The reported case of Roman Abramovich and his UK visa has brought the topic of source of wealth (“SOW”) in to focus. In this particular case the delays in granting the new UK visa have been attributed to tighter regulations introduced in April 2015. It has been reported that Mr Abramovich was asked to explain the SOW and the UK government has commented that some wealthy individuals who had successfully applied under the investment visa route before the 2015 changes would no longer be eligible.
Putting the political landscape aside, it is not clear in this case whether the delays were due to the UK government not being satisfied with the answer, or the subject’s decision not to provide sufficient explanation. It is understood that the application has since been withdrawn having been neither refused nor denied. Nevertheless the case raises some pertinent questions for financial services firms who are providing banking services to individuals in these cases.
Where there are circumstances leading to a high risk of financial crime (politically exposed persons, high risk jurisdictions etc.) firms are required to establish SOW. Firms should follow a risk-based approach i.e. apply reasonable measures dependant on the client’s money laundering and terrorist finance risks. Once the client’s net worth is established, information should be obtained on where it came from and for corporate/legal entities, the firm should ensure SOW is generated from legitimate business and commercial activities. Depending on the level of risk posed by the client, firms should seek to find some evidence from a reliable, independent source that corroborates the essence of how the wealth was generated.
The immediate question for financial services firms in a case like this is, if, as it would appear, the subject has not been able to satisfy the government in order to successfully apply for a visa, have the firms themselves been able to adequately satisfy the SOW requirements? It would be prudent, given this type of change in circumstances for firms to revisit and reassess the financial crime risks in accordance with their due diligence policy and procedures.
Establishing and verifying the legitimacy of the source of wealth can be a challenge for firms and one which may rely as much on a firm’s moral compass as its appetite for risk.
The challenge for firms is determining what standards they should apply. Standards will be driven by a firm’s appetite for risk and whilst this may be a little easier to define for reputational risk, it is less so for financial crime risks. Firms are under an obligation to reduce the risk that they might be used to further financial crime. The standards expected are that of prevention rather than the lesser requirement of detection and reporting, and therefore there should be lower tolerance. As a result of this, a firm’s systems and controls should be appropriately robust.
When assessing the source of wealth information a firm must consider amongst other things how much credence should be given to unsubstantiated rumours and the views of critics or political opponents, such as is the case referred to above where it has been suggested that wealth was generated through the acquisition of state companies below market value as a result of close ties to the Kremlin. Clearly this information needs to be thoroughly investigated as part of the due diligence process, but in the absence of anything more substantive is it enough to refuse services, particularly where it may be enough for government agencies to delay consideration of a visa application?
Of course as the generations pass and wealth is inherited, the source of the wealth is diluted and in certain cases may be considered to have been legitimised through time. Some commentators will argue that those in the present cannot be responsible for the actions of ancestors and the mechanisms of wealth making in the past. We do not need to look overseas to identify old money created through activities which would be unlawful today. Establishing and verifying the legitimacy of the source of wealth can be a challenge for firms and one which may rely as much on a firm’s moral compass as its appetite for risk.
K&E is a boutique regulatory, compliance, governance and risk consultancy with extensive experience of compliance and regulatory issues for banks and investment firms. We can assist clients in their preparation and implementation of regulatory change projects or with remediation exercises or day-to-day compliance solutions.
K&E together with their strategic partner Danos Associates can assist firms with their financial crime prevention arrangements including an independent review on policies, procedures, systems and controls or resourcing AML/CDD remediation projects.
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Written by our strategic partners K&E Consultants.