Knowledge is protection

One of the biggest changes over the last 20 years has been the emergence of the need for legal firms to assess the risk of simply acquiring a customer. The increase in consumer debt and rises in fraud of all types, in particular ID theft, has resulted in Know Your Customer (KYC) requirements becoming top of the agenda for many firms.

At Callcredit Direct, we still receive many enquiries about both the requirements for Know Your Customer and the Anti-Money Laundering Regulations. It’s clear from the queries that many companies remain uncertain what checks they need to carry out or exactly what they need to do. Some, admittedly a very small minority, even think that it is not essential to know their existing customers as long as they have systems in place to check the identities of new customers.

What the regulations require

The Joint Money Laundering Steering Group (JMLSG) sets out guidance on the KYC requirements, and offers practical assistance on how the regulations should be met. The introduction and enforcement of the Money Laundering Regulations 2007 on 15 December 2007 affected all regulated sectors in the UK. Under these regulations, legal firms are required to enhance their current anti-money laundering procedures in a number of ways, with an emphasis on taking a risk-based approach to carrying out Know Your Customer checks.

Through enhancement of KYC processes and the operation of a flexible risk-based policy, firms will be able to protect themselves from criminal activity such as money laundering, and improve the service that they offer to clients.

Under the regulations, firms must have the ability to recognise a politically exposed person (PEP). Considered to be “high risk” clients, PEPs should be subject to enhanced due diligence and any work to be undertaken for the client must be approved by senior management. According to the Law Society of Scotland, “in order to know whether someone is a PEP, you will need to have in place risk-based and proportionate systems”. Furthermore, “if the risk is deemed to be high or information indicates the client

is a PEP, enhanced due diligence will be required. There are private databases that can be used to check names: firms who provide electronic verification of identity normally also provide this service”.

But what does all this mean in practice? How do firms ensure they know who they are doing business with, particularly when they may have started their relationship with the customer at a time long before the current, more stringent rules around KYC came into play?

Section 8 of the Money Laundering Regulations also mandates that KYC checks are necessary on an ongoing basis. Firms should therefore carry out retrospective bulk verification exercises on pre-existing customer bases.

In addition, it is important to continually review customer identities at agreed points in the relationship, for example when a customer withdraws a large sum of cash, or when an address change is received. The extent of the check will be based on your analysis of the risk.

Why electronic verification?

Consider using an electronic source (particularly in a volume, service focused environment). By doing so, firms can satisfy their regulatory requirements whilst minimising the impact on their customers. The costs incurred by installing such a system may be chargeable back to the customer as an administration fee.

Electronic verification is widely accepted as a viable alternative to documentary proof of ID and address when delivered by a recognised provider, such as a credit reference agency (CRA). It allows firms to set the level of checking to the appropriate risk level attached to the individual and the service/product the firm is providing. According to Callcredit Direct’s own research – an online survey of 67 law practices in October 2008 – 90.6% of firms state that electronic verification has helped them comply with the Money Laundering Regulations.

Employee screening is another area which should be high on the list of any risk prevention strategy. A recent survey revealed that 71% of people admitted to having lied on their CV, in particular about their qualifications, previous experience and salary.

Online employee screening services, many of which are now provided online, enable companies to perform checks on potential employees quickly and easily. A definitive set of checks can enable recruiters to confirm where a candidate lives, verify their identity and confirm financial information they have supplied. In addition, details of academic history, career history and professional membership can be verified.

Electronic verification has moved away from being a luxury and has proved to be a necessity for legal firms and many other industry sectors. Advances in technology have made integration of such solutions easier than ever before.