The expectations placed on banks’ boards and their compliance officers are intense and rising. They are expected to ensure their organisations meet their own high internal compliance standards and then apply the same level of rigour to their counterparties’ compliance standards. In an increasingly global economy, the complexity of transactions is increasing as fast as the demand for transparency.  

Amid all the fines and regulatory action a dominant theme has emerged:  do you know who is behind the organisation you are doing business with? Who ultimately controls your counterparty or your counterparty’s counterparty? What are their connections or other interests?

The “Panama Papers” revealed how complex ownership structures can be and how easy it is for criminals and other unscrupulous individuals or entities to hide their ownership of seemingly respectable entities. They also showed how damaging it can be for individuals and institutions to be linked, even unknowingly, with these kinds of activities.

First line of defence

Banks now find themselves at the front line of cultural expectation: whether it be their employees or consumers or wider society, people want to see an end to drug trafficking, human trafficking, corruption, terrorism, tax evasion and arms dealing. Banks are seen as one of the first lines of defence by the authorities as they seek to recover funds, interrupt their flow or trace their source. 

Regulators worldwide now require banks to identify the ultimate beneficial owners (UBO) of the organisations they do business with, setting the threshold of ownership at 25%, 10% or even lower. But banks are struggling to meet this requirement and find themselves behind the regulatory curve. They are helped by improving technology and ever-increasing amounts of data available online. But while data volumes raise the bar in terms of what constitutes ‘best efforts’ in discovering UBO, the challenge extends beyond what banks knew to what they could and should have known at the time. And knowing what you don’t know is equally important in our view.

Moreover, online data is fragmented, unreliable and often out of date.  Criminals are becoming more adept at covering their tracks using data protection laws to clean up their online presence. Holdings in banks may be dispersed among numerous entities that fall below the regulatory threshold. 

Compliance woes mount

Compliance is becoming increasingly stressful for individuals and costly for banks.  Compliance officers face not only impossible workloads but the threat of personal liability, fines, career damage or even imprisonment. Already we are seeing the unintended consequences of this, as compliance professionals leave the industry.

Banks not only face the risk of fines but also the loss of reputation, and these risks are matched by the rising cost of compliance. Banks have tried to meet their compliance requirements by hiring more and more compliance staff but the problems haven’t gone away and the cost of compliance has become prohibitive. 

Some banks have responded by withdrawing from whole regions, or terminating risky relationships, raising the prospect of unbanked nations. Often this has rebounded on banks as they are perceived as acting in a heavy handed or even discriminatory manner. And the irony is that banks derisking in this way only make it easier for criminals to launder money through illicit channels.

The lack of trust based on lack of knowledge also hurts banks’ business on a day to day basis: the need to establish ownership slows down and disrupts a bank’s ability to form new trading relationships. They may have to walk away from or lose a promising counterparty relationship because they simply cannot establish who they are ultimately dealing with – the UBO. They may have to route transactions through a larger number of trusted intermediaries and bear the increased cost. 

How do banks discover UBO?

When a bank wants to form a new relationship with a counterparty, particularly if it is in a new country or territory, discovering the ultimate beneficial owner of a bank can be more like detective work, but compliance officers in banks have many sources of information.  

Typically a bank will follow the guidelines laid down by the Wolfsberg Group around correspondent banking and counterparty relationships. When entering a new territory banks will look for the top 5 banks and assess their performance based on financials; they will check history to see everything was in order; and perform other research before they decide which counterparty to proceed with (based on the cost of doing business, preferential rights, charges, etc).

When a bank has decided to work with a counterparty bank, it needs data on the counterparty’s location, registered address, contact details, senior personnel (such as board members and compliance officers), and other senior people they may need to contact. The bank will need to look at financials, performance, auditor’s reports and regulatory information, such as, is the counterparty compliant? Does it have the required documentation? They will also need detailed ownership information up to the ultimate parent or individual UBO. 

Some organisations have teams manually producing physical reports, others are beginning to collate and store this information online. Currently, it is only the larger institutions that have built their own in-house systems to track workflow and monitor everything that users are doing. These organisations do have an audit trail, so they can see who has done what and why certain decisions were made in the past. But these systems are costly to create and maintain and do not help with the wider data issues. 

Because data comes from so many sources, officers will have to access different systems simultaneously and the information can become out-of-date overnight. Chief among these sources will be the wealth of information already found in Accuity’s Bankers Almanac, which has evolved from its origins as the “Orange Book” to a digital tool used by 90% of the industry to establish ownership and collate information and documents required to know your customer. 

The key difference between the data provided in Bankers Almanac and other sources is that it is compiled and verified by a group of 130 data analysts. Between them they speak 30 languages and are in regular contact with banks and other financial institutions around the world. Not only does all data come directly from the source, whether banks themselves or regulators and other institutions, but it is also regularly updated. This proactive methodology means that by using Bankers Almanac due diligence, banks automatically embody best practice in their own compliance efforts. If Accuity hasn’t found the information, it is likely that it isn’t going to be found.

In addition, Bankers Almanac data is not judgmental; it doesn’t judge whether a bank is good or bad, it just provides the data for customers to use in their own compliance activities. Nor can Bankers Almanac always be comprehensive—because not every bank is willing to share everything. But Bankers Almanac will tell you that this is the case, which may be vital information in itself.

What does the future look like?

In our view, with better information and a clearer view of ownership structures, banks can make better and faster decisions about where and who they do business with. They can refine their attitude to high-risk entities and avoid blanket policies while knowing what they do and don’t need to be aware of. Furthermore, they can demonstrate to the regulators that their decisions were sound and reflected not only their best efforts at discovering UBO, but best practice in due diligence. Accuity is innovating its solutions to deliver this new level of ownership data, including:

• data validated directly with banks 

• UBO information connected to data identifying heightened risk in order to fulfil compliance checks eg PEPs

• audit trail showing regulators when and how decisions were made and on what information 

• live data and visualisation

When banks have this level of ownership information they will find they can onboard and review entities faster, so that they can start doing business earlier, or quickly reject unsuitable partners. Or they can quickly decide not to get involved in a compliance process which may prove too lengthy or ultimately inconclusive.

For compliance officers it will mean a faster decision-making process, with decisions supported with hard factual data, intuition replaced with evidence, and manually compiled reports replaced with accurate and powerful online live data.