In an initial settlement, it was agreed that the bank would pay a severe penalty (upwards of $800 million) and turn over the identities of hundreds of clients suspected of U.S. tax evasion via secret offshore accounts.
In the latest salvo from the DOJ, a pernicious civil lawsuit was filed against the bank, seeking the identities of more than 50,000 account holders suspected of hiding $15 billion in taxable assets with the help of the bank.
Thus, in a turn of events that would have been shocking a decade ago, one of the world's largest wealth management firms finds itself risking criminal charges and all future business in the U.S. unless it complies and satisfies the informational requests of the U.S. government. Given that all banks doing business in the U.S. are expected to know their customers, it is not acceptable for it to claim that it does not know the beneficial owners of tax-evading accounts, and thereby refuse that information to law enforcement authorities.
While critics of the U.S. government may bemoan the long reach of its regulatory tentacles, the truth is that governmental authorities and international policy-making bodies have been blasting away against the firmaments of offshore tax havens and banking secrecy laws for several years. A case in point is the emergence and effectiveness of the G7 Financial Action Task Force (FATF).
As global law enforcement has become sophisticated in its fight against terrorism, corruption, money laundering, illegal goods and substance trafficking, the bulwarks of banking privacy have weakened. Since the September 11 terror attacks, international banks doing business in the U.S. have come under increased arm-twisting from policymakers and regulatory bodies to conduct more effective due diligence on their customers. By necessity, these banks now usually have teams of compliance pros working on know your customer (KYC) efforts to make sure that the owners of private bank accounts are not terrorists, money launderers or the like.
There is a flip side to risk management in international banking. Effective due diligence should never been seen as a purely compliance-focused task; instead, it should be viewed as an opportunity to better service and anticipate the needs of customers as well as develop new ones. Business intelligence, driven by customer demographics, will add value to all facets of corporate operations - from better supporting the sales and marketing processes to streamlining all product and service supply chains. Your organization should view KYC costs as strategic investments that will pay rewards across numerous business segments. The benefits of an up-to-date repository of robust customer reference and transactional data tend to materialize fairly quickly, provided an adequate data mining infrastructure is in place.
Ironically, the Swiss bank under investigation by the DOJ had reportedly expanded their KYC and anti-money laundering efforts. Yet its KYC practices did not do enough to prevent bankers from garnering handsome fees in exchange for advice that directly resulted in clients acting illegally and evading taxes. While they may have had considerable information about their customers, they did not grasp the bigger picture. At the time of authorship, nobody can say for certain whether there was widespread and institutionalized wrongdoing at the bank or if a few rogue bankers were responsible for this epic scandal. Although the bank confessed to gaps in their compliance efforts, they refuse to admit to any wide-scale fraudulent or illegal practices.
Nevertheless, the damage to the bank's reputation has been severe, and its future viability in the U.S. has been considerably periled. High-wealth clients have been burned by following bad advice that was too good to be true. In the short term, potential customers with lofty net worth will invariably do business with competing investment banks and money managers.
KYC initiatives and customer profiling were not enough to avoid a catastrophe for the bank, its shareholders and its customers, which included the Swiss government. The lesson learned for large global financial and banking institutions is valuable: they must all do a better job of properly integrating KYC with other compliance efforts, thoroughly mapping them to the regulatory demands of all foreign jurisdictions where they transact business. In doing so, they will also serve the core motives of customer acquisition and service.
KYC will be marginalized unless internal compliance processes are audited on a regular basis so that any rogue activity is spotted and corrected. With the risks of not effectively performing due diligence on one's banking customers so irrevocably publicized and socialized, a KYC audit may be an immediate necessity at your enterprise.
William Laurent is a renowned independent consultant in data, governance and IT strategy. You can reach him at william@williamlaurent.com.
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