Source of Wealth Due Diligence: Assembling the Puzzle Pieces

Monday, October 14, 2019

Uncovering a customer’s “wealth narrative” has become an increasingly important component of compliance in private wealth management. Regulators require deeper due diligence on higher risk customers, such as those who are politically exposed or whose wealth originates from higher risk industries. All of this is designed to verify and document that a customer’s wealth is derived from legitimate means.

However, the capability to piece together the history of an individual’s financial assets has proven challenging for many financial institutions. AI-powered technology, coupled with local due diligence expertise, is rapidly proving to be an effective tool in managing mounting regulatory expectations and the increased workload many financial institutions currently face. Financial institutions should not rely solely on client-provided source of wealth information and the due diligence process should not only aim to corroborate client information, but also uncover any undisclosed details which may be relevant for a risk assessment. This article addresses the key challenges in assembling the puzzle pieces behind source of wealth and how to overcome them at scale.

Managing a Growing Population of HNW Customers

High net worth (HNW) customers represent a small, but not insignificant, share of the global population. These individuals now represent millions of customers that financial institutions need to approach with more rigor at the onboarding and refresh stages. This includes completing enhanced due diligence into a potential customer’s employment and business affiliations, investment history, family wealth, assets, media coverage and relationship network. In addition, institutions may want to consider whether a potential customer’s wealth originates from a steady income flow or one-off events, as these considerations may impact the overall risk profile.

Building the Wealth Narrative is Not as Easy as it Sounds

A myriad of information sources, a lack of transparency in emerging markets and complex wealth structures often make it difficult for financial institutions to assemble a clear wealth narrative for HNW customers. Accordingly, source of wealth due diligence cannot be conducted from a single source of information. Rather, due diligence practitioners often query multiple sources of information before constructing a meaningful narrative. Assessing source of wealth should focus on all means by which assets have been acquired and all the ways in which they are now represented. Conducting investigations of this depth and scope at scale requires extensive due diligence experience, regional expertise and technology-powered compliance solutions.

Fact Finding

Due diligence should include the collection, verification and corroboration of information related to the individual’s career, income, nature of work and location. It is incumbent on financial institutions to also collect and corroborate information concerning current and historical investment holdings, directorship records and any other investments.

Family wealth and inheritance should be documented and verified based on an individual’s family tree, including where wealth has been inherited from. Depending on how much time has lapsed from the point of inheritance, additional documentation may be needed to substantiate the source of wealth. It is important that financial institutions also examine the source of wealth for the individual from whom the wealth was inherited. All real estate holdings, properties and high value assets, such as artwork, must also be recorded.

It is challenging for financial institutions to conduct all of these searches manually in a way which provides reasonable assurance that information sources have been sufficiently reviewed as part of an investigation. In technology-driven enhanced due diligence, elements of the data collection process are automated, therefore reducing the time a due diligence researcher needs to spend aggregating information, freeing them up to investigate potential red flags. In this way, source of wealth due diligence en masse becomes more scalable.

Screening and Monitoring

Prior to conducting enhanced due diligence, financial institutions will usually conduct an initial screening of a prospective customer. As part of this process, financial institutions are responsible for flagging up numerous risks, including politically exposed persons (PEPs), or individuals who are on sanctions or other watch lists.

Corporate registries and regulatory databases are relied upon as a key starting point in this process. Special attention must be paid to sources of wealth derived from high risk industries and high risk jurisdictions. Financial institutions must also conduct screening on an ongoing basis to capture and respond to any updates that may impact a customer’s risk profile. Automated screening tools can help alleviate the burden on compliance professionals to ensure ongoing monitoring and they also minimize false positives generated from traditional continuous screening platforms.

Gaps in an individual’s wealth narrative or any indications that an individual has used a complex tax avoidance scheme are example red flags. Financial institutions must also screen available media for negative news related to the individual that calls into question the legitimacy of their wealth in light of financial crime allegations, including convictions, suspicions, bribery, corruption, illegality, unethical behavior, ties to organized crime, litigation or bankruptcy. Interpreting the findings of adverse media, particularly in the context of unfamiliar markets, requires local expertise unique to the subject jurisdictions.

Guarding Against Reputational Risk Whilst Staying Competitive

The stakes are high for financial institutions that fail to conduct the appropriate level of source of wealth due diligence for HNW individuals in a reasonable timeframe. It is important to remember that the entire source of wealth due diligence process takes place at the onset of a customer relationship. Financial institutions must meet customer expectations and a lengthy onboarding process may act as a competitive disadvantage. Deploying technology-enabled due diligence streamlines onboarding, avoiding this negative side effect of deeper due diligence. But more importantly, it’s about not missing potentially damaging or problematic information, which could risk regulatory enforcement action or damage to a financial institution’s business integrity.

 
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James Swenson, Vice President | Head of International, Exiger Diligence EMEA & APAC

James is a Vice President and Head of International for Exiger Diligence. He brings over 16 years’ experience leading due diligence research and operations for financial institutions, multinational corporations and governments.

James is uniquely placed to lead Exiger Diligence in the EMEA and APAC regions, overseeing the delivery of sustainable compliance solutions that integrate purpose-built technology with financial crime expertise.

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