In wealth management, the ability to spot reputational risks posed by a client with exposure to sanctions, money laundering or financial crime is just as important as finding alpha. How is Source of Wealth enhanced due diligence (EDD) able to pinpoint risk with confidence?
- Understanding a client’s Source of Wealth is a multi-faceted process, with economic activities, marriage and inheritance among the many factors to consider.
- Source of Wealth enhanced due diligence (EDD) screening should include corporate affiliations, property record checks and an additional search for undeclared sources.
- EDD reports from Refinitiv combine cutting-edge screening technology with invaluable human expertise for better risk decision-making.
Avoiding financial and reputational damage by investing in thorough and rigorous due diligence should be high on the agenda for any organisation – and the wealth management industry is no exception.
Financial institutions (FIs) are required to understand the Source of Wealth (SoW) of each potential client, in particular ensuring that this wealth originates from legitimate means and does not have any links to financial crime.
This form of enhanced due diligence research is often carried out after a preliminary risk assessment covering politically exposed persons (PEP), sanctions exposure and high risk country screening.
Understanding a client’s Source of Wealth is a multi-faceted process.
Economic activities (such as the individual’s work history and investment portfolio), marriage, inheritance, and any other factors that could generate net worth should all be taken into account.
This research should never be limited to the primary or main source of wealth, but should investigate all aspects of wealth acquisition.
Financial crime risk
Identifying the origin of net worth alone is not sufficient. A thorough EDD report should also include a narrative on an individual’s corporate affiliations and employment history, as well as information about all assets, including, for example, property and shareholdings.
Furthermore, where wealth originates from sources such as inheritance, marriage or other events, a Source of Wealth assessment should be extended to include the original holders of the wealth.
This additional information plays an important part in uncovering potential risk relating to, for example, links to sanctions lists, money laundering or any form of financial crime.
While it may not be possible to corroborate an individual’s entire Source of Wealth, the purpose of a comprehensive Source of Wealth EDD report is to build a coherent subject profile that presents reasonable evidence to support the legitimate accumulation of the individual’s wealth.
High risk indicators
When conducting Source of Wealth due diligence, some of the red flags that could indicate a high risk situation include:
- Negative media articles surrounding the individual, in particular, allegations of fraud, corruption and bribery or ties to organised crime.
- Evidence of illegal or unethical conduct, for example, regulatory breaches, social accountability or other reputational risk.
- Employment of tax avoidance schemes, including offshore jurisdictions.
- Gaps in the subject’s Source of Wealth profile that indicate that the origin of the net wealth is not fully explained.
Source of Wealth EDD
A risk-based approach recommends that FIs focus due diligence efforts on areas of higher perceived risk.
This maximises the effectiveness of limited resources and frees risk and compliance professionals to concentrate on areas of greater value-add within the business, but informed decisions about risk are only possible where robust and complete information is available.
The quality of an EDD report is therefore of the utmost importance.
Best-practice EDD research should include:
- Information about corporate affiliations, backed by enquiries with official corporate registries to uncover current and previous directorships and shareholdings. If these are unavailable, research should be supported by consulting reputable media sources and any available corporate databases.
- Property record checks. While many jurisdictions provide these, the bulk of research is usually completed via a comprehensive media review. Public records of any sale of business or divestments are usually located in this manner.
- A special focus on identifying sources of wealth not declared during the onboarding process. If found, undeclared sources should be scrutinised further for any associated risk.
In line with this best-practice approach, Refinitiv offers comprehensive EDD reports that enable better decision-making based on relevant information from trusted sources.
In particular, our vast country-specific knowledge ensures global coverage backed by local knowledge, so you can conduct EDD on any individual, regardless of their geographical location.
Creating a competitive edge in the wealth management arena is an ongoing and ever-challenging goal, but not conducting the right due diligence amounts to gambling with your reputation and is simply not a risk worth taking.
Given the potentially devastating financial and reputational damage that can result from inadvertently engaging with any individual with links to financial crime, don’t underestimate the importance of adding EDD to your investment strategy.
Refinitiv offers an unrivalled combination of cutting edge EDD and screening technology, coupled with invaluable human expertise to help you pinpoint risk with confidence.
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