By John Dobson, CEO, SmartSearch
The UK has long been regarded as one of the most regulated countries in the world when it comes to the financial services sector. Arguably much of this has been driven by membership of the EU, and the numerous money laundering directives we’ve adhered to over recent years. However, the UK will still be one of, if not the most strictly regulated countries even after Brexit – as the City of London needs to continue to be seen as beyond reproach as a financial institution.
As such, one area where regulation will not change drastically is anti-money laundering. The topic has been in the news recently as swinging fines have been handed out to money transfer services and banking firms for failures in compliance. These should serve as a reminder to all financial institutions about their requirements. In addition, the Financial Action Task Force (FATF), the global money laundering and terrorist finance watchdog, said recently that the pandemic and national lockdowns have introduced new opportunities for criminality. There is a clear correlation between the development of the coronavirus outbreak and rise in money laundering and financial fraud.
In January, EU-wide money laundering directives (6MLD) were published and still need to be adhered to in the UK. In addition, as part of the legislation governing the departure from the trading bloc, the UK government has stipulated that electronic verification should be used, enabling businesses to move away from manual, document-based checks when onboarding clients.
The Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020 made clear its position on electronic verification, clarifying that it is the most effective way for businesses to ensure compliance with all the latest legislation. Both in the UK and EU.
In fact, the Legal Sector Affinity Group (LSAG) also announced the results of its extensive revision of anti-money laundering guidance at the start of the year. In this they refer to the Brexit legislation which is a welcome move in terms of bringing the sector up to date with the latest technological solutions.
How to ensure you are compliant?
Switching to electronic verification is the best way for banks to ensure compliance with all the latest legislation in the UK and EU. This is particularly pertinent for those wanting to do business with those in the EU, as they will need to be compliant with the latest money-laundering directives.
For any bank, the best way to be compliant is by switching to electronic verification when onboarding new customers, and we would urge all businesses to make that switch this year.
Who’s behind the mask?
Switching to electronic verification will not only ensure compliance, it will also help identify clients. While a lot of interactions have become virtual, when meeting a client in person, a face mask will certainly impact a persons’ ability to identify and onboard new clients. This may even present an issue when communicating with existing clients.
Establishing who the person you are speaking to is a crucial step in ensuring you are compliant with anti-money laundering regulations. But with face masks likely to still be needed when meeting in person for the foreseeable future, how can banks ensure the client is who they claim to be? In addition, the closure of many local branches will further negate the convenience of face-to-face meetings.
Facial recognition software has come a long way in recent years, however, there still remain some operational challenges for the consumer. Frequently consumers find it difficult to work through the process of facial recognition especially in the older community, and accordingly the pass rate remains challengingly low at around 50-75% compared to a 95% match & pass rate with data verification. There are also issues when wearing masks as the technology is clearly not effective unless the mask is removed. However, facial recognition when used in conjunction with data verification delivers the ultimate solution, a 95% pass rates with protection against document forgeries and fraud.
At SmartSearch we introduced facial recognition technology in 2020 as part of the technological enhancements to our digital solution, and have always seen it as supporting traditional terrestrial data verification.
To be fully compliant with current anti-money laundering regulations you need a minimum of two independent pieces of identity verification data to establish a pass result – which you can easily do with Credit Reference Agency (CRA) data typically providing six or seven independent verifications.
Documents are dead
For some time now it’s been clear that documents are dead and that there is an alternative in electronic verification, which is quicker, more accurate, more reliable and cost effective. It’s also less intrusive for you and your client, as well as being 100% Covid-secure because you don’t need to meet face-to-face. Faced with the prospect of further waves from coronavirus in the future, financial institutions need to act fast to make the switch.
Few, if any, people would be able to spot a fake passport or driving licence if it passed their desk, as forgeries are now so convincing that an expert can be deceived.
Why is preventing money-laundering important?
Banks that have not switched to electronic verification could find themselves seriously exposed at best, or in breach of anti-money laundering regulations at worst. Therefore, switching to an electronic system which makes the customer onboarding process incredibly fast should be a priority. These electronic checks will include all the necessary Know Your Customer (KYC) and Anti-Money-Laundering (AML) checks and can be conducted completely remotely and securely.
The latest technology can combine credit reference data, biometric facial recognition, and digital fraud checks. At SmartSearch we incorporate CRA (credit reference agencies) data, electoral roll data and other reliable public data sources to establish identity. By triple checking these different sources of information a unique ‘composite digital identity’ is produced that is virtually impossible to fake. All this can be done online, with no need for in-person meetings, face coverings or hard copies of documents.
This automated approach is quicker, more convenient and more accurate. With HMRC recently sending a reminder to regulated businesses about their responsibility, now is the time that banks should be adopting a quick and secure approach to AML and KYC checks.
On top of preventing punitive actions, complying with anti-money laundering procedure can even boost the value of a bank. Research from Dr. Henry Balani in the journal ‘Research in International Business and Finance’ found, as a direct result of implementing changes suggested by the anti-money laundering directive, stock valuations across Europe’s banking sector have increased. Those with non-traditional revenues streams, including investment banking, brokerage services and asset securitisation, also reported a steeper rise in their stock market valuations when compared to more traditional banks, such as those in commercial and retail banking. The research found the benefits of regulations far outweighed the cost of implementing and adhering to them.
Banks operating in EU countries, like the UK, seemed to fare better. According to the report, this is due to the fact that banks in developing countries, with weaker financial services infrastructure, there were greater challenges and higher costs in setting up their compliance function. Banks in richer countries, however, have an easier time when it comes to complying with changing regulations, which drives their stock valuations even higher.
Both bankers and regulators should take note of these findings that regulations are essential to protecting consumers from criminal activities and also positively benefit the valuation of banks. With the 6MLD released and implementation on the horizon, it is reasonable to assume that it will have a similar effect.
To protect themselves and to increase their valuations, banks can be up and running with a full one-stop-shop electronic AML platform that partners with the world’s best data suppliers in 24 hours. This will deliver completely reliable ID verification, automatic global sanctions and PEP screening with ongoing monitoring in a matter of seconds, ensuring your firm always remains AML compliant.