Category: Banking

The Panama Papers incident highlights one of the most significant financial leaks in the last decade. It refers to the 11.5 million leaked encrypted confidential documents of Panama-based law firm Mossack Fonseca. These files were made public on April 3, 2016 by the German newspaper Süddeutsche Zeitung (SZ). They had christened the name as the “Panama Papers.”

The documents revealed the active network of more than 214,000 tax havens. These involved people and entities across 200 different nations. A joint effort was made by SZ and the International Consortium of Investigative Journalists (ICIJ) for a year to decipher the encrypted files. The files furnish detailed information about thousands of offshore “shell” companies. These were used by some of the world’s most influential people to conceal wealth or avoid paying taxes.

Mossack Fonseca was established in 1977 by Jurgen Mossack and Ramon Fonseca. The firm was one of the top offshore legal services providers until April 2016.

The Panama Papers allegedly reveal a global system of undisclosed offshore accounts, money laundering and tax evasion. They displayed how influential people around the world use shell companies to conceal assets. They can also be involved in possible illegal activity.

The Source of the Name “Panama Papers”

The files have been given the moniker “Panama Papers” due to the country of origin. However, the government of Panama has vehemently objected to the name. This is because it seems to put some blame or negative association on the country itself. This is despite any involvement of the government in the actions of Mossack Fonseca. Nonetheless, the nickname has become widespread. However, some media outlets that have covered the story have designated them as the “Mossack Fonseca Papers.”

The incident is the greatest disclosed data breach around a law firm. After the incident, founding partner Ramon Fonseca and other public sources stated that the firm’s network had been jeopardized by hackers sometime in 2015. Security researchers identified numerous unpatched vulnerabilities in Mossack’s website and email server. These could have been very easily compromised by hackers. A total of 2.6 terabytes of data — including 4.8 million emails, 3 million database files, and 2.1 million.pdf files — were leaked. including client documents dating back to the 1970s.

Main Highlights

 

• The Panama Papers were a massive leak of financial files from the database of Mossack Fonseca. This firm was the fourth-biggest offshore law firm in the world.
• The documents were leaked anonymously to German newspaper Süddeutsche Zeitung (SZ), which released them on April 3, 2016.
• The files date back to as far as the 1970s. They shed light on a network of 214,000 tax-havens. These involve wealthy people, public officials, and entities across 200 nations.
• The confidential documents were made public by the International Consortium of Investigative Journalists (ICIJ). The body is a non-profit organization based in Washington. It said that the documents contain details of both current and former world leaders. Other important people include businessmen, criminals, celebrities and sportsmen.
• A majority of the files showed no illegal activity. However, some of the shell corporations were for fraud, tax evasion, or avoiding international sanctions.
• The ICIJ’s website lists banks including HSBC, UBS, Credit Suisse, Deutsche Bank who have utilized Mossack Fonseca. They used the firm to create offshore accounts.

The Truth In Netflix — How The Story Goes Hollywood

The Panama Papers scandal had a multifold impact on nations. It enhanced the national and global focus on the overall harm of money laundering, tax evasion, and terrorist financing. The incident also helped propel the international critique of USA as a potential haven for money laundering and tax evasion. This is mainly due to provisions in the U.S. to form legal entities. Such entities are formed without having to disclose the identity of true beneficial owners. It also showed the world how lawyers can facilitate their clients’ money laundering.

The somber reality sure caught the attention of Steven Soderbergh. he soon went on to direct the recently launched Netflix-original “The Laundromat”. The movie revolves around the main protagonists of the Panama Papers incident

– Jurgen Mossack (portrayed by Gary Oldman)

and Ramon Fonseca (illustrated by Antonio Banderas).

 

“How do 15 million millionaires in 200 countries stay rich? With lawyers like these — “ The trailer of the movie “The Laundromat” itself hints to a satirical flavor and adds to the point we mentioned earlier. Many people may find knowledge through humor in the movie. But the original characters certainly don’t share that perspective. The movie has been subject to an extensive lawsuit by the original duo. They have cited the grounds of the movie as “defamatory”

The incident and resulting scandal also illustrates another looming threat. The growing frequency, ease, and potentially devastating consequences of data breaches are concerning. Cyber attacks can threaten even the richest and most powerful people. The breach of client confidential information held by a law firm can have serious potential legal consequences. This applies to both the firm and its affected clients.

The Impact On The Indian Subcontinent

 

The Indian Express was the partner of the ICIJ project on the Panama Paper Leaks. They had revealed the names of over 500 Indians in its report. This came after 8 months of an extensive investigation of over 36,000 files.

The list publishes the names of corporate figures like the DLF owner K P Singh and nine of his family members. Other names include the Indiabulls Sameer Gehlaut, Vinod Adani who is also a businessman and the elder brother of Gautam Adani. India-born Dutch businessman Ratan Chadha who is the founder of Mexx clothing is also mentioned in the list.

• The list provides details of big businessmen to celebrities of Bollywood and politicians. Top names from Bollywood include Amitabh Bachchan & Aishwarya Rai Bachchan.
• Mohan Lal Lohia, Abdul Rashid and others are also named among others in this context. The list also shows the addresses of businessmen in Panchkula, Dehradun, Vadodara and Mandsaur. It also includes cricket franchise deals. The files indicate linkages of those people who are already under the scrutiny of the CBI and Income Tax department.
• The main accusation against Indians is that they propped up their offshore companies long before the rules were changed in 2013. it was with the intention to place foreign exchange in a tax haven.

Violations of Indian Laws Under Panama Papers Leak

There are mainly laws which are being violated in the Panama Papers case which have been found under the investigation,

• The Incorporation of Companies Overseas.
• Acquisition of the majority shares of overseas companies in contravention of FEMA rules.
• Violation of RBI’s Liberalised Remittance Scheme.

According to Indian legislation, Indians could not incorporate companies outside India. This is because remittances to foreign countries were not allowed before 2004. RBI in 2004 introduced a scheme called as Liberalised Remittance Scheme. This permitted individuals to remit upto $250,000 in phases. These remittances could be utilized for different reasons. Examples — medical, gifting, buying shares, etc.

The people were facing a lot of confusion on this issue. So, the RBI issued a notification in the year 2010. This stated that though the Liberalised Remittance Scheme, Indians are allowed to buy shares. However, it specifically prohibits the setting up of companies abroad by individuals.

RBI issued another notice in 2013. It allowed resident Indians to invest in joint ventures through the Overseas Direct Investment route. So, any company overseas by an Indian can be considered legal only if it was established after 2013.

Insurance Swindles, Shares Fraud and Money Laundering — The Stark Realities Of The Panama Papers

Take One (Insurance Fraud):

The Laundromat portrays the impact on individual lives with respect to the business handled by Mossack Fonseca. The first incident revolves around Ellen Martin (portrayed by Meryl Streep) and her husband (played by James Cromwell). Ellen Martin and her husband Joe are on a pleasure boat at Lake George, New York when it capsizes, drowning Joe. Ellen tries to get compensation from the boating company for Joe’s death. But she could not do so. The reinsurance company that the boat company’s owner and son Matthew bought their policy from was sold to another company based out of Nevis. The Nevis-based company is actually a trust of one of Mossack’s shell companies. It was under investigation by the Internal Revenue Service (IRS) for fraud. Several attempts to contact Mossack and the Nevis-based company were unsuccessful. Ellen travels to Nevis to confront Malchus Boncamper, the manager of the trust. Malchus tricks Ellen and escapes to Miami. But on the way he is caught and arrested by IRS-CI Special Agents at a Miami airport.

Take Two (Shell Shock — Bogus Shares)

The second story is about Simone, who is the daughter of Charles, an African billionaire. Simone discovers her best friend is having an affair with Charles. He offers her shares (supposedly worth $20 million) in one of his investment companies to keep her silent. She accepts his offer. But when she with her mother travels to Mossack’s offices in Panama City to claim the shares, they turn out to be worthless. This is because they are actually part of a shell company under Mossack that only exists on paper. The companies individual values turn out to be $100 and $27 each!!

Take Three (Money Laundering)

The third story is a dramatization of the death of Neil Heywood, part of the Wang Lijun incident. Heywood (renamed “Maywood” in the film), is an intermediary for wealthy Chinese looking to funnel money abroad. He visits a Chongqing hotel to meet Gu Kailai. Maywood demands and pressures Gu for a much higher price. This is if she wants him to continue laundering money for her family through a shell company Mossack owns. Gu responds by poisoning Maywood’s drinks. Gu discloses the incident and reports Maywood to Chongqing police chief Wang Lijun. He secretly records the conversation; he then reports her to the Chinese government.

The story ends with the arrest of Gu and her husband Bo Xilai for Maywood’s murder and for corruption in connection to The Wang Lijun incident. It was a major Chinese political scandal which began in February 2012. This was when Wang Lijun, vice-mayor of Chongqing, was abruptly demoted. He had revealed the details of British businessman Neil Heywood’s murder and subsequent cover-up to the US Consulate.

Interestingly, Neil Haywood, was depicted as a shark in the shell company game through the movie but not much details were provided about him. A point to be noted here is that the film is vague about the reasons why the offshore world thrives. It bludgeons its message home as a “haves vs have-nots” narrative. The particular focus is on tax evasion. This misses some of the other reasons that AML practitioners should be concerned about offshore companies.

KYB — Why It Would Have Been The Anti-Laundromat?

Besides legal considerations, there are also social and ethical responsibilities for knowing UBO. It means the ultimate beneficial owners (UBO) of companies you are doing business with. The Panama Papers disclosed over 200,000 shell companies that hid billions of dollars from lawful taxation. These hidden funds go into the hands of already influential people . In turn, it creates a larger tax burden for society.

Implementing Know Your Business (KYB) requires investigating the UBO structure by law. This is part of the customer due diligence (CDD) process.

KYB in Europe

For example the 4th AML Directive is already in effect in Europe and requires:

identifying the beneficial owner and taking reasonable measures to verify that person’s identity. In this way, the obliged entity is satisfied that it knows who the beneficial owner is. UBO includes legal persons, trusts, companies, foundations and similar legal arrangements. KYB takes reasonable measures to understand the ownership and control structure of the customer.

A beneficial owner in the EU is an entity/individual who owns more than 25% of the corporate entity. Currently the EU customer due diligence requirements are:

(a) identifying the customer and verifying the customer’s identity. This can be done on the basis of documents, data or information procured from a reliable and independent source.

(b) identifying the beneficial owner to the extent that the obliged entity is satisfied. It knows who the beneficial owner is.

© assessing and obtaining information. This is done as required on the purpose and intended nature of the business relationship.

(d) monitoring of the business relationship including scrutiny of transactions. This includes all transactions undertaken throughout the course of that relationship. It ensures that the transactions being conducted are consistent with the obliged entity’s knowledge of the customer, the business and risk profile.

KYB in the US

In the US, the Customer Due Diligence (CDD) Final Rule went into full effect May 11, 2018. It states that all covered financial institutions must identify and verify the identity of the beneficial owners of all legal entity customers (other than those that are excluded) at the time a new account is opened (other than accounts that are exempted). Financial institutions (FIs) includes banks; brokers or dealers in securities, mutual funds; and futures commission merchants and introducing brokers in commodities.

Unfortunately, different jurisdictions have different requirements. Even within the same jurisdictions different regulations are applicable. For example, besides the Bank Secrecy Act (BSA), which covers the CDD rules, US FIs also have to consider Dodd-Frank, SEC disclosure rules, OFAC (Office of Foreign Assets Control), and FACTA (Foreign Account Tax Compliance Act).

Conclusion

The Laundromat may appear entertaining to many a Netflix enthusiast, but the mortifying part is that it is based on true events. Previously we have encountered movies like The Big Short, The Wolf Of Wall Street and many such titles. These have been entertaining and devastating at the same time. You often love to see and hear about the ways that con man take money, but we often forget that in many cases, its YOUR money that is getting taken and it is YOU that gets scammed.

But there is hope — once KYB comes into full sway. The enforcement and regulatory authorities will finally have the trail to follow fake organizations and prevent hundreds of millions of dollars worth of economic offenses in the form of financial fraud. Yes, you might not have an original classic like The Laundromat, but at least your money will be safe — and then you can always turn to Ocean’s Trilogy for a similar experience, only fictional.

About Signzy

Signzy is a market-leading platform redefining the speed, accuracy, and experience of how financial institutions are onboarding customers and businesses – using the digital medium. The company’s award-winning no-code GO platform delivers seamless, end-to-end, and multi-channel onboarding journeys while offering customizable workflows. In addition, it gives these players access to an aggregated marketplace of 240+ bespoke APIs that can be easily added to any workflow with simple widgets.

Signzy is enabling ten million+ end customer and business onboarding every month at a success rate of 99% while reducing the speed to market from 6 months to 3-4 weeks. It works with over 240+ FIs globally, including the 4 largest banks in India, a Top 3 acquiring Bank in the US, and has a robust global partnership with Mastercard and Microsoft. The company’s product team is based out of Bengaluru and has a strong presence in Mumbai, New York, and Dubai.

Visit www.signzy.com for more information about us.

You can reach out to our team at reachout@signzy.com

Reach us at: www.signzy.com

Written By:

Signzy

Written by an insightful Signzian intent on learning and sharing knowledge.

 

 

 

Know Your Business (KYB) process is not so different from the most widely known and standardized Know Your Customer (KYC) process. The difference lies in the purpose and intentionality of the process. The focus is on identifying companies and suppliers in the first case. It changes to consumers or customers in the second one.

KYB (Know Your Business) process shares all the features we have seen in defining KYC processes. The difference lies in the user to identify. In the standard process, potential clients or users are identified to register them in a company. KYB process involves identifying the person responsible or legal representative of a business.

Most B2B (Business-to-Business) companies need to carry out due diligence to identify the businesses they work with. This is to fight money laundering and other tax crimes. It also ensures that they work with organizations with security and guarantees. Even so, in the great majority of occasions, as in the financial sector, it is a mandatory requirement of legal compliance.

For example, companies that offer professional services to other companies must establish KYB. This is to identify the legal representatives of these businesses. It also verifies their connection with the client company.

As with the KYC process, digital solutions in KYB help

– reduce costs

– eliminate bureaucracy

– develop control methods that are safer and more reliable than traditional methods.

KYC To KYB — How One Led To The Other

The US Banking Act of 1970, laid the foundation for the Anti Money laundering (AML) regulations. Customer Due Diligence (CDD) was deemed essential to the financial sector. The term assigned to CDD at the earlier stages was Know Your Customer or KYC.

However, in June 2016, a loophole was found in KYC compliance regulations in the US. These regulations ensured the identity of the customers while assesing the risk factors associated with them. The loophole is that financial institutes weren’t required to identify or verify the stakeholders and beneficiaries of the businesses and entities they are serving. This meant that legitimate firms could unknowingly shelter bad entities or shell companies. These entities could perform illegal and high-value transactions on their behalf. To verify the identity of businesses, the need for KYB was born.

 

Talking About KYB Terminology

Ultimate Beneficial Owner | UBO

A UBO or Ultimate Beneficial Owner denotes the person or entity that is the ultimate beneficiary of an organization that initiates a transaction. A UBO of a legal entity is a person who possesses:

An interest of at least 25% capital of the business.

At least 25% voting rights at the common meeting of shareholders

A minimum receipt of 25% of said organization’s capital as a beneficiary

Customer Due Diligence | CDD

Customer Due Diligence is a KYC process. It involves conducting background checks on clients. This helps in risk mitigation before further dealings. Business relationship risks may root from many factors in the finance factor. These may have financial crime, creditworthiness and inefficient AML/CFT policies.

Enhanced Due Diligence | EDD

Enhanced Due Diligence is a KYB process having a greater level of scrutiny of potential business partnerships. It also highlights risks that evade Customer Due Diligence.

Simplified Due Diligence | SDD

This is the simplest level of due diligence that can be carried out on a customer. This is appropriate where there is nil to moderate risk of money laundering or terrorist financing. Under such criteria, products and services fall into simplified due diligence criteria. The only requirement is to identify your customer.

AMLD5 Guidelines — Role In KYB Compliance

Recently, two major regulatory global directives were updated. These are the 2nd Payment Services Directive (PSD2) and the Fifth Anti-Money Laundering Directive (AMLD5). The PSD2 requires financial institutions to share data with other institutions. This can be done through the use of APIs (Application Programming Interfaces). On the other hand, AMLD5 compels financial businesses to keep checks on personal information online.

Some key takeaways of AMLD5 –

Obliged entities should assess the information available in KYB records. Then they can proceed with the data process to mitigate any gaps in the Ultimate Beneficial Ownership (UBO) data. There may be gaps or new requirements to obtain information. KYB periodic reviews can be used to obtain or confirm existing beneficial ownership information. This way, the necessary information is available for updating relevant beneficial ownership registers.

The following are the requirements for a robust KYB process:

1. Collect information on the customer, UBOs and intended nature of the business relationship.

2. Gather data on the source of funds and wealth of the customer and UBOs. The reasons for the intended or performed transactions can also be procured.

3. Gain consent of senior management for establishing or continuing the business relationship.

Need For KYB In Businesses

KYB checks are most relevant in the context of AML compliance currently. In India, the major reason for introducing KYB is fraud. Despite advancements in KYC, frauds at the organizational level continue to occur in India. Here are some examples:

 

Money Laundering Through Shell Companies

A common method of money laundering is through the establishment of fake companies. These are also called shell companies. Most of these appear compliant with the Government of India. However, these companies do not really exist. Shell companies sell no goods or services. They exist only on paper, not in reality.

In a recent crackdown on Chinese companies in India, the Income Tax Department conducted a series of search operations. A scant number of Chinese individuals and their Indian counterparts were found. They were engaged in money laundering and hawala transactions through shell entities. Above 40 bank accounts were created in various dummy entities. These were used in the transactions of over Rs 1,000 crore. With KYB, these shell companies could have been easily investigated and identified faster.

Chit Fund Scams

In India, chit fund scams go back to several decades. In such cases, a registered organization looks authentic. But it mainly just cheats people with lucrative offers. The customers end up providing money. Then the company disappears without a trace.

In Himachal Pradesh, a recent scam was run under the name of Sarv Manglam Cooperative Society Non-Trading Company. This organization was registered in Dharamshala. The members were been accused and arrested for cheating people of Rs 2.75 Cr. With KYB, this could easily have been prevented as the UBO information would have appeared as bogus or fraud.

Bank Loan Frauds

These kinds of fraud involve a bogus organization. It registers as a genuine service company. The objective is to scheme people into providing payments by cash or through fraud accounts. Recently this has become a pain point in multiple states.

The Anti-Bank Fraud Wing of the Central Crime Branch on 6th Feb 2020 arrested six persons. The accused were running a call center in Pazhavanthangal (Chennai). They cheated several persons who sought loans online. In a similar incident this year, 4 fraudsters were arrested in connection to fraud of Rs 2 crore from more than five banks. This was done by pledging forged land documents. With KYB, the business information could have been traced early on.

Challenges associated with manual business verification

Businesses are required to verify customers, corporate clients, and other critical information under the KYB guidelines. Some of the major challenges for this process are are:

Time taking manual onboarding process

 

Normally, KYB verification for customer onboarding can be a hectic manual process. This is because it requires extensive efforts. In a 2019 Survey Report by Thomson Reuters on AML Insights, 47% of respondents used manual document scanning during client onboarding. This ensured a robust digital identity verification at the expense of laborious effort. The report further states that 4/10 companies employ no digital verification at account opening.

The conventional method leads to a frustrating customer experience. Customers are probable to abandon the account creation process. Moreover, the chances of errors and mistakes when done manually are higher.

High compliance cost

In the Thomson Reuters report, 95 % of respondents reported that data accuracy was very important. 93% cited both well-structured data and company reputation/credibility were also crucial. High costs are required for manually retrieving UBO information. These other factors also drive up the cost for manual KYB verification.

Complex ownership structure

KYC/KYB regulatory directives such as AMLD5 and PSD2 CDD rules make it necessary to verify and identify the business entities. This becomes a mandatory regulatory requirement. Financial institutions rely on gathering business details from clients. This is done with a manual process of filling in forms and verifying the information manually. There exists a high probability of data discrepancies to occur in this process.

Data inconsistencies

Companies can afford manual data retrieval. But the problem of data verification remains. There are multiple sources for collecting companies’ data. Sometimes the information can be defunct or invalid.

Technology To The Rescue — Areas To Address For Automating KYB

With an increase in regulatory requirements, the above points clearly state the need to automate the current process. Here are some solutions that could help businesses:

Automated KYB onboarding

AI-powered verification opens an opportunity to increase the efficiency of the onboarding process. It also reduces the cost and speeds up the process.

The manual method for retrieving UBO information can be achieved in a fashion similar to KYC process. What used to take 24–30 days for manual KYC has been reduced to 2–3 minutes by Signzy’s VideoKYC solution.

Access to authentic business registries

Companies must have access to the properly updated business registries. This is valuable and will make business compliance an easy task. Signzy’s proprietary APIs that can easily retrieve company information. This can be done from reliable sources like from the Registrar Of Companies (ROC) database

API integrated KYB solutions

Advanced API integrated solutions can be designed to aggregate data from various sources. Businesses only need to enter the required details to retrieve data. For ex, business registration number and the jurisdiction code where the business is operating.

Signzy provides a host of microservices involve unique APIs that can extract and verify the UBO data in a matter of hours as opposed to days. Our APIs are also capable of cross referencing data across multiple govt. Databases and sanction lists.

Virtual Identification Using VideoKYC

Businesses are now turning towards automated software. This is due to increasing compliance costs. Software helps conduct checks for everything. This includes from basic forgery attempts to advanced negative checks. The data is cross-referenced against sanction lists across the world.

With Signzy’s VideoKYC, the entire process can be completed in a matter of 2–3 minutes. Our unique video conferencing tool can also allow officials to interact and verify the credibility of the data. This is done while maintaining KYB compliance as well as data accuracy.

Scope Of The KYB Market

 

The market for KYB includes multiple services. Ex: business verification, beneficial ownership identification, and risk assessment and so on. This market is projected to grow to $11.8 billion by 2022. This projection comes from OWI Labs in their recent report

The total global KYB addressable market, as of 2017, the value of the market is estimated at

$5.6 billion with an annual growth rate estimated at 16 percent, adding up to a market size of $11.8 billion in 2022

KYB in Europe

In Europe, the AMLD5 has already been implemented. It facilitates the businesses to know about the UBOs. This is to enable trust between foundations. It also ensures legality of the entities to comprehend the structure of the business and customers.

Devoid of commitment to KYB and other related AML activities can have extreme consequences. For example, Deutsche Bank was fined $16.6 million last year by Frankfurt prosecutors. This was due to failure to observe suspicious transactions. This came as a direct result from their poor management of their AML processes. Previously, a £163 million fine from the UK’s Financial Conduct Authority. This was again due to effective AML oversight. Criminal activity associated with a business can also harm credibility and reputation. It can also cause other business disruptions.

Therefore, KYB is an essential element of anti-fraud frameworks and requirements. This includes Anti-Money Laundering regulations. An extension of KYC and regular due diligence is having a proper KYB process within your organisation. This protects against potential clients and vendors who intend to commit money laundering activities or other financial crimes. By establishing and understanding risk levels during onboarding, organisations can manage potential vulnerabilities. They can also respond effectively to indications of fraud or crime.

KYB in the US

The Customer Due Diligence (CDD) Final Rule is active from May 2018 in the US. This rule states as:

“Beginning on the Applicability Date, covered financial institutions must identify and verify the identity of the beneficial proprietors of all legal entity customers (other than those that are excluded) at the time of opening a new account (other than exempted accounts)”

The financial institutions constitute banks, dealers and brokers, mutual funds and futures commission merchants. However, different jurisdictions constitute different requirements. For example, the US financial institutes, in addition to the Bank Secrecy Act (BSA), are also liable to OFAC (Office of Foreign Assets Control), FACTA (Foreign Account Tax Compliance Act) and SEC disclosure rules.

KYB In India

The newly developed concept of KYB is still in its infancy and yet to be fully applicable across all business sectors. While the regulatory authorities have to take the developments of KYB under consideration, the need for KYB is clear in certain business sectors, particularly in financial space as listed below:

Banking

With money coming in from all corners of the globe, banks must be able to perform Know Your Business (KYB) checks on a client base that may be moving money all around the world. In addition, a “beneficiary owner”, which is a derivative of KYC, must be a present as a priority before financial transactions take place.

A recent article by Times Of India has brought to light how certain “fake” branches have been operating in major Indian states. These are Tamil Nadu’s Cuddalore district as an SBI branch, as well as a false branch of Karnataka Bank which was discovered in Phephna in Ballia district. The culprits behind the 2nd incident swindled almost Rs. 17 lakh in terms of new accounts and fixed deposits. With such fraudulent methods in full sway, KYB in banking is now necessary more than ever.

Lending

India’s lending market is one of the largest in the world, particularly with the advent of digital platforms. Digital lending to micro, small and medium enterprises (MSME) in India can grow upto 7 lakh crore by 2023, a 15x increase in annual disbursements. This is based on a joint report by Omidyar Network and Boston Consulting Group (BCG).

Assessing the integrity and ability of a borrower can be difficult — despite assets backing the loan, making it rock-solid. Unfortunately, there is no stereotypical “fraudster”. There is no scam artist who can be profiled or categorized. A polished CEO with an impressive background can look the same as every other swindler. Lenders need to be particularly mindful of who the borrower is and this means conducting proper due diligence. KYB in lending can help assess:

• The background of the directors and the organization
• Past offences/lawsuits/ criminal cases registered
• Any other controversial data which may harm future business

SMEs/Merchant Onboarding

KYB (know your business) checks are crucial to help businesses verify customer identification by gathering and verifying important documents. It should be mandatory for most financial companies to conduct KYB on their customers/businesses to protect against money laundering, identity theft and fraud. KYB can be incorporated at the time of onboarding to minimize risks as well as mitigate potential frauds.

A lot of companies adhere the use of time-consuming manual KYB processes due to:

• Need for complete checks and collect signatures from multiple directors
• The applicant is not always the director
• The application can quickly become a complex journey if there is overseas ownership or beneficial ownership

Insurance

India does not have an effective insurance fraud law against insurance frauds. According to an article in Business Today, frauds burnt a Rs 45,000-crore hole in the Indian insurance industry’s pocket in 2019. Most of these are due to bogus or fraud claims passed. In many cases, insurance companies, their intermediaries or those pretending to be either of them may also perpetrate frauds.

As India’s insurance industry continues to grow, fraud management is now a major concern for insurers and business leaders. Fraud risk in the insurance value chain can originate from internal as well as external factors. There is also the risk of employees misusing confidential information. Colluding with fraudsters is on the rise. Insurers must install internal checks and balances to rectify such issues.

KYB can also contribute by providing the list of people who have access to sensitive client information as well as conduct checks against the background and history of the organization as well as the people involved.

Conclusion

The global business markets are growing at a rapid pace. Companies must tighten customer due diligence for clients. The KYB processes and checks defined above can take hours to days without a platform with automation capabilities. However, cutting corners to achieve faster onboarding without proper controls increases the risk. It exposes the business to fraudulent actors and their illicit activities. Therefore while complete automation remains a challenge, care must be taken to improve KYB to match the levels of KYC automation that has already been achieved.

About Signzy

Signzy is a market-leading platform redefining the speed, accuracy, and experience of how financial institutions are onboarding customers and businesses – using the digital medium. The company’s award-winning no-code GO platform delivers seamless, end-to-end, and multi-channel onboarding journeys while offering customizable workflows. In addition, it gives these players access to an aggregated marketplace of 240+ bespoke APIs that can be easily added to any workflow with simple widgets.

Signzy is enabling ten million+ end customer and business onboarding every month at a success rate of 99% while reducing the speed to market from 6 months to 3-4 weeks. It works with over 240+ FIs globally, including the 4 largest banks in India, a Top 3 acquiring Bank in the US, and has a robust global partnership with Mastercard and Microsoft. The company’s product team is based out of Bengaluru and has a strong presence in Mumbai, New York, and Dubai.

Visit www.signzy.com for more information about us.

You can reach out to our team at reachout@signzy.com

Written By:

Signzy

Written by an insightful Signzian intent on learning and sharing knowledge.

 

On September 20th, the International Consortium of Investigative Journalists (ICIJ) released the “FinCEN Files” to the world in collaboration with Buzzfeed News. These were the same reporters who brought us the “Panama Papers” and the “Paradise Papers”. This latest data leak of the FinCEN Files delivered a stunning blow to law enforcement and regulators across the globe. As we have seen from similar past incidents, releasing such highly confidential data into the public domain has serious consequences for the businesses and authorities involved.

2 Important Terms In Connection To Fincen

FinCEN stands for the US Financial Crimes Enforcement Network. It constitutes the people at the US Treasury who counter financial crime. Any concern about transactions made in US dollars is sent to FinCEN, even if they occur outside the US.

Suspicious activity reports (SARs) are the documents where the above-mentioned concerns are recorded. A bank must fill up one of these reports if it has a suspicion against one of its clients. The report is forwarded to the relevant authorities.

The Suspicious Activity Reports (SARs) have established that most banks often moved funds for companies registered in offshore tax havens. Ex: the Cayman Islands and the British Virgin Islands, where the owner information was unavailable.

Banks could have denied proceeding with these transactions. But in most instances, the transactions were carried out and a SAR report was later filed to fulfill their reporting obligations.

The Fincen Files — What Are They

The so-called FinCEN Files constitute 2,657 documents leaked from the Financial Crimes Enforcement Network (FinCEN). The FinCEN files were leaked to Buzzfeed News in 2019 who promptly shared them with the ICIJ. For the last 16 months, 400 journalists across 88 countries have sifted through the leaked records. They conducted a number of their own investigations to verify the data.

 

The documents contain 2,121 SARs sent to the US authorities. These are regarding transactions that took place between 1999–2017. The leaked SARs allegedly provide “some of the international banking system’s most closely guarded secrets”. They cover 200,000 suspicious transactions Which are at over USD 2 trillion that occurred over two decades.

Key Revelations Of The FinCen Files

• HSBC enabled fraudsters to move millions of dollars of stolen money around the world,. This was done even after it learned from US investigators the scheme was a scam.
• JP Morgan assisted a fraud company to move more than $1bn through a London account. They did not even know without knowing who owned it. The bank later discovered the company owner to be a mobster on the FBI’s Top 10 Most Wanted list.
• Recovered evidence from the files hint that one of Russian President Vladimir Putin’s closest associates used Barclays bank in London to avoid sanctions that were meant to stop him using financial services in the West. Some of the cash was used to buy works of art.
• The husband of a woman donated £1.7m to the UK’s governing Conservative Party’s. According to the files, he was secretly funded by a Russian oligarch with close ties to the Russian President.
• The UK is called a “higher risk jurisdiction” and compared to Cyprus. This is according to the intelligence division of FinCEN. The number of UK registered companies that appear in the SARs has over 3,000 UK companies. These are named in the FinCEN files — more than any other country.
• Chelsea owner Roman Abramovich once held discreet investments in footballers not owned by his club. These investments were made through an offshore company.
• The UAEs’ central bank did not respond to warnings against a local firm which was helping Iran evade sanctions.
• Deutsche Bank was involved in money laundering for organized crime, terrorists and drug traffickers.
• Standard Chartered Bank mobilised funds for Arab Bank for more than a decade. This was even after their clients’ accounts at the Jordanian bank had been funding terrorism.
• In North Korea, a host of shell companies were used to mobilise millions of dollars through U.S. banks in New York. The funds were routed through China, Singapore, Cambodia, the U.S. and elsewhere. This is based on the suspicious activity report filed by the Bank of New York Mellon and JP Morgan Chase.

 

In another instance, JPMorgan Chase, alerted the Treasury Department in January 2015. This was about suspicious financial transactions linked to North Korea. In its report, JPMorgan Chase said that it oversaw $89.2 million in transactions from 2011 to 2013. These transactions benefited 11 companies and individuals with ties to North Korea. The bank said it had previously flagged those companies in its own suspicious activity reports for sending funds to North Korea.

The Indian Involvement

The Indian Express joined 109 media organizations in 88 countries at the International Consortium of Investigative Journalists (ICIJ) as the Indian representative. They coordinated tracking of the Indian entities and the banks mentioned in these SARs filed with FinCEN from 1999 and 2017.

Suspicious bank transactions of Indians are red-flagged by FinCEN. They are suspected for money laundering, terrorism, drug dealing or financial fraud.

The investigation also revealed transactions of a range of individuals and companies. The list includes a jailed art and antique smuggler, a global diamond firm owned by Indian-born citizens named in several offshore leaks, a premier healthcare and hospitality group, a bankrupt steel firm, a luxury car dealer who allegedly duped several high net worth individuals, a multinational Indian conglomerate, a sponsor of the Indian Premier League (IPL) team, an alleged hawala dealer who became the reason for a massive fight within the Enforcement Directorate (ED) and a key financier of an Indian underworld crime boss, among others.

Not The First Incident, But How Is It Different?

There have been a significant number of big leaks in the financial world in recent years:

• 2017 Paradise Papers — This event marks a bunch of leaked documents from an offshore legal service provider Appleby and corporate services provider Estera. The two were partners in operation together under the Appleby name. This was until Estera became independent in 2016. The documents divulged the offshore financial dealings of politicians, celebrities and business leaders
• 2016 Panama Papers — The infamous incident marking the leak of documents from the law firm Mossack Fonseca. These documents showed in detail how wealthy people were using offshore tax regimes.
• 2015 Swiss Leaks — The documents from HSBC’s Swiss private bank were revealed in 2015. They displayed how it was using the country’s banking secrecy laws to help tax evasion.
• 2014 LuxLeaks contained documents from the accountancy firm PricewaterhouseCoopers. These documents exposed big companies who were using tax deals in Luxembourg. The deals helped to reduce the tax amount they were having to pay

The FinCEN papers are different because they are not just documents exposing a bunch of fake/offshore companies. They are actual reports which come from a number of well-established banks.

These papers bring to light a plethora of potentially suspicious activity involving companies and individuals. The reports also put up questions about why the banks which had noticed this activity did not address their concerns.

Once a bank has delivered a report to the higher authorities, it is very difficult to prosecute it or its executives. This is despite the fact that it carries on helping with the activities and collecting the fees.

FinCEN stated that the leak could

– have repercussions on US national security

– jeopardize investigations

– place the safety of institutions and individuals who file the reports under risk.

Role of Shell Companies In Money Laundering And Fraud Businesses

A shell company is an on-paper business that is established to hold funds and manage another entity’s financial transactions. Shell corporations don’t have any employees. Their shares/stocks aren’t traded on exchanges. Shell companies neither generate any revenue nor provide customers with any products/services. The only normal business practice that shell companies take part in is managing the assets they hold. This usually doesn’t amount to much money.

• Tax Evasion: Many times corporations set up shell companies at offshore venues. These locations usually have a very lenient tax rate. These places are known as ‘Tax Havens’. Examples of these places are Panama and Switzerland. These corporations dump their assets in the shell companies. This way, they can escape from paying high taxes on their assets. Foreign companies can create shell company law. This is because some tax havens don’t have to report any tax information. This makes it a cakewalk to defer taxes and hide offshore accounts from other tax havens. Ex: include places such as Switzerland, Hong Kong and Belize which have gained public attention.
• Money laundering — The Black & White Game; In India, a lot of shell companies were discovered in 2016 when demonetization happened. This was because they were engaged in making use of black money. Many people and corporations make use of shell companies to store their surplus cash. This is preferable instead of making deposits.
• Ponzi Schemes: People or corporations may create shell companies to defraud people. They do so by offering fraudulent schemes and earning money out of it. By making use of these companies, they save themselves. When the fraud is discovered, it is very difficult to find the actual people behind the scheme. The only thing upon which the blame can be put on is the company (which is not of any use).
• Masked Vigilantes — Hiding The Identities: Finding the real owner of a shell company can be a problematic task. The owners of these companies successfully hide their identities. They cannot be located as usually the registered office of the company or directors is at a completely different place. In most cases, it does not match the address submitted to the registrar.

Can There Be Any Legal Reasons For Setting Up Shell Companies?

There are some legal reasons for which a shell company can be created. These are as follows:

• Hold or store money temporarily. This is mainly when the main company/ owner of the shell company is planning to start a new company.
• If a company wants to conceal its business with another company, which has a bad reputation, a shell company can come into play. This can be solely to deal with the other company.
• A shell company may be created in order to stage a hostile takeover of another company. This happens when a company buys another company. This is usually done without the approval of the management of the target company.
• To protect assets from lawsuits.
• In case a company is working in a dangerous country with rampant terrorist activities. The people may formulate shell companies to hide money. This helps avoid being a target of criminals and thieves.
• Shell companies are often used to receive access to foreign markets.

Why Shell Companies Prefer Offshore banking

Essentially, an offshore bank is just a bank located outside the account holder’s country of residence. Offshore banking services are typically offered by banks with a presence in a low tax jurisdiction. These banks tend to offer financial and legal advantages over domestic banking arrangements.

There are plenty of legitimate reasons for having an offshore account:

When living or working abroad, holding an international bank account can make it easier to manage finances. Also, offshore accounts are often available in multiple currencies. This can be more convenient for someone making or receiving payments across different countries.

Clients like the ones mentioned above may find it more convenient and more economical to direct all of their business through one bank. This makes sense to centralize this in a jurisdiction that is the most tax-efficient. There are several companies that do this without actually having a physical presence in the country where they are tax domiciled. This is not illegal, but it can be stated as highly unethical.

International banking facilities usually offer more flexibility. This helps those who need immediate access to their money or to international financing. They can do so more cheaply, quickly and easily than would be possible with domestic arrangements.

There are of course demerits here as well.

– Such accounts usually require a minimum balance

– These accounts are not protected in the same way as account balances are protected (up to £85,000 in the UK) via schemes such as the UK’s Financial Services Compensation Scheme.

KYC and AML — Need For A New Approach

KYC (Know Your Customer) and AML (Anti Money Laundering) are very popular terms today. They’re basically catch-all procedures designed to prevent all kinds of horrors in the financial world.

The same processes are used for sanctions.

KYC and AML procedures have modernized over the years as international payment volumes boomed through the ages. After 9/11, the prevention of terrorist financing made these processes more refined.

The newly introduced concept KYB is an additional security layer to the above. It requires each bank to formally identify who their customer is. So if the client is a company, the bank needs to know who each Ultimate Beneficial Owner (UBO) is.

This can be a bit tricky. Criminals often build shell companies in offshore jurisdictions. These are usually owned by companies in another country. These shell companies are handy for hiding who the real owners are.

The bank must then engage in a series of Customer Due Diligence (CDD) — and sometimes Enhanced Due Diligence — checks. The bank must also check that the person isn’t on a sanctions list (e.g. they’re not considered a danger by the USA or EU).

Need For KYB — Good For Business

In recent years, combatting money laundering and terrorist financing has ramped up. There are stricter regulations in place to ensure financial transparency around business ownership.

Over the last few decades, the introduction of new regulatory updates like AMLD5, PSD2 and many more have changed the game. Companies and financial institutions are expected to know who they are doing their business with. This requires the detection of the ownership structure and their business relationships.

Use of offshore tax havens, shell firms, investments in cash-intensive sectors like bullion and real estate, Trusts with no specific purpose, layers of shareholding (for instance, through subsidiaries or intermediaries), are some ways fraud and crime are concealed.

Fraudsters utilize fictitious addresses and fake identities to :

– avoid the deposit of annual financial statements

– conceal their identities and get away in the case of investigations.

UBO — The New Weapon

UBO is an acronym for ‘Ultimate Beneficial Owner’, i.e. the person or entity who is the ultimate beneficiary of the company. The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog.

Their definition of UBO is as follows:

“the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted.”

The FATF focuses on two types of UBO, based on “ultimate ownership” and “ultimate effective control”. The beneficial owner is thus;

– the person you are doing business with, who may be the legal owner of the entity, or

– the person, or group of persons, who own/s or controls that business.

A company may have more than one beneficial owner or group of owners, to conceal the identity of absolute controlling person or interests.

 

The UBO compliance law applies to;

– Financial transactions, financial institutions (commercial banks, investment banks, insurance companies, brokerages and investment companies), and companies that deal with money (credit unions, money transfer businesses, payment services, online marketplaces, gambling and gaming companies).

– Other companies, like real estate and bullion trading, where transaction above threshold limits, may trigger the requirement of UBO reporting.

– Jurisdictions where regulators have explicit AML/CTF laws, and KYC rules.

Regulated entities are required to retrieve, maintain and disclose such UBO information. Non-compliance can lead to heavy fines and severe reputational damage.

Significance of KYB screening.

KYB screening guarantees fraud prevention and gainful regulatory consistency. It assists organizations with accomplishing believability and generosity in the business network. The better the rating an organization has from the specialists, the more business it draws in.

It helps businesses achieve their share of the worldwide market. Enterprises are developing online connections with others from every corner of the planet. With the limited experience of the prospects, the chances of loss are high due to ambiguity.

This ambiguity leaves a loophole in the B2B relationship. This loophole is then exploited by the criminal entities. It is used to prepare attacks on companies with various types of fraud.

There certainly are a few common scams or fraud which are committed through B2B relations like:

Money laundering.

–black money is channeled through a business with weak security protocols. It is used to launder money and to aid terrorist activities.

Shell businesses fraud.

Fake businesses are set up to wash black money. Black money is incorporated available proceeds and declared as legit revenue. In case a shell company is found by the authorities, the credibility of the businesses conducting business with it is also tarnished.

KYB is significant for global companies to achieve retainable growth in today’s scenario of fraud and increasing regulatory scrutiny.

Conclusion

There are no winners in scandals such as the FinCEN Files — except, perhaps, for the media who can profit from sensationalist headlines. Neither the banks nor the regulators come off well.

This case can, however, be used as a call to arms for positive change. With KYB, bogus corporations and shell companies can be weeded out to prevent further misuse of funds. While SARs are easy to be ignored, mandating KYB as part of the initialization process can easily prevent such fiascos from happening in the future.

About Signzy

Signzy is a market-leading platform redefining the speed, accuracy, and experience of how financial institutions are onboarding customers and businesses – using the digital medium. The company’s award-winning no-code GO platform delivers seamless, end-to-end, and multi-channel onboarding journeys while offering customizable workflows. In addition, it gives these players access to an aggregated marketplace of 240+ bespoke APIs that can be easily added to any workflow with simple widgets.

Signzy is enabling ten million+ end customer and business onboarding every month at a success rate of 99% while reducing the speed to market from 6 months to 3-4 weeks. It works with over 240+ FIs globally, including the 4 largest banks in India, a Top 3 acquiring Bank in the US, and has a robust global partnership with Mastercard and Microsoft. The company’s product team is based out of Bengaluru and has a strong presence in Mumbai, New York, and Dubai.

Visit www.signzy.com for more information about us.

You can reach out to our team at reachout@signzy.com

Written By:

Signzy

Written by an insightful Signzian intent on learning and sharing knowledge.

 

Digitization has transformed the way customer onboarding was done. With online video KYC, banks are now able to reduce customer friction and automate the onboarding process. Let’s dive deeper to understand more about video KYC

You may already know, but ‘KYC’ short for ‘Know Your Customer,’ coming from the conventional investment world, with ‘detailed information from investors and banks about risk appetite, investment expertise and financial position for their clients.’ For the case, Banks complete this KYC strategy at the Time of opening of a bank account. The bank additionally must keep on upgrading the KYC of each client with Time. KYC formally came into existence in India in 2002. RBI also directed the banks to be compliant with the KYC Master circular by Dec 2005.

Though digitization started quickly, we had a long way to go.

What is Video-KYC? And Everything You Should Know About It

Traditionally, either consumer, or the bank has to be present physically in front of each other. With the acceptance of digital methods in practice, IPV still alluded the customers. Other digital methods restricted the per annum transaction to a certain extent. Right before the COVID mayhem, RBI formally introduced online video KYC as a valid method of onboarding the customers.

Through a video call, the client can straightforwardly chat with a Financier, give all the personality records to confirm who they are, and finish the account opening steps in many minutes. The Video KYC helps you remotely link customers without the need for a physical “IPV” test. A bank officer reaches individuals through a live video call, and they ought to submit identity confirmation virtually in the Video KYC process.

It is also referred to as Video KYC, Digital KYC, or Visual Customer Identification (V-CIP). The recently allowed video-KYC guarantees to supplant the out-dated KYC framework totally, with clients now not required to follow it up with physical confirmation of documents. When both identity and record is confirmed, the outcomes are sent to the back-office. Along with it, Video KYC lets you open an account immediately or take out a loan too.

Future of Video KYC (and finance)

Components like reliability and versatility of Video KYC arrangements have been most talked about and talked about. Online video KYC can prove to be a hassle-free norm in the future even after the battle of COVID-19 too. KYC Video could be a significant benefit to investors, pre-paid wallet players, insurance firms, private and public banks, financial securities, and non-banking entities.

It is a safe way of achieving a clean consumer base for the banking industry and particularly Fintech companies. KYC is the first step in this process, and we hope that will bring you to us as your Video KYC solution partner and be a significant move towards the customer.

Who is offering Video-KYC?

1. The banks said in their press releases that RBL bank and IDFCFirst bank launched video KYC for the opening of savings bank accounts and that IndusInd bank has enabled KYC for the opening of savings accounts and has tied up BankBazaar for applicants for credit cards.

2. According to Deepak Sharma, the video feature of KYC will have its learning curve, chief digital officer Kotak Mahindra Bank. “This offers the user the ability to receive a restricted KYC account that can be transformed into a full KYC account due to network problems or records.

3. And many many more have started using it by Sep 2020. In fact, vendors are even getting replaced while I am writing this.

How Can Video-based KYC Be Beneficial For India?

Why is V-KYC such a big deal? The brief reply is that it serves as a reliable software for social distancing. The recent outbreak of social distance may have been alarming, and our daily financial activities could have been limited. There’s some good news here, no worries! To eliminate the conventional paper-based KYC approach for identifying the consumer, the Reserve Bank of India (RBI) has taken an essential step towards digitalizing the KYC mechanism for the ecosystem. Many banks and financial agencies have begun introducing guidelines for an effective online video KYC operation. That is how V-KYC can serve as a critical success factor:

a) Comfort: The video KYC method can be done with home comfort. You only need a laptop, smartphone, or tablet that is linked to the Internet.

b) Less Time Consuming: The Time for the document review is less. It can be accessible to complete the procedure, which took weeks sooner in a matter of days.

c) Safer: Video KYC test eliminates the need for customers to visit a branch or exchange paper copies or wait for days to complete the account opening process. That will improve the conditions for social distancing, the way bank accounts are opened in the future, and significantly reduce the boarding cost.

d) Reliability: In a nutshell, it enables fraud prevention and error checks. It also stops malicious behavior from occurring and corruption practices such as money laundering.

e) Cost-Effective: For both parties, KYC costs between Rs.50 and Rs.500 while V-KYC cuts cost significantly, allowing more consumers, no matter where they are, to be on board quicker. Video KYC gives customers a more convenient choice when raising their costs during onboarding.

f) Efficiency: The face to face KYC is unpredictable and lengthy due to which only 3 KYCs can be performed a day, but Video KYC comes up with more flexibility and only requires 2–10 minutes for the entire sessions reducing turn-around time while not being limited geographically.

Details Required in the Online Video KYC Process:

The following steps are required to proceed:

1. Fill up the necessary details on the online form.

2. The customer’s picture should be live and not a photo-of-a- photo. Banks can use facial recognition technology to validate the client with an image of the documents on camera.

3. Provision of bank consent to fetch Aadhaar details and enter the PAN number or conduct an e-PAN verification.

4. Live customer locations need to be geo-tagged to ensure that they are located in India.

5. The session requires both the user and the staff of the regulated entity to be present simultaneously.

Bottom Line

Online video KYC serves as an utmost foolproof innovation to set a social distancing and has a long way to go. Customers can now update or complete their KYC process and continue to use the loan service. Considering the current digital pandemic scenario, this is the only way of life. So what do you think of Video-KYC?

About Signzy

Signzy is a market-leading platform redefining the speed, accuracy, and experience of how financial institutions are onboarding customers and businesses – using the digital medium. The company’s award-winning no-code GO platform delivers seamless, end-to-end, and multi-channel onboarding journeys while offering customizable workflows. In addition, it gives these players access to an aggregated marketplace of 240+ bespoke APIs that can be easily added to any workflow with simple widgets.

Signzy is enabling ten million+ end customer and business onboarding every month at a success rate of 99% while reducing the speed to market from 6 months to 3-4 weeks. It works with over 240+ FIs globally, including the 4 largest banks in India, a Top 3 acquiring Bank in the US, and has a robust global partnership with Mastercard and Microsoft. The company’s product team is based out of Bengaluru and has a strong presence in Mumbai, New York, and Dubai.

Visit www.signzy.com for more information about us.

You can reach out to our team at reachout@signzy.com

Written By:

Rahul Raj

Sales professional with 12+ years of experience in technology sales, and business consulting.