Human error in customer onboarding and how to solve it

As we have discussed in previous posts, Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) regulations do not apply to financial services firms in isolation.

The soon-to-be introduced 4th Money Laundering Directive from the European Union (AML4) will add increased compliance regulations onto a raft of other industries, from estate agents to casinos; and importantly, law firms.

AML4 brings with it a host of new measures that must be considered, covering a range of different issues from Politically Exposed Persons (PEPs) and sanctions to Ultimate Beneficial Owner. Viewed in isolation it would be understandable if firms were to view AML4 as a complex problem. However, by taking a longer lens to the situation it can be shown that AML4 is indeed an opportunity. An opportunity to save time and money, and to improve customer experience.

Currently, law firms have not been subject to the same force of compliance that has been implemented on their cousins in the financial services sectors. We have seen, in the financial arena, heavy fines being handed down to Deutsche Bank, HSBC and Standard Chartered amongst others.

While there have been instances of individual lawyers being fined, or even struck off for AML offences over the last 24 months, the legal profession has to date avoided some of the major fines incurred by the likes of Deutsche Bank (over £500m). With the introduction of AML4, however, law firms are likely to see substantial penalties handed down to them from the SRA should they fail to comply with new regulations.

As easy as it is to get caught up in the bluster of how this will be a significant challenge to legal practices, the reality is that law firms can use the new compliance laws to their advantage; by taking the opportunity to update their systems and processes, focusing on regulatory compliance and ensuring client satisfaction.

Ultimately, firms who are compliant and can illustrate that they have undertaken Customer Due Diligence (CDD) in line with their own internal processes will have nothing to fear from regulators. Moreover, where these processes have been followed correctly, they will assist in client retention and satisfaction.

One example of how this is possible is in the use of human labour versus automation during the onboarding process.

Updated Processes can Provide Opportunity

Currently, law firms are heavily weighted to using human labour to undertake CDD. There is also a split between who undertakes CDD. In some firms, this is handled by the Partner who brings on the client (or realistically, and more likely, by a secretary, paralegal or junior), and in others is undertaken centrally.

There is nothing wrong with either approach, and firms will have calculated internally what the right process is for them when onboarding new clients.

Where the opportunity now lies for firms, is to implement new systems and processes prior to the introduction of AML4 that will ensure they are fully compliant with regulations, can produce an audit trail for regulators, and remove the possibility of manual error throughout the onboarding process.

The biggest opportunity available to law firms here is in the removal of the human aspect during the CDD stage of client onboarding.

There are a number of issues that arise from having people undertake CDD.

Cost
Significant cost savings can be made by reducing human interaction from the onboarding process. Humans currently involved represent a cost through their salaries. These same people, however, can be moved to the direct servicing of clients, offering greater value to the client and the firm.

Errors
With the introduction of AML4, errors in the onboarding process could prove to be potentially catastrophic for law firms. As we discussed above, we have already seen what has happened to financial services organizations, and it is entirely possible that similar fines and sanctions could follow for law firms. To remain fully compliant, firms must ensure that not only are processes in place, but that the same process is followed exactly in every instance. Moreover, a distinction must be made between those who require enhanced due diligence (EDD) such as PEPs.

Added Value
While people are undertaking the CDD function within a firm, they are offering no value to prospective clients. By moving them into a client-facing role, they immediately begin to add value to clients, supporting the work of Partners and senior solicitors.

Training
As legislation changes, as we see with AML4, it is necessary to update the knowledge and skills of those undertaking the CDD process. This has necessary time and cost implications.

So what’s the solution?

It is possible to save time and money by reducing the involvement of humans from the onboarding of current clients, and using their skills in the direct servicing of clients. This has the additional benefit of being a zero-sum win, because where these people were a cost burden, they can now be shown to be a cost benefit as they work in the servicing of clients.

In order to make savings through removing people from the CDD process, ensuring compliance, and adding value to clients, there must necessarily be a method to compensate for the lack of human involvement.

As with financial services, professional services firms can undertake CDD using assistance from RegTech providers offering automation in the Know Your Customer (KYC) field.

In a constantly shifting playing field like regulatory compliance, this technology can provide law firms with a competitive advantage. For law firms, the important thing to do will be to consider the new regulations as an opportunity, not just to ensure that they remain compliant, but to redefine value for the customer and cut costs and time on manual labour.

Final thoughts

While we recognise the challenges that lie ahead as a result of the implementation of AML4 and the possibility of difficulties faced by law firms, they can, with a change of mindset be replaced by opportunity.

The opportunity is there for them to update processes, save time and money, and add value to clients by automating KYC processes. This will ensure compliance with new legislation brought about as a result of AML4, and remove the issues caused by having people undertaking the KYC process, including removing the possibility of manual errors and costs.