A guide to reducing the cost of AML compliance with electronic identity verification

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1 A guide to reducing the cost of AML compliance with electronic identity verification

2 Legal firms often struggle with the cost of compliance associated with Anti-Money Laundering Regulations. Electronic Identity Verification offers a timely and comprehensive solution. Introduction In the UK, turnover of the most serious forms of organised crimes (mostly drug-trafficking) is around 15 billion, with around two thirds of that sum being laundered throughout the regulated sector, such as banks, insurers, accountants - and lawyers. As such, AML regulatory compliance is as current an issue as ever. In response to money-laundering, its definition and penalties, The Solicitors Regulation Authority (SRA) recently took action, and released warning cards to legal firms throughout England and Wales informing them that they must be fully compliant with AML regulations, and that failure to do so will be considered as a criminal offence. These stringent laws demand that lawyers must carry out full Client Due Diligence (CDD) searches against their clients to ensure that they are operating legally and are not attempting to launder money through legal processes. The response from the legal community has been clear and unequivocal: carrying out CDD procedures is incredibly time-consuming and costly, and another solution is urgently needed. Electronic Identity Verification (eidv) can provide a workable, time-saving yet thorough solution that will satisfy the demands of AML Regulations. It is worth noting that The Joint Money Laundering Steering Group (JMLSG) offers guidance on adherence to AML regulation compliance (www.jmlsg.org.uk). The JMLSG Guidelines emphasise the responsibility of senior management to manage the firm s money laundering and terrorist financing risks, and how this should be carried out on a risk-based approach. The remained of this document will thus consider: 1. Current AML CDD compliance obligations for legal firms 2. How legal firms are responding to AML compliance 3. Practical difficulties with current AML compliance procedures 4. Answering lawyers AML compliance needs via Electronic Identity Verification (eidv) 5. How eidv can save time and money, whilst ensuring full compliance with AML regulations 2

3 1. Anti-Money Laundering obligations for Client Due Diligence within legal firms Currently, law firms must carry out AML Client Due Diligence (CDD) searches where there is a financial or property transaction involved, such as: Buying and selling real property or business entities Managing client money, securities or other assets Opening or management of bank, savings or securities accounts Organisation of Contributions necessary for the creation, operation or management of companies Creation, operation or management of trusts, companies or similar structures In addition, the need for CDD arises when firms: Are establishing a business relationship Are obtaining information on the purpose and intended nature of the business relationship Will be carrying out occasional transactions Wish to monitor the business on an ongoing relationship (including transactions scrutiny) to ensure that they are conducted in a manner consistent with their knowledge of the customer, the business and risk profile (including, if necessary, the source of the funds) Suspect money-laundering or terrorist financing Doubt the veracity or adequacy of documents, data or information previously obtained for CDD purposes 2. How legal firms are responding to AML compliance Currently there appears to be a shortfall between statutory AML/CDD demands on lawyers and the response to these demands. Due to the costly and time-consuming nature of identity verification procedures, compliance regulations are often met but not always comprehensively enough. This lack of robust compliance is placing individual solicitors, compliance managers and law firms at risk of major personal and corporate financial penalties - all the more so when one considers the growing amount of anti-money laundering legislation to which lawyers must pay heed. This includes: The UK Proceeds of Crime Act EU 3rd Money Laundering Directive The Money Laundering Regulations 2007 The Prevision of Terrorism Act 2008 The Weapons of Mass Destruction Act The Solicitors Regulation Authority and the Law Society. The US Treasury Department s Office of Foreign Assets Control (OFAC) Sanctions List, making it illegal to conduct business with sanctioned individuals or entities linked with crime proceeds or the funding of terrorism. 3

4 A recent Law Society survey* of 115 law firms in England and Wales revealed that 74% of those interviewed had not checked their entire client list against Her Majesty s Treasury (HMT) Sanctions lists, whilst 48% of firms did not screen new clients against HMT Consolidated Sanctions lists. In addition, many firms were still relying on outdated e-verification or monitoring systems. These are so limited in capability that they cannot even cross-check: Aliases Abbreviated names Transposed names Names translated from foreign characters into Latin characters This makes it well nigh impossible to find the truth behind names provided by clients, especially since the use of multiple false identities is common amongst criminals and terrorists; what s more, the fact that many law firms use verification systems that depend on clients giving their real name undermines the entire screening process. Consequently, many law firms are probably unknowingly acting on behalf of terrorists, criminals, drug traffickers and money launderers - so as long as they continue to employ current screening procedures, they will be at high risk of prosecution and substantial fines. *Anti-money laundering compliance by the legal profession in England & Wales {January 2009} 3. Practical difficulties with current AML compliance procedures There s no doubt that current (usually paper-based) identity-checking procedures are inefficient, insubstantial - and, worst of all, time-consuming, as can be seen from a simple example of manual, labour-intensive passport or driving licence checking: 1) The client sends/takes their identity document to the law firm 2) The firm takes a copy 3) The document is posted/given back to the client 4) The copy is saved on the firm s internal system From this straightforward example, it can be seen that (irrespective of the inadequacy of the checking procedure itself) cost implications can be prohibitive, due to staff time spent on each of these procedures - never mind training staff in being aware of exactly what sort of authentication will ensure fulfillment of AML regulations and how to identify fraudulent documents. Once individual client identity information is gathered under current identity-checking systems, yet more time-consuming searches must be undertaken; a Home Office website list of some 7,000 Politically Exposed Persons (PEPs) must be searched to see if the individual client is on the list. The list runs to around 135 pages, and must be searched manually - which, again, takes a lot of valuable staff time. 4

5 4. Answering lawyers AML compliance needs via Electronic Identity Verification (eidv) Many law firms don t always fulfill their AML/CDD obligations comprehensively enough; many are genuinely keen to embrace new technology and so enhance compliance levels. Their reasons are manyfold but all urgent: Non-compliance is a criminal offence which carries significant penalties Pressures of the current recession are generating increasing competitiveness amongst law firms, with fees being mercilessly driven down. Consequently, law firms are seeking to cut costs internally wherever possible, so that they can reduce their fees but still remain profitable. Optimum use of staff time via improved checking procedures can clearly make a major positive difference to internal costs Higher compliance levels generate lower insurance premiums for the firm To help ensure that the lawyers, as members of the regulated sector, make a significant contribution to preventing the criminal money-laundering behaviour which is a current focus of Government anti-money laundering and counter-terrorist financing strategy Electronic Identity Verification (eidv) can provide the answer to all these challenges by replacing outdated paper-based identity checking processes with the latest electronic ID verification (eidv) tools. GB Group s eidv solution (URUTM) matches basic client identity information against more data sets than any competing system and offers match rates in excess of 97%, confirming that individuals really are who they say they are. 5. The benefits of Electronic Identity Verification (eidv) eidv has many benefits for law firms, not least of which are increased speed and comprehensiveness of verification, as well as full conformance with increasingly onerous legal requirements. In addition, there are many other significant benefits: Reduce cost of manual process. Law firms that transfer their AML processes from paper-based manual checks to electronic ID procedures can reduce overall operational costs by: Decreasing the number of staff needed to carry out AML processes Reduce the time needed to run a check from days to minutes (e.g. from almost 7 days to 1 minute using GB Group s eidv software, URU) Removing non-chargeable administration time and replacing with fee-earning work (e.g. a manual check can take up to 30 minutes to complete, and for fee-earners who would typically charge out their time at an hour this represents a major lost cost opportunity) 5

6 Reducing the cost of compliance with FSA money-laundering regulations (reductions of up to 95% have been achieved) costs which have usually been absorbed internally (not passed on to the client) Making billing easier via transparent and intuitive management reports Increasing immediate verification from basic identity information (e.g. 97% of one firm s clients, using URU) Remove the risks inherent in manual processes. There are many risks associated with the transfer and storage of paper documents, all of which can include sensitive information related to an individual s identity. These risks can simply and effectively be removed by using an eidv solution, which captures sensitive information over the telephone. Data is then stored online in a secure environment, where it is searchable by approved personnel, thus eliminating paper-based risks. Improve accountability of compliance process and decisions. eidv solutions quickly and efficiently provide a clear idea of where the issues lie if an individual fails or is referred within the Due Diligence process. In addition, all checks are held online for an unlimited amount of time, thus providing compliance checkers with the security of knowing that previous checks can be searched and checked at any future time. In this way, compliance with requests from internal sources or governing/regulatory bodies is a rapid and straightforward procedure. Enhance the customer experience. Law firms must make the AML Due Diligence experience positive for the client, reassuring them that it is a simple, quick but legally necessary process. eidv checks achieve this aim through their speed and efficiency - and, of course, potential clients need not produce documentation to enable the process to go ahead. Overall, this adds up to speedier processing so that the client feels that they are being well looked after - resulting in more potential initial and repeat business. Minimise integration costs. Aside from paper-based systems, identity verification can be carried out electronically in the following ways: As a stand-alone system which sits separately from the existing case management software (therefore requiring double-entry of information) As software that is integrated into the case management system (removing double-entry requirements). This usually requires an upfront integration fee Pre-integrated eidv software (that is already part of the existing case management software) as provided by GB Group. GB Group works in conjunction with the leading technology partners who provide case management software - so if a firm has case management software from one of the leading suppliers GB Group s software is already integrated. eidv information can be input instantly with no integration costs 6

7 Reduce manpower costs of keying in data. Completing an ID check via GB Group s eidv (URU) software within a partner s application ensures that the details entered in the case management system or workflow tool at the point of instruction are also used to conduct an ID check. This removes the need to duplicate this task, as in a stand-alone solution. Conclusion Given the continued growth of multi-billion pound global criminal and terrorist activities, money-laundering challenges are here to stay for the foreseeable future. Lawyers must respond by adopting state-of-the art eidv procedures that are now available. The benefits to lawyers are clear - and as more law firms and other commercial institutions adopt these procedures, the fight against world crime becomes more widespread, more powerful - and more effective. 7

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