Investment managers – AML applies to you too

Investment management has traditionally been regarded as ‘lower risk’ when it comes to money laundering and other financial crime, but the shift to online fund management, combined with a number of other factors means investment firms are more vulnerable than ever.

For example, while many other regulated businesses - particularly those in the property and legal sectors – tend to onboard significant numbers of new clients regularly, wealth managers tend to have a smaller number of clients with whom they have close relationships. This ongoing contact and trust they have with their clients often means they let their due diligence slip. And while they may know their clients – or think they do – this type of approach leaves investment firms open to financial abuse, as they are allowing certain risks to go unnoticed, as Martin Cheek, Managing Director of AML experts Smart Search explains.

“Due to the fact that many investment firms see themselves as at low risk from financial crime due to their trusted client relationships - and the fact that there has been relatively little action against investment firms for AML failures - many do not see the financial benefits of using resources to fund large scale compliance processes.

Recent research from SmartSearch found that a third (33%) of investment firms still rely on manual checks to verify new customers, but that 24% have actually been a victim of financial crime in the past year.

“Seeing investment management as ‘low risk’ and therefore not taking compliance seriously is a hugely dangerous attitude,” said Cheek. “Criminals are increasingly taking advantage of this lax approach to customer due diligence.”

And, says Cheek, the number of investment firms that are failing to complete proper individual checks is just one area of weakness – another, arguably bigger issue, is the fact many are unable to  perform proper business checks on corporate customers, which is opening them up to large scale financial abuse.

“The Pandora Papers recently exposed the extent to which shell companies and other corporate vehicles are being used by the rich and powerful to hide the ownership of a legal entity for a whole host of reasons, including tax evasion and money laundering,” said Cheek.

“It is almost impossible to run Ultimate Business Owner (UBO) checks using manual processes – some of the business structures involved are so complicated, that bad actors can easily hide at the top of a very tall corporate tree with a legitimate business at the bottom. If this ‘legitimate’ business is the one the investment firm runs manual checks on, they are highly unlikely to be able to identify what is really going on.”

Cheek says there are also new threats that investment managers need to be aware of – the most pressing at the moment being crypto.

“More and more investment clients are now interested in investing in this highly volatile and unregulated area – which again exposes investment firms to abuse.

“However, despite these growing risks, many investment firms still do not see compliance and AML as something they need to worry about, but it absolutely is, and those that do not have proper AML procedures in place are not only risking fines and reputational damage, but could be enabling money laundering, which is not only a crime in itself, but is an enabler of serious organised crime.”

The most cost effective, reliable and robust way for investment firms to stay compliant, protect their businesses, protect their customers and avoid fines and reputational damage is to use electronic verification.

Cheek concludes: “SmartSearch is the only AML solution to offer identification, verification – using biometric and facial recognition technology - screening, anti-fraud checks, ongoing monitoring and hosting all from one platform.

“Our business checks service is the most robust on the market, identifying the UBO in even the most complicated corporate structure, and running full AML checks on the key individual identified so our customers know exactly who they are dealing with.”