The 1MDB affair shows that lax know-your-customer and due-diligence procedures are a major risk, says Paolo Brignardello, head of product management and marketing, Fundsquare. New solutions are needed.
Reputations, careers and earnings have been damaged as a direct and indirect consequence of corruption allegations at the Malaysian 1MDB state development company. If financial businesses had been working together, sharing information about the practices of clients and partners, they would have given themselves a better chance of avoiding the crossfire.
Currently, professionals have to conduct their own background checks on each client, adding to cost and red tape. Duplicate proofs of identity criss-cross the globe, as the same customers are asked for the same information by different service providers. The risk of making an error is ever-present with these complex, laborious tasks. The challenge is all the greater when working cross-border.
Specialised KYC market utilities would be an answer. A trusted, user-centric, well-regulated, secure information depositary would collate client information from different sources. This could be provided directly by the customer, by financial businesses, or culled from publicly available sources. This wealth of data would enable the utility to build a clear picture of the honourability of each individual. Moreover, this would be updated swiftly in the light of new information. Not only would this make it easier to on-board new clients, but it would flag up potential and real issues with existing clients. Clients would stay in control of their identities, able to specify who would and would not have access to this information.
As well as higher-quality KYC work, this move towards mutualisation would cut costs as duplicate procedures are eliminated. The utility would also have the financial muscle to invest and develop cutting-edge tools such as digital ledgers and digital ID assurance. This would boost efficiency and accuracy further. For example, the utility could provide added value services such as a risk rating engine to give context to the information and ‘tokenise’ information that would be of use to other businesses.
Tailored to cross-border
Several KYC utilities have emerged around the world, but none addresses the specific needs of cross-border fund distribution. It is no surprise that work to deal with this question is ongoing in Luxembourg, the leading internationally focused fund domicile. The feasibility of a KYC utility is being discussed by a consortium under the coordination of Fundsquare, the Luxembourg-based user-owned, user-run utility for order routing and information services. Ideally this utility would operate worldwide, tracking the identities and interests of all customers.
Regulators and legislators would welcome such an initiative. Not only would it facilitate compliance with existing rules, it would demonstrate the industry’s desire to tackle the problem of criminals using the financial system. This might help prevent the need for future regulation.
KYC rules are still causing headaches a decade and a half after their introduction. Related procedures are some of the most costly regulations faced by the financial sector. A utility designed to meet the needs of the cross-border fund industry would cut costs and, most importantly, risk.
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