The ACIP Legal Persons & Arrangements Working Group produced two best practice papers to share recommended good practices and illustrate through case studies on certain risk areas in relation to financial institutions’ (FIs) dealings with wealth management customers and establishing customers’ sources of wealth (SOW).
A summary of the key highlights are provided below. For the full details, please refer to the actual documents in the links provided.
Best Practices in Relation to Risks in Wealth Management
The scope of the paper highlights the risk related to wealth management structures, macroeconomic developments, non-face-to-face onboarding, client nationality/ residency, external asset managers (EAM) and ongoing monitoring challenges. Although focused on the banking sector, other FIs can consider applying the relevant principles and practices to their policies and processes.
- Wealth management structures, such as personal investment holding companies, trusts, foundations, family office vehicles, and collective investment vehicles, can be misused for illicit purposes like disguising beneficial ownership and obscure origins of activities. Best practices involve understanding the structure and economic rationale, engaging experts on tax and fraud, assessing capital control circumvention risks, and implementing defined processes for onboarding these structures. Additionally, obtaining further information on operating companies, including their nature, location, and counterparties, is crucial to mitigate risks effectively.
- Macroeconomic events can lead to capital movement from unstable to stable countries and may cause restrictions or illicit asset flight. Best practices include conducting country-level risk assessments, monitoring sanctions or ratings changes, implementing restrictive measures group-wide, considering contagion risks, using monitoring tools for early warning, sharing transaction findings across business divisions, and performing targeted reviews on specific markets to identify exposure and concentration risks.
- Non Face-to-Face (NFTF) onboarding poses risks related to impersonation, which can be mitigated by setting specific formats for ID verification during physical meetings, providing sufficient training for these verifications, assessing the robustness of NFTF measures, applying markers on accounts opened through NFTF processes, considering additional ID validation measures for remote certifications, and storing relevant parts of video calls for ID validation performed remotely.
- Clients’ nationality and residence pose significant risks, including misrepresentation of domicile country, tax evasion, name changes, and legal prohibitions on additional nationality. Best practices to mitigate these risks involve requesting information on all nationalities, obtaining renunciation certificates to prevent name change issues, compiling a list of high-risk countries based on the OECD list, cross-checking client-provided information against static and transaction data, assessing the rationale for golden passports or dual nationality, and utilizing information sources for further citizenship application details.
- When dealing with External Asset Managers (EAM) or Financial Intermediaries (FIM), it is crucial to be vigilant about potential risks, especially regarding ‘bad actors’ who may assist clients in providing misleading information or documents. Best practices include using network analysis to detect red flags in EAM-client relationships, identifying common contact details among clients to uncover connected networks, analyzing Suspicious Transaction Report (STR) trends to pinpoint risk concentrations from specific markets or EAMs, and raising awareness of risk typologies derived from STR analysis to senior management.
- Ongoing monitoring involves a combination of name and media screening, transaction monitoring, and tracking changes in client data, such as nationality, location, or wealth profile. Best practices include using multi-factor data analytics to identify client connections, analyzing non-financial indicators, scrutinizing sources of funds, applying the same scrutiny to 1st party transactions, comparing transaction flows against client profiles, and implementing alerting methods for significant changes in client profiles during their lifecycle.
Industry Perspectives on Best Practices for Source of Wealth Due Diligence
The paper is focused on the banking sector but other FIs can consider applying the relevant principles and practices to their policies and processes.
- Framework for Source of Wealth (SoW) due diligence – Adopt a cascading logic, considering risk principles such as materiality, relevance, and prudence. Establish and corroborate the material elements contributing to wealth, using reliable and independent documentation. Assess documents for plausibility and red flags, using benchmarks appropriately where necessary. This approach aligns with guidance from the MAS Circular AMLD 08/2024 and ensures the effective corroboration of customers’ wealth sources.
- Risk-based tiered approach – Includes a two-tiered system where customers with lower risk are subject to baseline checks while those with higher risk, such as Politically Exposed Persons (PEPs) or individuals with adverse news, undergo comprehensive SoW due diligence. Key practices involve corroborating material elements of wealth, using reliable documents, and assessing the plausibility of the information provided. Regular reviews and monitoring are recommended to ensure up-to-date and relevant SoW assessments.
- Corroboration – Two-tiered approach to differentiate between lower and higher-risk customers. Key attributes for Tier 2 SoW include PEPs, adverse news, high AUM threshold, and suspicious transactional activities. Regular reviews and trigger event assessments are crucial to keep SoW information relevant. The paper emphasizes the importance of ongoing monitoring and senior management oversight to detect inconsistencies and suspicious activities. Mitigation measures include restricting relationship expansion, imposing account-specific limitations, and requiring senior management approval for transactions. Best practices for corroboration involve using public information, third-party confirmations, and detailed analysis across various scenarios such as inheritance, business ownership, investment gains, sale of goods, and employment income.
- Ongoing monitoring and senior management oversight – Continuously assess customer transactions and sources of wealth for any inconsistencies or suspicious activities, adjusting risk levels as needed. It recommends mitigating controls such as restricting relationship expansion, limiting account-specific or product transactions, downgrading customer risk ratings, limiting assets under management, and requiring senior management or compliance approval for transactions.
Disclaimer: The information, views or opinions expressed are provided for general information and should not be relied upon as legal or professional advice.