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Changing the way we think about KYC

Law firms and their insurers are seeing an increasing number of fraud cases resulting from inadequate client onboarding processes. David Green from The Strategic Partner reviews the impact of poor KYC checks and offers advice on how to tackle the problem.

It is well known that if a fraudster gets through a law firm’s (CDD) process then the consequences are significant and far-reaching.

The most obvious impact will of course be to the firm itself. The Solicitors Regulation Authority (SRA) requires all serious breaches to be reported, risking regulatory sanctions, and reputational damage.

These breaches also often result in monetary loss which means a claim will need to be presented to the insurers. As part of that claim, there will be questions raised around the firms' systems and approaches to risk management. It could lead to an increase in premium and for some firms, they may even find themselves uninsurable.

Fraud will also have an impact on others: -

  • The Client or other affected party, who is the ultimate victim of the fraud,

  • The fee-earner who let the fraudster through, who will face their own issues which can have consequences on their career, particularly if they are deemed to have not followed the regulatory requirements

  • The MLRO and COLP who are required to address the issues and deal with the fallout.

Whilst law firms turn to insurers to compensate financial loss, being caught up in fraud or a scam is a stressful experience for everyone involved.

The damage done by fraud can be overwhelming. So how does a firm ensure its CDD process is robust enough to stop a fraudster at the door? When bringing clients into your business, the first barrier to fraud should be your identity verification and anti-money laundering (AML) checks.

Your first port of call should be ensuring your firm’s policies, controls and procedures are sufficiently robust. In particular, focus on those that tackle risk and risk assessment, with adequate training and resource available to anyone onboarding clients. Be sure to assess and audit the application of the PCPs. Even the best-written documents are useless if they are not adopted and applied effectively. Bear in mind, this is also a requirement of the AML Regulation 2017 where a firm must set up an independent audit function.

Electronic ID & Verification (EIDV) can also support a firm’s KYC processes and is an excellent digital compliance solution. It is a simple reality that a fraudster is only too happy to provide stolen, tampered with or fake documents to a law firm, and may even turn up in person with such documents. A manual check of documents, even when the person is stood in front of you, is unlikely to reveal that the document provided is fake. A digital solution that can verify the authenticity of the document and that it pertains to the correct person can stop even the most sophisticated copies making it past your verification checks.

Another issue facing manual verification is self-reported details. Most AML searches are conducted with a client's self-reported name and address. Being able to get your client's ID and address verified digitally provides a strong first line of defence against fraud, ensuring your AML checks are run on the correct person.

Alongside self-reported details, there is also the risk that documentation for proof of address can be forged. Often law firms will accept print outs or photocopies of bills as proof of address, but needless to say, these can be easily manipulated. Technology is now available to validate origin of digital documentation, ensuring your firm is seeing the original document.

Introducing a tool like Mirror to your onboarding process helps eliminate these concerns. By using technology to verify your client’s identity in minutes, you are able to start work without worrying about the security risk, and resulting penalties to your firm and your clients. Find out about how Mirror works or book a demo to find out how introducing an Electronic identification tool to your client onboarding can save your law firm time, money and stress.

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