In our experience, the Know Your Customer (KYC) onboarding process is the biggest bottleneck in wealth management. Why? Well, as you can imagine, no wealth owner likes to disclose all details about their wealth, but this is precisely what financial institutions need to know about their customers. This all too often results in a stalemate that takes time and energy and may taint a business relationship supposed to be of mutual interest. While there's no easy solution, today, we can guide you through a wealth manager's due diligence process from a wealth owner's viewpoint since we regularly observe this dilemma. Before we begin, please note that this is not a specific country assessment as regulation may vary locally, and we take European standards as the benchmark for our guidance.
What is KYC all about?
Financial institutions are frequently abused for money laundering and terrorist financing - estimations of the global volume of money laundering amount to trillions of USD. According to the Financial Action Task Force (FATF), the international money laundering and terrorist financing watchdog, money laundering is the processing of criminal proceeds to disguise their illegal origin. This happens in two steps: in the placement stage, illicit funds are introduced into the financial system, and in the layering stage, through conversions and movements, they become distant from source to finally appear legitimate. Financial institutions need to assess those risks they are exposed to and implement appropriate measures.
Where does it start?
Right at the start of any interaction with a wealth manager, you should expect the process to take weeks. Customer due diligence requires identifying you and verifying your identity based on documents, data, or information obtained from a reliable and independent source. The wealth manager can then determine the person ultimately controlling the assets as the beneficial owner, assess and get information on the purpose and intended nature of the business relationship, and conduct its ongoing monitoring. This includes transaction monitoring and keeping the underlying information up to date. Wealth managers do this on a risk-based approach, i.e., specific criteria and parameters determine the level of due diligence to obtain a holistic view of the risk associated with the particular business relationship.
Customer risk factors
Whenever you deal with a financial institution, they will assign the relationship to a risk category according to their classification system's risk factors. Suppose you have links to sectors commonly associated with higher corruption risk, such as construction, pharmaceuticals, healthcare, the arms trade and defense, the extractive industries, or public procurement. You'll be allocated to a high-risk category. The same applies if you run a casino or deal in precious metals. If you use your company as a contractual party, you'll need to clarify the purpose. Prominent positions or high public profiles are another customer risk factor. Politically exposed persons or persons related to them immediately trigger an enhanced due diligence requirement.
Financial institutions also need to assess if your background is consistent with what they know about your business activity, your business's turnover, the source of funds, and the source of wealth. Source of funds means the origin of the funds involved in the business relationship. It includes both the activity that generated the funds used in the business relationship, for example, your salary, and the means through which your funds were transferred.
Source of wealth means the origin of your total wealth, for example, inheritance or savings. Since they already have to collect all this information about you, they are also obliged to check your reputation. Adverse media reports need to be checked in light of credibility and reliability, and a clean criminal record may not be sufficient to dismiss allegations of wrongdoing. If your assets have been frozen based on administrative or criminal procedures, you'll need clear and precise arguments and evidence to overcome this red flag.
Next to your reputation, doubts about your identity's evidence, integrity, or accuracy need to be cleared. Your reasons for the business relationship need to make economic sense. If you request complex and large transactions, be ready to provide a sound commercial rationale. Same if you ask for particular secrecy in the business relationship.
Your behavior throughout the entire process counts. If your source of wealth and funds cannot be explained quickly and plausibly, you'll run into another red flag. If your approach starts with a low profile and then comes up with the complicated stuff, again, that's also a red flag since it has not been highlighted at the beginning of the business relationship. For opening an account abroad, you should be prepared to answer why you are not doing it at home.
Countries and geographies
Your residence, place of business, and links to countries play an essential role in the KYC process. Country and geographical risk factors and the applicable anti-money laundering standards will be considered when the source of funds is abroad, or funds are received from abroad. Financial institutions have to evaluate the effectiveness of the foreign jurisdiction's anti-money laundering and financial crime prevention regime and its level of tax transparency and exchange of information for tax purposes.
Products, services, and transaction risks
The level of transparency, complexity, and volume of products, services, and transactions are other criteria to define your risk profile. Structures such as trusts and offshore companies to hide or keep the beneficial owner anonymous may trigger a red flag. The complexity of products, services, and transactions needs to be plausible and in line with legitimate objectives pursued. Cash intense and high-value and volume transactions require an apparent reason.
Based on the above information and business profile, a financial institution needs to take a holistic view of the risk factors and weigh them according to their relevance. It will then decide if you are subject to regular or enhanced customer due diligence according to the business relationship's individual risk classification. The higher the risk of a business relationship, the more information must be available about it. Suppose you are a politically exposed person from a high-risk country or performing transactions deemed complex, unusually large, or unusual transaction patterns with no apparent economic or lawful purpose. In that case, the enhanced due diligence process will be performed. It increases the quantity of information to be obtained on your identity and circumstances and the specific business relationship, and the frequency of ongoing reviews. The financial institution needs to be satisfied that the business relationship's purpose is legitimate and complies with their customer due diligence requirements to onboard you.
Wealth Management is considered to be particularly vulnerable to abuse by clients who wish to conceal the origins of their funds or, for example, evade tax in their home jurisdiction. At the same time, it caters to a legitimate demand for very high-value transactions and portfolios, complex products, and services, including tailored investment products, and an expectation of confidentiality and discretion. Thus, it would be best if you were prepared to provide the information that allows a complete picture of your business's purpose and nature, including your source of wealth and why complex or unusual arrangements may nonetheless be genuine and legitimate. While you may provide your relationship manager with that information, the compliance department's independent oversight risk assessment will still be performed.
How to manage the process
Your KYC profile must be sufficiently informative that expert third parties are in a position to get a complete picture of the business relationship's circumstances and risks. It's the story of your economic background and origin of assets. Wealth owners often choose a piece-by-piece approach in providing information, but that goes along with losing control over the narrative. The reviewing compliance department is trained to identify the gaps, and you run the risk that they have plausibility concerns. A back and forth between the client and compliance department may delay the process and lead to additional red flags.
Thus, you are well-advised to provide the relevant information upfront to take control over your story. Document your source of wealth and funds with written proof of income, tax returns, extracts from corporate registers and contracts of company sales, financial statements, inheritance certificates, extracts from land registers, information about associates and businesses to which you are connected. As well as potential corporate acquisition targets or third-party beneficiaries to whom you make payments. It will not be enough to state that the assets have been generated by business activity without providing further information on this activity.
The plausibility of such information needs to be verified with third-party supporting documentation. When you use complex business structures such as trusts and private investment vehicles, in that case, there's an evidence requirement for a legitimate and genuine purpose and the understanding of the ultimate beneficial owner's identity. If you already work with a wealth manager, a copy of the business and compliance profile can support another wealth manager's onboarding process.
To sum up
Wealth managers are obliged to strict due diligence requirements. Presenting the KYC information comprehensively and coherently is key for a smooth onboarding process in wealth management. You are subject to a risk assessment and analysis based on the above-outlined criteria performed by compliance officers who don't know you in person. The higher the risk classification, the more information on the purpose, background, and beneficial ownership of the business relationship you will have to deliver. In our experience, the best way to keep control over the narrative of your economic background and origin of wealth is by sharing it thoroughly and transparently. With that, you avoid stalemates and delays in the KYC process.