Whilst the financial system runs for the most part safely and smoothly, it is still vulnerable to abuse by groups ranging from large money launderers to smaller-scale fraudsters. Because of this, all regulated financial institutions need to adhere to due diligence rules about verifying the identity and intentions of prospective clients / investors.
As a part of this, due diligence must be carried out not only when a business relationship is initially established, but throughout the relationship.. Additionally, due diligence is required for certain specified transactions or again where there is any suspicion of money laundering or terrorism financing. The risk of money laundering or counter terrorism has to be judged on a risk-based approach, where factors such as using non-resident banks, payment intermediaries and offshore jurisdictions are clear risks.
The outcome of the above means firms need to manage their own assessment of risk. For example, firms may need to consider whether an automated or manual due diligence process is more appropriate and will need to provide oversight and training to involved employees. There are also requirements pertaining to reporting any suspicions transactions and maintaining the relevant records. Working with third party outsourced services can help a firm manage processing times, data storage and reporting.
Where risks are low, simplified due diligence may be assessed as appropriate. On the other hand, enhanced due diligence, mostly involving more monitoring and information gathering, should be carried out on actors with the highest risk. Additionally, Controlling parties (usually identified as the Directors and Shareholders of a company) should have to go through due diligence, which then needs to be kept up to date over the course of the business relationship. If either the customer or beneficial owner cannot comply, the account may have to be frozen.
Further regulation mostly deals with specific scenarios. For example, financial services firms have to screen individuals and corporate clients for Politically Exposed Persons and Sanctions, which if found would increase the risk profile of the client/investor. Along with this, it is emphasised that any local data laws need to be stuck to when outsourcing due diligence to a provider and that firms should carry out a degree of oversight on the company that the firm in question is outsourcing to.
Due diligence, alongside other regulatory reporting, is becoming more onerous. The volume of data clients handle is becoming larger. Linear believe in working with our clients to support their day to day business flow, ensuring best in class service and support.