Due diligence efforts, aided by sophisticated software, are growing at Swiss banks. But are they enough to prevent new cases coming to light of politically exposed persons (PEPs) stashing ill-gotten gains in Switzerland?
At a recent conference in Geneva, a dark-suited group of executives met to talk about an issue that hasn’t gone away for Switzerland’s banks: that of dealing with politically exposed persons, or PEPs.
As banking secrecy has moved to the sidelines, and financial institutions stirred to clean the country’s image regarding dirty money, boosting compliance departments has become the new norm within the sector. A blooming industry offering support services in data research on clients is another effect.
“Information is tricky. Not all of it is accurate. There’s lots of false information. Who is going to screen that information?” asked David Ford, a former compliance director at Safra Republic and ex-head of anti-money laundering at HSBC Private Banking.
Ford highlighted some of the issues involved in verifying the identity of potential clients, a process also known as KYC (Know your customer).
He said that with so much data available from various sources, knowing how it is screened and who does the screening is key.
While committees made up of senior executives are often set up within banks to decide which PEPs can be “onboarded” as clients, junior officers are frequently made responsible for monitoring information, to replace superiors who are away travelling or busy with other work.
“It may look perfect on paper, but it may be flawed in practice,” Ford explained.
Limited experience by lower-ranking staff may lead to inaccurate information collected and inadequate judgement used to interpret sensitive data.
Ford said “a massive failure in monitoring” may therefore take place when junior compliance officers become, by default, central to the KYC process.
“The junior compliance officer will have a tough time interacting with a powerful relationship manager, with a strong personality.”
Culture and “specialisations”
Xavier Isaac, head of trust and fiduciary at Salamanca Group in Geneva was also at the Geneva conference that was organized by Wealthbriefing, an industry publication. For him, a rigid traditional culture within private banks, where a hierarchy of seniority exists, may be to blame for ineffective compliance processes.
“Certain values should be promoted such as the obligation to challenge each other. An accountant can pick up a financial transfer that is suspicious. He should be able to challenge the boss and say that there’s a problem. If the culture within a firm is such that the boss says ‘shut-up,’ there’s a risk.”
“It is fundamental for RMs – relationship managers – and compliance and risk officers in the same organization to share the same value systems.”
Marcus Menz, a professor of strategic management at the University of Geneva’s School of Economics and Management, explained that organisations typically would be structured internally according “functional specialisations.”
But with bankers, relationship managers and compliance officers involved, screening prospective clients and PEPs should be a cooperative process within institutions.
“For compliance to work well, it needs to build on a collaboration of different functions in an organisation. Often people within line management responsibility do not appreciate the compliance issue,” the Geneva professor said.
Over the years, politically exposed individuals have gained awareness of heightened compliance mechanisms and are taking note.
“PEPs are increasingly used to being asked questions, in banking relationships and in dealing with financial transactions. They are aware that there is increased due diligence,” Jonathan Kirby, managing director of JTC, a Geneva-based wealth manager explained.
Companies offering software programmes and databases, as well as business intelligence to banks have mushroomed over past years, to offer compliance officers support for deciphering the backgrounds of such prospective clients.
One of the most influential databases, World-Checkexternal link, launched by Thomson Reuters, offers a “global media search” that automatically scans the internet in a multitude of languages for information on individuals and organisations.
Alessandro Tonchia, the founder of Finantix, a financial advisory firm, explained that such technologies “can search all documents on an individual, where reading 10,000 documents takes five to ten minutes, which would be difficult to beat with the human eye”.
In Switzerland, a number of London-based business intelligence firms have opened branches in response to the growing market for research.
Charles Carr of K2Intelligence, which opened its Geneva office last year, warned of the shortfalls of relying on online databases.
“They would get the passport information: tick. They do the media documentation, tick. They would get the company information, tick. But in the end you need to make a judgment, and because the system is automated, it has zero judgment,” he told swissinfo.ch.
Yves Mirabaud, president of the Association of Swiss Private Bankers, defended their record.
“Compliance mechanisms in Switzerland are very strong and are constantly evolving,” he told swissinfo.ch.
“Every establishment is different. But the interest of every layer of an organization is to avoid problems, and to avoid reputational risks.”
Isaac, whose Swiss business administers family trust and fiduciary structures, explained the “traffic-light system”, a three-tiered approach at his firm for accepting prospective clients who may raise suspicions. This involves a series of checks and research reports carried out internally and by business intelligence firms.
But Ford, the former compliance officer, emphasized caution in outsourcing risk intelligence and ultimately in how that data is interpreted.
“There are lots of business intelligence companies out there, so it’s important to look at those that are reputable and well known.”
Occasionally, prospective clients may provide a bank with a due diligence report produced by such a firm – so-called reverse due diligence - in an effort to expedite the due diligence process.
“If you have a report and you know that the client has paid for it and it comes from a new business intelligence company, you have to evaluate that because you don’t want someone to write for a fee what is favourable and minimize negative information.”
Ford added: “It’s very nice to spend millions of dollars on systems but you should also look at the people who are actually doing the alerts.”
Cost vs risk
Devoting more resources, and sometimes extended amounts of time - meaning weeks, if not months - into researching potentially risky clients, puts banks in a fix.
“Not making a decision is also a decision,” according to the former HSBC officer.
“You have this thing called endless process, where many people are afraid to make a decision.” Committee members are summoned every few weeks to report back with additional information on a client, but the group’s composition often varies due to absences.
At the end of the day, banks hope to identify and retain clients for whom all the efforts were worthwhile, red flags minimized and where due diligence results positively.
For now, Mirabaud, the head of the Swiss private bankers group said that with Switzerland being the world’s biggest wealth management centre, “by definition one could have to deal with badly intended clients, that you may not necessarily be able to detect”.
“But proportionately the risk is bigger in Switzerland than elsewhere.”
Politically exposed persons, or PEPs, are individuals, currently or formerly holding a powerful public position in a foreign country, and their family members and close associates.
After the FIFA scandal exploded last spring, some 40 top officials, associates and entities linked to the world football body have been indicted on charges including money laundering at the Zurich-based football organisation.
Accounts linked to individuals enmeshed in criminal proceedings into the selection of the 2018 and 2022 World Cups in Russia and Qatar, were frozen by Swiss authorities, while three of the country’s largest banks, UBS, Credit Suisse and Julius Baer, said they were helping prosecutors in the cases.
In December 2014, Switzerland adopted legislation that qualified officials at international sports organisations, as PEPs.
Meanwhile in the corruption scandal linked to Brazil’s state owned oil company, Petrobras, more than 30 banks accounts, used to “process bribery payments” by the state company’s officials, were seized by Swiss authorities.