The Tribune

Criminals may be locked down, but are we - as risk and compliance professionals - ensuring they are also locked out of our financial systems? While the cycles of lockdowns and curfews continue based on COVID-19's worldwide impact, one fact is certain - the threat of financial crimes is very real.

Financial crime is simply any criminal action related to financial services, such as money laundering, fraud, terrorist financing, information security intrusion, bribery and corruption. Many of these crimes can be stopped or mitigated if financial institutions clearly identify the source of funds and, if needed, source of wealth from clients during the on-boarding process and duration of their relationships.

The Wolfsberg Group,in its August 7, 2020, publication of frequently asked questions (FAQ) on sources of wealth and sources of funds pertaining to private banking/wealth management, said: "Sources of wealth and sources of funds are to be considered among the key elements of customer risk assessment and risk management for certain customers, as defined by each financial institution.

"A source of wealth assessment seeks to identify how a customer accumulated their wealth, and sources of funds information provides a financial institution with the understanding of how - and for what purpose - an account is going to be funded. Sources of wealth/sources of funds assessments allow financial institutions to recognise any risks and note any inconsistencies, which should be addressed and either mitigated or escalated for further review."

This clarification between sources of wealth and sources of funds is paramount to having an effective customer due diligence process. It is recommended by both the Financial Action Task Force (FATF) and the Central Bank of The Bahamas' anti-money laundering/counter terror financing guidelines that supervised financial institutions should confirm the source of wealth of potential clients once they are deemed to be high risk.

It is against this backdrop, and for good governance, that I would suggest you ask yourself: "How strong is our institution's risk management framework and, in particular, the risk identification and assessment stage?"

No standard approach

Although there has been guidance supplied by regulatory bodies and inter-governmental bodies, based on my research there is no standard worldwide "approach" to the corroboration of sources of wealth and sources of funds. Every client and situation are different. There should be no expectation that fact patterns would be consistent based on the products or services being offered. However, before corroboration can occur, risk and compliance professionals should confirm their policies and procedures surrounding customer identity, and establishing if there are any inherent risks, such as being a politically exposed person (PEP), a sanctioned individual or entity and other risk factors.

Checklists should be avoided

Historically, many institutions tend to lean on ensuring they have documented the items required by law or guidance. Sources of wealth and sources of funds, in some instances, can be that straightforward and clear. However, in other cases the sources of wealth can be more complex and lack clarity. No matter if the client's sources of wealth and sources of funds appear opaque or as crystal clear as the waters of our Bahamaland, risk and compliance professionals should be able to form a reasonable conclusion from the evidence collected and document the rationale. The Wolfsberg group said: "Financial instituitions should consider all evidence collected and determine whether it is sufficient to support the sources of wealth."

Source of wealth validation

Although there may be overlap, the sources accepted to validate initial sources of wealth will differ from the sources used to validate this moving forward. Financial institutions during the on-boarding stages can consider records of external investment, commercial loan agreements, written confirmations from a qualified party, grant of probate/certified copy of a will, audited financial statements, etc. On the other hand, some acceptable sources for ongoing and sources of wealth may include audited/unaudited financial statements; business bank account statements from regulated financial institutions; pay slips; third-party referrals from regulated financial institutions; annual reports and other sources.

When you have doubts, escalate

All employees have an obligation to escalate suspicions when there is any uncertainty. Management must take these escalations seriously. Moreover, money laundering reporting officers (MLRO) have a regulatory duty to review an internal escalation and determine its validity. If valid, in the MLRO's opinion, a suspicious transaction report must be filed with the Financial Intelligence Unit.

Conclusion

Throughout my external audit and internal audit journey, along with travelling to conferences and interacting with regional and international risk and compliance professionals, it was made clear that the "one size fits all approach" to sources of wealth would frustrate many stakeholders and, in particular, the client. Criminals may be locked down, and it is the risk and compliance professional's job to ensure they remain locked out or are made to exit our financial systems.

NB: Derek Smith Jr is a compliance officer at a leading law firm in The Bahamas, and a former assistant vice-president, compliance and money laundering reporting officer (MLRO), at local private bank. His professional career started at a 'Big Four' accounting firm and has spanned over 15 years, including business risk management, compliance, internal audit, external audit and other accounting services. He is also a CAMS member of the Association of Certified Anti-Money Laundering Specialists (ACAMS).