and what technology-driven best practice should be when it comes to know-your-client, anti-money laundering and sanctions tests, a new study shows.

Alarmingly, some 16 per cent of firms in a recent survey are fully re-screening their high-risk clients only once a year at a time when massive compliance dangers, as demonstrated by the recent Panama Papers affair, loom large. By contrast, the survey shows that as many as 19 per cent of managers now screen such persons once a day.

The survey was produced by ClearView Financial Media (publisher of this news service), in partnership with smartKYC, a technology provider. The report is called Towards True KYC: Technological Innovations in Client Due Diligence and is based on a survey of wealth management professionals in the UK, EU, Switzerland, Hong Kong, Singapore and US. The survey’s findings are illuminated by in-depth interviews with 20 senior wealth management executives, compliance and technology experts, lawyers and consultants. 

Encouragingly, significant investment appears to be afoot across the industry globally, however. Almost two-thirds (63 per cent) of wealth managers will increase their client due diligence spend in the next year, with a third maintaining current levels and just 4 per cent predicting a fall. Of those increasing their budgets, just over a tenth (11 per cent) will focus on outsourcing, such as employing third-party specialists to compile client reports. The majority, however, were evenly split (44 per cent each) between those focused predominantly on recruiting more staff and those investing in technology, the report said.

Demand for senior compliance officers with the requisite knowledge and experience to tackle the thornier regulatory issues, and who can balance risk management with business development, has pushed wages dramatically up. Average remuneration for director-level compliance professionals hit £107,617 ($157,231) (source: Morgan McKinley) among London’s wealth managers last year, underscoring just how much of a priority optimising the use of their time is for firms today. In fact, such is compliance wage inflation that in fast-growing wealth hubs it is reportedly not unusual for compliance personnel to secure increases of 40 per cent with each move. 

In CDD, as in so many other areas of compliance, wealth managers are turning to technology to help them cope with the sheer volume of regulatory change. Preparatory and extensive remedial work is going on at a frenzied pace right across the industry, with firms facing a range of pain points related to regulation. Ranking jointly as the sector’s biggest CDD challenges are proving source of wealth/funds and PEP [politically-exposed persons] screening (29 per cent each). Yet issues around data capture and document collation (17 per cent), and detriment caused to the client experience caused by additional checks (11 per cent) are also high on the agenda.

“Wealth managers and trustees should not see changes driven by new regulation as a requirement but as an opportunity. This report assists firms in understanding how this can be achieved and how they might win or retain business as a result, whilst maintaining high compliance standards for the firm,” said Xavier Isaac, head of trust and fiduciary at Salamanca Group Trust (Switzerland), and a contributor to the report.

“With wealthy families from developing countries playing an increasingly important role in business growth and often presenting with a ‘high-risk’ profile, the ability to deliver seamless onboarding experience and organise regular re-screening checks through technological innovations in client due diligence is mission-critical,” he said.

“It is now becoming prohibitive to hire so people are more open to doing more with technology by necessity. Wealth managers want technology providers to help them hire fewer people and then enable the ones they do hire to be more productive. We allow all internal staff to do more, including the junior ones, because our system interleaves data sources and the information is presented in the right format to aid decision-making and enforce compliance policies,” Alessandro Tonchia, co-founder of Finantix, a partner firm of smartKYC, said.

The regulatory burdens continue. As the report points out, EU member states have until June 2017 to write the Fourth Anti-Money Laundering Directive into national law. Meanwhile, in the US definitive guidance is awaited on FinCEN’s Proposed Rulemaking to amend the Bank Secrecy Act to hinder the use of anonymous companies for money laundering purposes. Add in the new requirements imposed by the Common Reporting Standard on tax information exchange (now live) and MiFID II (only slightly delayed to January 2018) and it is therefore reasonable to suppose that wealth managers face a heady mix of new rules concerning CDD, in addition to the general compliance onslaught the industry has seen in the past decade or so.

You can download a copy of the research here.