The interview featured in the WealthBriefing Research report, Towards True KYC: Technological Innovations in Client Due Diligence, based on a global survey of wealth managers and insights from 20 senior executives, consultants and legal experts.

Are you seeing any significant divergences in EU and US policies on CDD?

EW: They are congruent in most major respects. The divergence, from the US perspective, is AML, economic sanctions or anti-corruption rules not being enforced with the same rigor in the EU. US law enforcement would point to almost all the major enforcement cases brought in the US against EU-based banks for purposefully changing information in SWIFT message fields to hide US-prohibited originators or beneficiaries of dollar-denominated electronic funds transfers.  US officials would make this point even though the UK’s anti-bribery law, for example, has a broader scope than the US Foreign Corrupt Practices Act .

Divergent enforcement will become a particular issue once disclosure of beneficial ownership becomes widely adopted - which will take a good deal of time, and even longer to ensure accuracy.

DA: I would agree that the US authorities are far tougher in prosecuting AML cases than their European counterparts.  Recent cases have shown escalating penalties and fines in the billions of dollars, the prosecution of senior management and in certain cases board members have been required to pay fines out of their own pockets.  

Also, since 9/11 US lawmakers have linked AML requirements to the USA PATRIOT Act and the notion of homeland security, so there is a special significance in the US attached to the overall AML effort.

Europe’s MLD IV imposes far more onerous requirements for verifying ultimate beneficial owners, including the maintenance of national databases. Will the US mirror this?

EW: The US approach, as outlined in a FinCEN proposed rulemaking, requires disclosure of the beneficial ownership of an entity opening an account with limited types of financial institutions - primarily banks and securities brokerages. FIs will be required to keep this information on file for a number of years and to provide this to law enforcement on request.  

Unlike MLD IV, beneficial ownership information in the US will not be made public; nor will the disclosure of beneficial owners upon formation be required, because corporations and LLPs, etc., are almost exclusively creatures of the states, not the federal government. Absent an act of Congress, the federal government has no authority to direct states in this area.  The federal government may, however, direct FIs because all but a very few banks are subject to federal regulation.

It is anticipated that some states, on their own timetable, will require disclosure of beneficial ownership information upon company formation. Here, the federal system in the US will make searching for information difficult; when federal law enforcement agencies are searching for a beneficial owner unknown to them, they will be forced to ask a large number of FIs for information as they may only have the name of an individual and no connection to a company.  Searching state databases will be similarly cumbersome: the US has 53 jurisdictions in which companies may be formed. Absent knowledge of the state of formation, all jurisdictions must be asked.

The New York authorities propose making CCOs personally liable for certifying the effectiveness of their firm’s AML transaction monitoring and watch list filtering systems. Are CCOs really in a position to do this, and might this further impact senior staff retention?

DA: There are some understandable concerns about the proposed NY law.  CCOs do not generally control budgets, and while many are increasingly getting much more proficient in technology, no system is perfect.
What is of most concern is that the “reasonableness” standard present in rules 38-a1 and 2067 by the SEC is missing.  The absence of this standard means that we are imposing essentially a strict liability standard on an individual who does not control budgets, often has limited resources, and even under ideal conditions cannot be expected to be omniscient.  This is the reason the proposed law has drawn so much criticism, which I believe is fair.  

Even under a reasonableness standard, it has been argued that the CCO is simply the wrong person to impose the certification on; they do not control hiring or resourcing decisions, and are limited in their effectiveness by the tone that permeates from the top of the organization.  

Several institutions in the US have recently been drawn into private litigation related to CDD issues, with suits brought over the loss of applicant clients’ data and – far more seriously – the contribution of AML failings to the commission of drug-related murder. How well are firms addressing these huge legal and reputational risks?

DA: The threat of regulatory sanctions for wealth managers, given the potential impact to a wealth manager’s reputation, is something that cannot be ignored.  Reputation is paramount in the wealth management business.  As such, wealth managers need to take whatever steps are necessary to address and excel in the new regulatory environment.  If that means reaching out to third-party attorneys and consultants to assist with designing and implementing a sound AML program, they should do so.

The goalposts on AML/PEP/sanctions screening seem to be constantly shifting. What key trends do wealth managers need to be anticipating to minimize future risks?

EW: The goalposts are changing, but in a predictable way, at least in the US – towards greater transparency in ownership and transaction participation, and easier law enforcement access to financial records. The one exception is the US’ reluctance to use tax data for purposes other than tax enforcement due to concerns this will lower the voluntary tax compliance percentages in the US .

I think the greatest changes will be in the continuing use of increasing computing power to identify, track and apprehend bad actors.  This has been the major theme since the early 1980s, when computers entered common commerce.

In terms of US FIs, increasing regulatory expectations will force further concentration of cross-border banking activities into fewer banks as the cost of regulatory compliance continues to grow.
There will also continue to be tensions among countries on enforcing economic sanctions.  The US sanctions against Cuba have long been an example of this tension.  

On this point, the easing of US sanctions against Iran is a big recent development. What can you say about the opportunities and challenges this market now represents?

EW: Iran is a large market with a young and growing population, and every company interested in expansion would like to be there.  There are, however, a number of issues to consider in addition to the substantial, ongoing US sanctions against Iran, entities in Iran, etc., and against using the US dollar in commerce with Iran.  

Doing business in Iran is largely an unknown for most of the OECD countries.  How will disputes be resolved?  Profits repatriated?  Who may own what?  What are the rules?  What permits are necessary?  Who regulates and to what degree?  These and a number of other questions are being studied carefully.