Too Good to Be True: A Story of Banking Compliance

We want to start a series that reveals the specifics of compliance officers' work. Compliance officers need not only to be well-versed in laws, regulations, and methodologies, but they also need to deeply understand the client's industry, know what the client does, who their counterparties are, and so on.

Bank employees often hear from clients that the questions they ask about how and under what circumstances the client established relationships with a particular counterparty, how goods are moved, services are provided, and similar questions, are irritating. This occurs due to a lack of mutual understanding.

On the one hand, yes, it might seem irrelevant for us to understand how our client and under what circumstances established business relationships with a particular partner. However, there is an explanation for this. We want to tell a story that happened to us more than 10 years ago in another project and almost led to negative consequences.

А regular client?

A client approached us with a request to open accounts for their European company. After conducting standard KYC procedures, as well as the mandatory personal interview, it became clear that the client needed an account for conducting international payments. The purchase of goods was carried out in Hong Kong, and the goods were to be delivered to one of the EU countries.

Since the client's activities were high-risk, during the onboarding process, in addition to the usual bank statements from other banks, accompanying documents were requested: bills of lading, transport documents, specifications, and other documents.

Too good

From the very beginning, all documents looked well-structured, clear, and neat. But the feeling that something was wrong worried our experienced compliance team. Usually, when an SME sector client approaches us to open an account, they often lack some documents or part of the documents contains errors. This is due to the fact that the company's beneficiary takes on different functions: he is a salesperson, a negotiator, and a lawyer. Quite often, at the growth stage, companies cannot afford a professional department or a separate lawyer who would be engaged in preparing documents for compliance.

In this case, however, our potential client, judging by the bank statements from other banks and his turnover, belonged to the category of small clients. But his documents were impeccable: verified, well-prepared, and filled out without errors. Invoices, contracts, and product specifications were issued for each delivery of goods from China. The goods themselves did not fall under the prohibited category, and the client's counterparties were easily verifiable.

Exposure

Almost a positive decision was made to open the account, but our compliance officer noticed a small detail: the goods carrier used a ship with a certain tonnage displacement. He compared the quantity of goods being transported and realized that it almost doubled the capacity of the ship.

We contacted the product supplier and the carrier, asking questions about the possibility of delivering to the specified regions and whether it was possible to load such a quantity of goods onto this ship. It turned out that the ship had been in the dock for repairs for a long time, the supplier from China did not supply goods directly to the specified EU country, but did so through its subsidiary in the EU.

The client responded reluctantly and nervously to our clarifying questions, claiming he had exclusive conditions. As a result, the account opening was denied due to insufficient and non-transparent information about the movement of goods.

Compliance keeps all customers safe

The conclusion is simple: questions that seem simple and silly, as well as attention to detail, can avoid many problems. Therefore, compliance officers must have a good intuition, understand what is typical and clear, and what deviates from the norm. And, of course, they should have a broad outlook.

So, what would have happened if we had indeed opened the account? In the best-case scenario, we would have faced a significant reputational risk as we would have been associated with a client whose activities were opaque and dubious. In the worst-case scenario, it could have led to involvement in fraud or other illegal operations, ultimately resulting in not only reputational damage but also legal consequences. Therefore, our vigilance and attention to detail allowed us to avoid serious problems and protect both the payment institution and all its clients.