Written by: Ryne Cornacchia
Recent Regulatory Scrutiny & the Importance of KYC & EDD
Catering an institution’s products and services to high-net-worth individuals does not exempt or reduce its need to comply with money laundering provisions. Morgan Stanley recently discovered this when multiple federal regulators began scrutinizing the lax controls in place for vetting wealthy foreign customers. It appears these concerns date back to 2020 and have yet to be addressed.
In light of the recent scrutiny faced by Morgan Stanley, it is vital for an effective anti-money laundering (AML) program to have controls in place that require the institution to know its customers. This is commonly referred to as Know Your Customer (KYC) and for high-wealth individuals, it is combined with understanding their source of wealth. To effectively monitor their activity, including spotting money laundering red flags or terrorist financing, it is critical to perform Enhanced Due Diligence (EDD).
Implementing a Robust Enhanced Due Diligence Program
EDD is not a one-size-fits-all method and should be built on a risk-based approach that considers not only the customer but also the products and services offered. When it comes to wealth management, the EDD program should be even more focused on collecting the source of wealth information, which will help the institution better understand the transactions within the account. Therefore, institutions need to put appropriate controls in place to thwart money laundering, terrorist financing, and other illicit financial crimes. Adding the international flair and large transactions only further increases the risk.
Allowing risky and high net-worth individuals to transact at your institution does not need to be avoided, but it needs to be executed with the appropriate controls in place. While these controls can be delivered with “white gloves,” it is important to ensure they still comply with regulatory requirements. In fact, they should be scrutinized even more due to their social and political connections.
EDD needs to be fresh and current, since aspects of the customer or member can change regularly. It is important to update this information at least annually for individuals deemed high-risk and to deploy a risk-based approach for all others. When performing reviews, it is important to keep in mind that the expected activity and possible money laundering risks for such individuals may be different than those for more traditional retail customers. Institutions should ensure that those individuals performing the reviews are appropriately trained and given the necessary support to ensure EDD reviews are appropriately customized.
Moving Forward
Another critical reminder from the Morgan Stanley news that seems simple but might be helpful to point out: If a regulator questions a practice, even if not in writing or a formal finding, it would still be in your best interest to investigate further and rectify if warranted. If a finding is issued, it becomes even more critical that the institution addresses the concerns promptly. It is important to collaborate with responsible parties and management to design a fix that meets the regulatory body’s expectations, while still maintaining the ability to serve customers and members.
If you have any questions relating to AML rules for wealth management or would like to discuss AML with us in further detail, please contact a member of our team.
