Category: KYC & KYB

Introduction

KYC (Know Your Customer) has become a crucial part of the financial framework in America. Banks in the US are required to have a proper understanding of the identity of their customers. This requirement with advancing technology creates challenges for the banks in conducting KYC. The cumbersome methods of traditional KYC are becoming outdated. It is time for Digital KYC.

The solution to these problems is similar to solutions to most problems in banking. Digitizing the entire process with technology does the trick. Unfortunately, most banks overlook this and stick with more clumsy routes from tradition. More than 64% of account opening applications in 2020 Q3 were either online or through a mobile device. This was a huge jump from the previous year’s 53% during Q2-Q4. The evidence is clear on how customers are changing their preferences.

One area in banking that can benefit from digitization is CASA (Checking/Current Account Savings Account). It’s a very beneficial option for the bank as the revenue from CASA and checking accounts is high. This is because of the low interests that they offer while providing other attractive options for the customer. Unfortunately, the regulations are strict in this area and conducting effective KYC is a tedious process.

Digital KYC is useful for CASA customers and banks. With efficient implementation it will save time and effort for both parties, rendering less attrition and more benefits. A detailed look at how the machinations will reveal a better picture.

Role of CASA In The US Banking Sector

Before understanding CASA we must know the exact difference between savings and checking/current accounts:

• A savings account is a deposit account that bears interest at a bank or any financial institution. Even though they provide modest rates of interest, they are often set against growing inflation. Nonetheless, they are safe and reliable with good liquidity. They are not very profitable for the financial institutions as they would have to provide interest to the customer.
• A current account/checking account on the other hand has no or low-interest rates. They have safety and liquidity too. But what makes them stand out is their option for unlimited deposits and numerous withdrawals. They are also called demand accounts or transactional accounts. They are far more profitable for the banks since they can hold the money while paying no or low interests.

 

CASA combines the features of both these accounts. This will have an appealing effect on the customers to keep the money in the bank. This is beneficial for the bank as they pay no or low returns on the checking/current account while maintaining decent interest on the savings portion. It doesn’t have a specific maturity date. Thus, it is valid as long as the account holder needs it to be open. Banks always prefer customers to have a CASA or checking account than a savings account.

Even though CASA is usually a combined type of account, the term is often used to refer to both Checking and Savings Accounts together. In most parts of the world, they are used separately, but West and Southeast Asia predominantly have CASA along with the other types of accounts. Such bank accounts are located in markets with saturation and cutthroat competition. The US banking sector is headed towards such a scenario.

During the COVID-19 pandemic, the USA has seen a fall in new checking accounts in regional and community banks. The major reason was the unease of the physical process of account opening. It is noteworthy that digital banks and Large banks (like JP Morgan Chase and Bank of America) who had digital KYC and onboarding options accounted for nearly 55% of all accounts in 2019 and increased it to 69% by Q2 2020

 

Source- CORNERSTONE ADVISORS

What Happens When Banks Don’t Know Their CASA Customers?

Even though KYC helps build better relations with the customer and smoothens transactions in the long run, it’s primary objective is to prevent fraud. Several frauds may lead to money laundering and even terrorist funding. In Q1 2020 alone saw a 104% rise in financial fraud reports compared to Q1 2019. This amounted to more than 430% increase from Q1 2015.

This is where KYC comes into play. An established data on the credibility of the customer helps banks determine the risk involved in dealings with each individual. Government bodies like FinCEN(Financial Crimes Enforcement Network) and international entities like FATF play a role in ensuring AML/CFT(Anti-Money Laundering/Combating the Financing of Terrorism). But financial institutions have their responsibilities.

The Federal Government has taken certain steps to ensure this. In 2016, a rule which mandates financial institutions to verify the identities of customers was established. This was especially for legal entity clients and their beneficial owners including corporations, partnerships, LLCs and others.

Banks and financial other institutions are advised to secure from the customer:

• The customer’s full name
• Residential address
• SSN(Social Security Number)
• Date of birth.

CASA is a lucrative option for the banks. They are sometimes given lenient customer onboarding directives. This might lead to inefficient KYC procedures. Unfortunately, money laundering and other illegal activities are mostly done through checking accounts. CASA will also be subject to this as it has similar accessibility. Thus KYC for CASA is of the utmost necessity.

Digital KYC Is The Next Step…Here’s Why!

Another major factor that comes into play is the digitization of bank functions. Customers prefer remote and digital KYC and onboarding procedures to physical and traditional ones. Some of the important reasons for this are:

• Ease of access as they can do it from their homes
• The time required is extremely low relative to traditional methods
• Health concerns amidst the COVID-19 scenario

In 2020 most of the US citizens preferred to access their old and new accounts through an online portal. Some of them went as far as to change their primary accounts from a traditional bank to a bank that provides uber digital access.

The biggest surge was from mobile users who found it much easier to access their bank accounts from anywhere in the world at any time they wanted to. They were literally carrying the snippet of a bank in their pockets.

From the data on fraud alone, it makes it necessary for banks to switch to digital KYC for onboarding process, combine this with the fall of new secondary checking account opening from 63% in 2017 to 24% in 2020 at traditional banks, digital KYC becomes essential

Source- CORNERSTONE ADVISORS

Source- CORNERSTONE ADVISORS

Digital KYC For CASA Operations Comes With A Plethora Of Benefits

Digital KYC is an idea that even governments are entertaining. With proper regulatory guidelines, they will be stringent and secure. It is the most efficient way to conduct KYC for CASA. As a matter of fact, it would be the most efficient method to conduct KYC for any aspect of the banking sector. The reasons for these include:

• As the numbers of in-person account openings have fallen it is clear that customers prefer other modes.
• As the entire populace has access to smartphones, it is only sensible to provide them with the option to create a CASA account from their mobile devices, if they wish to
• Long Queues and formal delays will be avoided due to the virtual onboarding process
• TAT can be reduced to a matter of hours or even minutes.
• Health concerns amidst the pandemic are nullified as no human contact is nil.
• Once implemented the procedure will be cheaper than traditional KYC.
• If regulatory guidelines for Digital KYC are strictly followed, fraud risk can be reduced to a minimum.
• With efficient and experienced third parties’ oversight, the platform can be user experience-driven.
• Overall customer experience and satisfaction is met.

Even without any push for digitization customers are preferring all their banking processes online. KYC usually is a one time process, if enough activation enthusiasm can be generated from the customers, permanent customers can be ensured by the institutions.

Conclusion

The facts are in front of us. The citizens of the world’s largest economy prefer to go digital due to the convenience, security and safety it brings. Digital KYC for CASA in US banks is gaining importance and is becoming the need of the hour in the banking industry. It’s becoming inevitable. Perhaps, in a decade or more the entire industry would go online rendering any physical interventions either useless or extremely unavoidable.

CASA is a symbiotic option for both the customers and the financial institutions. Welcoming more customers into using it would benefit all. It is the responsibility of Such institutions to ensure that customers are attracted and easily integrated into their user-base. Digital KYC is the next step for all entities in the banking sector. Without further adieu, that is where they should head their wheels at.

 

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.

Introduction

With a projected GDP of USD 24.9 trillion by 2023, The United States of America will remain to hold the title of the World’s Largest Economy. This position has always provided lucrative opportunities not just for genuine investors but also for fraudsters and scammers. This is evident from the fact that the majority of all scams in the US revolves around the investment sector.

An Investment Scam is an initiative where fraudsters and scammers convince investors to expend their money in fraudulent opportunities offering high returns and unrealistically low risks.

With the advent of technology, along with the benefits it brings to investing and banking some concerns need to be addressed too. It is far easier for fraudsters to scam individuals and organizations as almost everything is going digital in the sector. Without proper precautionary measures, the boon of technology might turn against the very people whose lives it is trying to make better.

All this renders institutions to hesitate before adopting new technology and its applications. This should change and the careful adoption of technology with secure and safe measures is the right solution. One major measure for this is to obtain and verify crucial data of the entity without letting any red flags go unnoticed. This will help the financial institutions to assess and evaluate if the situation involves any potentially fraudulent activities. Properly implemented KYC achieves this.

Investment Scams and Financial Fraud From The Past Century In The US

No discussion about investment fraud can avoid the name Charles Ponzi, the first man to have nationwide infamy for creating one of the earliest pyramid schemes in the world. The term ‘Ponzi Scheme’ originated from his name.

In the late 1910s, Ponzi promised a 50% return in a mere 45 days time span. The scheme failed causing 5 banks and all investors to lose money and earning Ponzi more than $20 million ( Adjusted to inflation- $220 million). But this was just the dawn of the next generation of financial fraudsters in the country.

Musch closer to the 21st century, Kenneth Lay, the founder of corporate mogul Enron. His ‘strategic’ moves resulted in Enron’s stock price plummeting from $90 to just $1 between 1999 and 2001. The once $68 billion company filed for bankruptcy in the fall of 2001. Neither the banks who had loaned the company money nor the general investors who had invested had any idea of how much they had been hoodwinked until they lost all of it.

Almost every citizen in the US is aware of investment scams in the country. But the problem is that they have neither the required knowledge nor the clarity to protect themselves from the fraudsters. A simple solution is to have strict identification procedures and security measures from banks while onboarding a customer and carrying out transactions.

Apart from these big ones, numerous ‘nuclear’ scammers operate in the country.

Such fraudsters focus on stealing social security numbers by presenting themselves as phony tax officers or stealing the identity of the consumer and misusing it with the bank. Some of them even misuse benefits by forging fake documents to fool the financial institutions. With the advent of the internet by the end of the century, the scams began to go global attracting remote scammers from all over the planet.

 

How is Financial Fraud Faring In The Age Of Information?

In 2014 a Brazilian National under the name Rojo Filho opened more than 17 bank accounts under his real name in the US and used them for illegal money transfer and laundering. The banks included JP Morgan Chase, Citigroup Inc., and Wells Fargo. This was a true mockery of these bank’ policies to know their customers. These policies and systems were supposedly strict after the 2008 financial crash. ‘Supposedly’ being the operative word here. It did not add to the banks’ safety credibility that Mr. Filho had committed multiple financial frauds and investment scams before this.

Mr.Filho was a mere individual who was unsuccessful in the long term. Imagine how many successful scammers are slipping through the cracks.

The fraudsters who target banks and financial institutions are the primary targets for bank security. They impart a direct threat. But what most banks neglect is that even the scammer ripping off of an old man’s IRA or another’s 401(k) can be stopped by proper verification of bank accounts and customer information. The indirect effect this has is immeasurable.

The ease of access to the internet in the 21st century has given tremendous access to scammers. Governments and financial institutions are not blind to this and are taking the necessary precautions to avoid any large scale scamming. This has helped them to subdue singular massive fraud occurrences. But the small scale or as some may call, ‘nuclear’ incidents still take place.

With banks adopting automation more, ACH(Automated Clearing House) scams are also increasing. ACH is a network that functions as a central clearing facility for EFTs( electronic funds transfer) forming an integral part of the national banking system. In the ACH system, payments linger awaiting clearance and to complete the transactions. Using commercial customers’ credentials or even employees’ credentials the scammers manipulate the clearing process and transfer the funds to their desired accounts. If the customer data is well fortified this can be avoided.

A practical way to reduce this is to implement proper verification of customers and businesses. An initial evaluation is necessary, but even annual follow-ups strengthen safety.

Top 5 US States Affected By Financial Fraud and Scams

Though almost all types of investment scams occur in almost every state, we have focused on the state-wise relevant ones here:

1. Florida

Social Security numbers are the primary targets for scammers here. They pretend to be phony tax collectors representing IRS or other agencies and contact individuals to obtain their financial information. The state also has one of the highest numbers of identity theft cases. The majority of the 40,000 complaints received in 2019 were associated with government benefits and documents.

• Complaints per 100,000 increased to 997.8 in 2017
• Total complaints were 208,443 in number

2. Georgia

More than 13,000 cases of identity theft were reported in Georgia in 2019. More than half of this includes government documents and financial benefits frauds. This occurs in a state with a financially dependent youth population with an average student loan debt of $32,283.

• Complaints per 100,000 increased to 924 in 2017
• Total complaints were 96,316 in number

3. Nevada

Nevada mostly had a mix of general financial fraud and identity theft cases in 2017 and 2018. A state that was hit hard by the housing crisis, citizens of Nevada are still struggling after a decade of recovery. The near 8% unemployment rate in the state also contributes to an increase in fraud as people are financially pressured.

• Complaints per 100,000 increased to 770 in 2017
• Total complaints were 23,071 in number

4. Delaware

New accounts are opened in other people’s names for phone and utilities frauds. This is more than in any other state in the US. Even the surging number of imposter scams contributed to the state becoming the 4th(2017) most affected from 5th most (2015).

• Complaints per 100,000 increased to 758 in 2017
• Total complaints were 7,290 in number

5. Michigan

Michigan stands out as of all the major states affected, its citizens had far fewer debts than most of the others. Nonetheless, it was severely affected by the cases of INvestment scams and other financial frauds.

• Complaints per 100,000 increased to 750 in 2017
• Total complaints were 74,689 in number

 

What Is KYC And How Does It Help?

In 2003 the Congress implemented the Customer Identification Program (CIP) as a provision of the USA Patriot Act. It prescribes institutions to verify the identities of individuals who conduct financial transactions with them. It is more commonly known as KYC

Know Your Customer (KYC- for individuals) or Know Your Business (KYB- for organizations and institutions) are processes where a firm identifies and verifies the data provided by its clients.

Clients or potential client data is obtained. This includes names, dates of birth, addresses, etc. From individuals and checking Companies House registration, ultimate business owners, annual returns, etc. for companies and businesses. KYC identifies PSCs(Persons of Significant Control), Ultimate Beneficial Owners, and exposed individuals.

Most businesses and financial institutions perform KYC manually using physical ID documents such as the original copy of the passport or driving license. As technology has advanced not only is it more convenient for digital processing but also safer as the options offered by novel fintech security players are well fortified. A Digital KYC process would cross-check all details with multiple data sources from government entities and other bodies to ensure accurate safety.

KYC prevents fraud in multiple ways. Some of them are listed below:

Tracking Tax Evaders
Undoubtedly, track evasion is a type of fraud. The perpetrators defraud the government and thereby the general public of the country. There have been cases in the judiciary where major tax evaders have been tried for grand larceny from the public. To perform this, individuals with high-income use banks to conceal their financial assets. This permits them to evade the high taxes levied on them by the government.

AML(Anti-Money Laundering) and KYC processes prevent such activities. They verify and confirm the identity of the customers as well as the data they provide. Referential data is stored after compulsory document and compliance checks. This will assist authorities in future investigations if there ever arises a need.

Continuous Transactions Monitoring
Regular Transaction Monitoring with compliance checks forms an essential part of KYC processing. Potentially suspicious customers are tracked and reported accordingly. This includes money being transferred for terrorist financing and money laundering. It prevents the flow of black-market funds into the economy preventing any funding for terrorist entities.

Such measures reassure the customers and stabilize trust in the financial system. This will encourage the public to act with integrity and report relevant instances.

Background Checks
Background checks help institutions to evaluate potential customer’s risk classification and status on government watchlists. This provides safety to the organization to be not involved in financial crime, even unintentionally.

Overall Benefits
As an overview, we can say that KYC helps understand the customer’s legitimacy better. All kinds of scams extract customer data and misuse it in another portal. KYC allows prevention at both levels. It makes it hard for scammers to produce legitimacy and double checks the use of data by verifying it with existent credible databases.

For scams ranging from basic identity theft to massive money laundering and terrorist funding, KYC will be a wall hard to pull down. Every single data provided by the customer will be used to verify at each access point. Not only does it fight the problem upfront, it roots it out by making it near impenetrable for scammers to even register as processors or other false pretexts. This renders the investment scammers to oust from their existing methods.

Ultimately KYC reduces investment scams and more significantly develops trust. Adopting strict KYC procedures ensures the customer that the institution is concerned with lawful business practices. This translates into credibility and a good reputation improving the trust in the company.

Conclusion

KYC is no longer an additional measure for banks to take. It is mandatory for safety. But methods of KYC implementation have altered in the US over the decades. The pen and paper approach is no longer viable and what we see are the prerequisites of a coming digitization. As Cyber Crime and Investment Scams evolve to adapt, we must take it with absolute certainty that we stay ahead of the fraudsters.

KYC will prevent scams, especially investment scams as the scammers in this particular arena are not as sophisticated as more developed fields like advanced cybercrime. But we must consider the fact that the scammers will evolve according to the cages they are put in. They are already evolved over our current traditional methods. KYC alone may not safeguard in certain occasions, but without KYC the sector doesn’t stand a chance. It has come to that, digital KYC is the next step in financial security for all institutions, including the traditional ones.

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.

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.