Sniggering Elves and the Multi-Nested Complex Corporates Conundrum

Once upon a time in a land far, far away there was a big CEO who lived at the top of a giant tower, just below a huge neon sign that said “El Mega Bank”.  He lived so high up that people in that land said his head was in the clouds and he only ever traveled to and from his tower by helicopter.  One day some important people in suits arrived from Mega Bank’s global head office in a far-off country and said to CEO:

“You need to know who your customers are and get copies of their government issued identification and proof that they live where they say”.

“Hmmm.  I see” said CEO.

So, CEO gathered together all his KYC elves in a room high in his tower and told them that they must paper their best customers.  At once all the elves burst out laughing.

“What’s so funny?” cried CEO.

“Well most of our richest customers don’t carry government ID and will never prove where they live because their children might be captured outside their condo building and ransomed back for $5 million because a naughty elf sold their address to the kiddie-snatcher”.

“Hmmm. I see” said the CEO.

Then a clever elf said: “What we will do is get our richest customers to write down their home address on a piece of paper and hand it only to a trusted elf who will immediately put it in a sealed box in the bank’s vault deep underground”.

“What a good idea said the CEO”.  And so it came to pass

This amusing little ditty concerns a few rich individuals in one medium size country.  Things get a helluva lot more complex when you need to start tracing the ultimate beneficial owners (“UBO”) of multi-nested corporate hierarchies with subsidiaries scattered around the planet in dozens of jurisdictions.  It doesn’t matter much why you need the info – AML, Sanctions/OFAC enforcement, anti-fraud, anti-bribery, anti-tax evasion or just because the boss says so – you’ll need robust business processes, great systems, fantastic data and great organizational structures to be successful and avoid creating a cottage industry.

Screening itself has become big business.  This – for the uninitiated – is the process of reviewing a prospective customer against up to 400 global databases of naughty people and businesses before deciding if they are fit to become a customer.  ‘Risk appetite’ is a fancy phrase banded around by regulatory risk managers to describe a bank’s tolerance level for dirty money.  Well not quite – but it kind of works out that way.  Higher ‘risk appetite’ theoretically translates into shadier customers coming to do business with you (at higher fees – by the way) and with the risk of more dirty money.  That at least is the theory - though I’ve read contradictory papers on whether or not this actually makes sense so I suspect for now the jury remains in its deliberations.  Certainly, I’ve seen plenty of banks who talk a good public game about ‘low risk appetite’ and then get caught with their pants round their ankles when OFAC, the Fed or one of the big European regulators cracks the door and sheds some light on the unsavory goings on within.

But getting this stuff right – i.e. avoiding dodgy customers with dirty money – is not just a moral and regulatory challenge it turns out to be darn good business too.  Banks are such a necessary evil – sorry, critical utility – that providing quality products and services to clean customers is all that’s necessary to turn a good profit.  OK, well I now it’s a bit more complex than that and years of regulatory squeeze and near-zero interest rates have not helped.  But the downsides of getting polluted by dirty money are so high that it’s really not worth the risk.  Interestingly, one bank spent a lot of money with a market research company asking customers what they thought about money laundering; guess what - 90% didn’t give a damn and thought it was squarely the bank’s problem and not theirs.  Which, frankly, it is.  So, when the same bank presented some of its existing customers with almost 300 questions that it thought it needed to be answered to ensure that none were drug dealers or arms smugglers there was a distinct lack of enthusiasm to cooperate.  In some countries where being multi-banked is highly common they simply switched business away to another, less painful, bank.  Some customers complained bitterly to senior bank management.  The resulting impact took the bank from healthy profitability to nasty losses in an 18 month period as it become known as the ‘pain-in-the-ass’ bank.

So here’s the good news.  If you can get your KYC right and use it intelligently you can actually use it as an engine of growth.  Really?  How so?  One bank took its questions and a) pared back the essential ones to a very minimum and b) set the rest into a series of decision trees so that only a very minimal number needed to be answered.  Enough to actually control the risk of financial crime without going overboard.  They gave their Relationship Managers (“RM”) shiny iPads with a sexy app that captured all this and sent them out to their clients.  The resulting data capture was married into their CRM systems and that allowed downstream product teams to work with RMs to identify additional sales opportunities.  Critically, RMs were give intensive training on the approach, processes and technology tools for doing this.  The results?  Good I think.  To be honest I never saw the numbers but common sense tells me that if the pilot experiment was expanded then it must have worked and who could not foresee that reaching out to your clients and gently coaxing out both their needs and desires along with the KYC data at the same time would work?  This customer centric approach is the way to go for the lower volume, high value business.  At the other end of the scale you can get close to achieving the same result but with much more intensive use of technology.  This is where the Fintechs operate and are busy eating the banks’ lunch.  But that’s a whole other topic.

So, let me conclude by entertaining you once again with another anecdote.  There was an overseas student studying at a university in Europe.  He had an account with a big, international bank and each month his father would deposit some funds there for his rent, expenses and so on.  As his father was a retired, successful businessman he tended to deposit bigger amounts than the average kid got to play with.  One day his bank decided that foreign students were a grave danger to national security and to the banks reputation so they wrote to several thousand telling them that their business was no longer welcome.  Our young hero, however, being a student and moving around didn’t receive the snail mail letters that the bank sent.  And the bank – having terrible customer contact systems and a 15th century attitude to email refused to email any of its millennial customers.  After a couple of months the bank summarily closed our hero’s bank account.  Dad’s money was refused, never arrived.  Rent and other essential bills went unpaid.  Suddenly it got, very, very noisy in the bank CEO’s office.  You see our hero’s father turned out to be one of Asia’s wealthiest billionaires.  Angry as all hell, only the personal intervention of the CEO prevented the termination of a global business relationship worth upwards of $25 million.

The small print: this article is entirely the author’s personal opinion and is in no way representative of the views of any current or past employer or client.

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