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Figuring Out Beneficial Ownership

Friday 2 March 2018


Financial Crimes 

The GRC Professional magazine got a chance to catch up with Eric Frost, Founder of Simple KYC, to take a look at the challenges businesses face in meeting their requirements under the Anti-Money Laundering and Counter Terrorism Financing Act.

Simple KYC is a RegTech start-up that assists organisations in navigating their way through the complexity of  beneficial ownership.

Certainly, if there are any lessons to be learned from the ‘Panama Papers’ and the ‘Paradise Papers’ in the last two years, it is the ability to know corporate clients and to maintain ongoing due-diligence—both a significant and costly challenge for organisations.

Frost believes that many organisations are able to handle simple relationship structures but tend to struggle with companies that have multiple layers of ownership.

“When it starts to get into the form of nominee ownership or non-beneficially-held ownership, error rates start increasing and, at the same time, so does the stress of trying to handle it on the first resolution, or as quickly as possible, and then the processes break down,” Frost explained.
 

The issues with corporate registry
A single registry that organisations can use to establish the beneficial ownership of a company does not fit appropriately with AML/CTF requirements.

Lack of education is another big factor. Then, there is the challenge of getting the right information about trusts from the customer during the on-boarding process. Sometimes, organisations may take short-cuts during this process, and that risks not collecting the right information.

“The irony of the whole thing is that I find everyone in Australia complains about there not being a register for trusts,” Frost said. “And yet for most other markets outside of Europe, and maybe few of the European countries, there is no equivalent of ASIC, or there are very bad registers. The US has no register, for example. You cannot identify beneficial ownership.”

 
Ongoing due diligence
Even if the business does get their KYC right and can identify the beneficial owners in a complex trust situation, there is still the challenge of ongoing due diligence.

The issue here is that most businesses have not developed their ongoing due diligence programs or thought in detail how to structure them.

Simple KYC uses visualisations to help show the links when it comes to ultimate beneficial ownership; however, according to Frost, when that has to be broken down into what he calls a ‘database structure’, that can be very challenging.

This then leads to a process that focusses on remunerations because the information has been lost or improperly maintained. More often than not, says Frost, ongoing CDD programs tend to be sporadic.

“I have only one met one business with really good processes around it. From my experience, people are still in the development phase of those programs, or at the implementation stage.”

Mostly what Frost finds is only limited effort when it comes to changing to beneficial ownership processes, or implementing them. And he often finds much less effort when it comes to transaction monitoring, for which ‘bigger’ institutions usually have firm frameworks.

“With ASIC data, is it possible to implement a program where you introduce changes for directors and ultimate shareholders, and then we can provide the tool that does the same job when it is complexed and multilayered,” Frost said.

With trusts and unincorporated entities, says Frost, it is a matter of when you will go back to the customer.
 

The tech-solution needs the process
“The challenge from outside is that when you are developing technology, there needs to be some level of industry view on it,” Frost explained. “There has to be some level of common practice as to how it’s done.”

RegTech solutions, like Frosts’, need to be configurable, since every entity will have a slightly different approach.

 
Common interest
According to Frost, one of things he is seeing from the RegTech perspective is that individuals and entities have an appetite to invest in technology-based compliance solutions.

“The great thing about RegTech is that it is one of the few areas that industry can get together and look at common solutions across industry and not compete,” he said. “I don’t think there are any financial institutions who go, ‘We want to be the best at this particular regulation.’ They are all just looking to comply.”

This means organisations can come together to look at new regulations.
 
The nexus
There are those entities who are looking for the end-to-end solution, however, or that ‘one compliance’ solution, instead of looking to on-board multiple RegTech start-ups.

“We know no one is going to develop the ‘solution’ for cybercrime or AML” said Frost. “This just won’t happen. Rather, it’s the combination of putting all these products together, and integrating them. If we want to go international, we need to bring in tons of APIs.”

In Australia, Frost said that would mean approaching other members of the Regtech Association and pooling their specialties together.

The challenge in this space will be regulation around data security. “To be able to do this, for banks, is very challenging,” said Frost. “You have to make sure the architecture is right.”

Frost remains positive. “ I believe secure APIs and collaboration amongst the RegTechs to help meet the needs of entities will happen eventually.”


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Eric Frost, Founder of Simple KYC