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Getting Cleverer About Tracking Risk With smartKYC

Tom Burroughes, Group Editor , London, 4 June 2018

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In the latest in a series of profiles of technology firms working with wealth managers, this news organisation talks to smartKYC.

(This is part of a series of profiles of technology firms operating in the world's wealth management sector in which they explain business strategy, plans for the future, and more. See examples of previous profiles here, here and here.)

With UK lawmakers putting the country’s anti-money laundering regime under the microscope amid tensions with Russia, advisors have had another reminder to keep abreast of potential risks around clients. The question is how they do so given the mass of data swirling around in today’s 24/7 news cycle.

Finding out if existing or potential wealth management clients could have problems stemming from their being “politically exposed persons” or in some other risk category, isn’t easy, particularly if the news stories are in foreign languages, obscure news sources or plain untrustworthy. Mindful of “fake news” risks, agenda-driven governments and other sources of bias, sorting through masses of data can be extremely challenging. And yet bankers and other professionals must increasingly prove they have checked out clients they take on board – or else face heavy punishment. While several years’ old now, bankers will recall the $8.9 billion fine meted out in July 2014 by the US against French bank BNP Paribas for sanctions breaches, for example.

A firm that seeks to offer professionals the tools they need to monitor data around clients is smartKYC, a UK-headquartered business founded in 2014. The business works with organisations such as private banks and wealth managers as well as other large financial institutions for whom thorough due diligence on natural or legal persons is a must. It principally targets Tier 1 banks and wealth managers in areas such as Switzerland and Asia. Latin America, given its obvious compliance risk challenges, is on the firm’s radar.

The business enables clients to see “red flags” in case a client they have or wish to approach is the subject of a media/other report that might suggest there’s a problem. The system generates risk intelligence in real time and draws information from private/public sources across the world, and in 32 languages, such as Arabic, Thai, Mandarin Chinese and Russian. The computer power of smartKYC’s engine means that the “false positives” problem – where a request for a name of a person brings up a mass of different people – can be managed as speedily as possible. The firm mines client-defined KYC sources: public, professional or private, structured on unstructured to scan risk-relevant and contextually useful intelligence on a counterpart, be they an entity or an individual.

And the ability to source news/data from different languages is particularly important given that risk-relevant intelligence from emerging market countries is likely to reside in non-English sources, Dermot Corrigan, chief executive at smartKYC, told this publication. (He has held senior executive and board level positions with information services and media brands including LexisNexis, PRNewswire, Independent News & Media, and Frost & Sullivan. Among other roles, he led the political risk intelligence business Exclusive Analysis to an exit to IHS Markit in 2014 and was a main board director of Gorkana Group during its sale to Cision.)

“If there’s something you need to know about a counterpart in Asia, Latin America or the Gulf states, the interesting stuff is less likely to be in English media or web sources,” he said. “Being able to mine intelligence with precision in local languages/scripts could be the difference between a fully compliant KYC search and a partial one,” he continued.

The politically exposed person (PEP) term is now part of wealth managers’ vocabulary. According to the Financial Action Task Force, the inter-governmental body fighting dirty money, a PEP is “an individual who is or has been entrusted with a prominent public function. Due to their position and influence, it is recognised that many PEPs are in positions that potentially can be abused for the purpose of committing money laundering (ML) offences and related predicate offences, including corruption and bribery, as well as conducting activity related to terrorist financing”. In practice, a PEP does not only have to be a serving politician; in some jurisdictions he or she could be a military figure, senior civil servant or NGO official wielding certain powers.

Proof of diligence
Banks and other organisations need to prove they have a single, auditable process that can be put in front of regulators, Corrigan said. Many of smartKYC’s banks will have clients from emerging markets and frontier markets where governance and legal issues can be a problem. “That is where a lot of management pain will be,” Corrigan said.

The firm provides four main types of services: help with day-to-day client onboarding; remediation of existing books of business; periodic refreshing via new screening of clients where needed, and constant monitoring of events such as senior management changes or corporate actions that might adversely affect the risk outlook.

Cost pressures have forced business leaders to think about getting value from compliance systems, given how margins are being squeezed, with money taken from other operations. “Another driver [of smartKYC’s business] is that private banking is not the land of milk and honey that it used to be…CEOs and COOs think sometimes that year on year all they are doing is writing cheques for additional compliance resources with no prospect of systemic efficiencies and that there must be another way. Then they pick up the phone,” Corrigan said.

Regulators realise, increasingly, that lack of good systems means some private banks might take the line of least resistance and kick out decent clients because of the slightest risk of a problem, Corrigan continued. The data smartKYC puts in front of managers enables them to make informed decisions.

A term Corrigan likes is “relationship intelligence” – denoting how RMs at firms, for example, can arm themselves with data and information about a potential new client before the onboarding process even starts so as to spot future pain points before they arise. It can also equip managers with information to serve clients better and steer them to the appropriate service – which is good for profits and revenues, he said.

“Relationship intelligence is about using information so you can go after the business you really want and that your risk policy allows,” Corrigan continued. “It doesn’t make sense to absorb the costs of identifying, pursuing and closing an opportunity only to have it fail the compliance acid test. So for us, smart KYC means using technology much earlier in the process, perhaps as part of the marketing and lead generation function, such that relationship managers have a clear run at securing and maintaining new business,” Corrigan said.

The risks smartKYC monitors are wide: legal risk, ethical risk, personal and professional associates, extent, source and evidence of wealth, country, industry and political exposure, among others. As the news headlines suggest, the type of risks that can confront a business or individual proliferate constantly, and wealth managers must keep ahead. When the penalties for getting matters wrong are so large, and the benefits of scanning intelligence for profitable insights so great, smartKYC appears to be a business sitting in a crucial part of the wealth management ecosphere.

smartKYC is a privately held business headquartered in London and with its main engineering hub in Los Angeles. www.smartkyc.com

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