The challenges of client onboarding (or why bitcoin will be regulated)

I hosted a dinner last night under Chatham House Rule (no quoting anyone) in a superb venue (Rules, the oldest restaurant in London, established in 1798).

The conversation was all about client onboarding and the challenge of keeping it fresh.  You get the KYC info, and then the customer is onboard.  But for how long?   Is a 25-year deposit holder still the same person?  Still trusted?  Do you ever need to onboard again?

Interestingly, these questions are being asked by regulators.  When MiFID (the Markets in Financial Instruments Directive) was introduced, there were so many significant changes that a big task arose called repapering.  This would have involved re-onboarding every single client in the investment markets for every single firm, with new contracts (paper).  The reason being fitness for purpose of the products being provided and a new need to KYC that those clients understood the risks they were taking.  Luckily we avoided this, as the cost would have been HUGE, but it’s come back.

FATCA is a great example, where all transfer of funds require signed W8 or W9 documents. I know, because I keep getting them and we have no idea what a NFFE is, and whether it’s active or inactive.

So we start the conversation and it’s fascinating as there are so many facets to client onboarding.  

You need KYC (Know Your Client) documentation, signed and notarised.  You need to check that the counterparty has no record of miscreant behaviour.  If it’s a corporate, you need to check it’s a stand-alone firm or a subsidiary or nested firm within a multiconglomerate structure.  You need to check that all the executive officers are who they say they are, and that there’s no PEPs around.  A PEP is a Politically Exposed Person, defined as someone who is undesirable. 

You need to make sure it’s nothing to do with a sanctions listed entity, and the son of a son of an Iranian son may get you into trouble with the daughter of a daughter of an American daughter.  Or something like that anyway.

The complexity means that you have hordes of people checking and then other people checking the checkers.  The average banks has something like 10%-20% of their staff involved in some form of compliance duties.  A good example is Citi who has offices in more than 140 countries and employ over 260,000 people.  The bank now employs nearly 30,000 people on regulatory and compliance issues, up 33% since the end of 2011.

KYC, AML, Sanctions and all this stuff is taking its toll.

And it’s getting worse as banks that are globalised have heavy overhead structures of history.  They’ve got customers who may be retail, commercial, private bank and wealth management customers all in one.  These customers may take out insurances, investment funds and use other parts of the bank.  As a result, one customer may sit in ten silos or more, and how do you get a single view of the customer?  How can you get a real-time 360 view of that individual?  That individual who may be the treasurer of one of your key corporate clients; who has a wife and four kids; who has over $500,000 of disposable assets you could manage; and who has just walked into the branch on a Saturday morning wearing jeans and loafers and needs to pay his utility bills today.

Few banks have even the notion let alone the capability to do this.  Often because their old systems are cemented in legacy silo structures too.  Therefore a real-time check is impossible.

When I talk to the bitcoin upstarts who say none of this matters as we have money without government, I wonder what this means.  Governments use the financial system as their money police.  As financial crime monitors, the banks track money launderers, drug runners, paedophiles and terrorist on behalf of governments.  That’s the point of FATCA, the Foreign Account Tax Compliance Act.

FATCA is America’s response to 9/11 but it’s also a great way to catch tax dodgers too, as evidenced by the crumbling of private bank and wealth management privacy.  Just this morning, another swathe of Swiss banks  changed their policies and procedures to comply with the program, and my friends in other banks in Europe tell me that large chunks (think 20% or more) of their budgets are going into FATCA compliance programs, even though they’re not American and don’t have American operations.  The fact is that the global police reach of the American system is strengthened whilst the American Dollar is the reserve currency of the world (what happens when it’s the Renminbi?).

Q: Can we really have a world without tracking of finance?  Can bitcoin really change the world to allow us to deal with each other as money without government?

A: Three headlines from this morning:

• Accenture Advised UK Government to Regulate Bitcoin Wallets
• Citi Urges UK Government to create its Own Digital Currency
• Commonwealth Bank of Australia to Launch Ripple Payments Soon