Recent reports[1]about FCA fines worth a total of £42 million levied at Barclays Bank for failure to accurately assess and manage the risk presented by certain of their clients in different circumstances have shown that failure to monitor customers’ regulatory permissions and client risk classification is a financially risky business.
In the case of WealthTek, which attracted a £3 million fine, Barclays was found to have failed to check that the firm had permission to hold client money before opening a client money account for it.
The bulk of the fine, £39.3m, was applied in relation to another case involving Stunt & Co. The FCA said Barclays "did not gather enough information at the start of the relationship or carry out proper ongoing monitoring" resulting in them facilitating "the movement of funds linked to financial crime" by providing services to Stunt & Co.It added that: "In the space of just over a year, Stunt & Co received £46.8 million from Fowler Oldfield, a multimillion-pound money laundering operation."
The cases demonstrate the need for banks to pay close attention to information about customers’ operations, not just when they are acquired, but during their ongoing relationship with them. Banks are expected to allocate a financial crime risk rating to customers and calibrate their oversight of that relationship accordingly.
The good news is that we at BankCheck have a dataset of regulatory data which is unique in the market. Using our data, organisations can quickly determine the appropriate level of KYC and AML checks to carry out on a client to support their risk rating exercise with confidence, knowing that BankCheck’s global regulatory dataset provides a secure foundation for identifying a high risk business such as a Money Service Business (MSB), ThirdParty Payment Provider (TPPP) or paytech company, with full transparency.
Balancing risk and opportunity
Clear examples of customers that could be highly risky for banks include MSBs, which provide money transfer, cheque cashing and currency exchange services to customers who may not have a traditional bank account.
Other examples include TPPPs, which can access customer accounts and conduct transactions on behalf of businesses, and the wider category of paytech companies, which leverage technology to offer streamlined payment services, especially cross-border.
The UK government highlights that services offered by MSBs are attractive to criminals who want to transfer illicit cash.
However, the number of MSBs, along with TPPPs and paytech companies, is thought to be growing, driven by the emergence of digital technologies that make it easier to set up businesses to transfer funds across borders, and demand from consumers who want faster and cheaper ways to move and exchange cash.
Stephanie Wolf, Board Member & Global Payments Executive, says that while the sector started out servicing consumers, it has since expanded to provide services to small and medium enterprises transacting overseas. “I’m beginning to hear more about paytech as a category of fintech, where companies are providing low-cost cross-border payment services.”
A vibrant growth sector can be an attractive proposition for financial institutions, largely because of the opportunities for greater transaction volumes and fees. But the challenge for banks is that they must comply with strict KYC and AML regulations: non-compliance can bring significant financial and reputational risks.
It’s a delicate balancing act. Banks can also face reputational risk when they terminate or deny banking services for customers. Recent examples include controversies over actions taken by banks concerning high profile figures in the UK and US.
Strict regulations
MSBs themselves are governed by strict regulations. For example, US MSBs must register with the Department of Treasury, and comply with the US-based Financial CrimesEnforcement Network (FinCEN) Bank Security Act (BSA) reporting system.
To operate in the UK, MSBs must register with HMRC, which provides detailed guidance on how to meet specific criteria, including safeguarding client funds, maintaining adequate capital, and demonstrating the "fit and proper" nature of those responsible for the business.
Despite these requirements, when banks provide services to MSBs, they do not have the same visibility into parties that are exchanging funds as they do with their own customers.
In addition, definitions of MSBs differ around the world, along with the regulatory requirements they are obliged to fulfil.
In deciding whether to take on an MSB or TPPPas a client, banks have to balance risks and the opportunity, says Charlie Beauchamp, an experienced Head of Reputational Risk at global banks: “You have to be able to assess whether every dollar you earn is a good dollar. Any data that can help fill in the blanks about a decision is important and can make the difference between responsibly accepting higher risk opportunities and making a bad decision that might create outsize regulatory risk, reputation risk, or both.”
Wolf agrees that banks need to draw their own lines in the sand when it comes to assessing and monitoring risks. “Banks are always looking to generate new sources of revenue and foreign exchange (FX) provides those opportunities,” she explains. “M&A teams within banks may also be establishing relationships with paytech companies in anticipation of a possible takeover or IPO that they would like to be involved in.”
How can BankCheck help?
More and more of our clients are centralising responsibility for such high risk businesses in a single unit, headed up by one senior decision maker, with BankCheck acting as a hub for otherwise hugely time-consuming review and monitoring processes.
Thanks to our daily checks of over 300 regulator sites, data on all financial counterparties’ regulatory classifications and permissions is continuously cross-checked and verified for accuracy.
Banks and financial institutions globally rely on our data to decrease financial counterparty risks, conduct faster, more efficient KYC reviews, meet regulatory obligations, reduce operational costs – and, increasingly, to monitor the status of high risk businesses.
Would you like to learn more about how BankCheck can support your organisation when taking on higher risk customers? Get in touch.
[1] https://www.bbc.co.uk/news/articles/cpwqeyj1d15o