Alarming lack of daily customer due diligence puts regulated firms at high financial crime risk

A recent revelation from SmartSearch has highlighted a critical issue in the compliance practices of regulated firms, indicating that an alarming 92% of them fail to conduct daily monitoring on their clients. This lack of daily customer due diligence exposes these firms to potential breaches of sanctions and other financial crimes, including money laundering, according to digital compliance experts at SmartSearch.

Under UK law, regulated firms are obligated to identify and verify individuals or businesses they work with, ensuring they do not unintentionally engage with entities under sanctions or with a history of financial crime.

The newly released data stems from SmartSearch's September 2023 survey, involving over 500 compliance decision-makers. The figure of 92% is notably higher than the 84% reported in their 2022 annual survey, indicating an alarming 8% increase in firms neglecting daily client screening.

The property sector emerges as the most vulnerable, with 95% of firms failing to conduct daily checks, followed closely by the financial services sector at 94%, a 6% increase from the previous year. Accountancy and legal firms jointly hold the third position, with 88% elevating their risk by not performing daily due diligence on clients.

Martin Cheek, Managing Director at SmartSearch, expressed concern about the rising sophistication of financial crime and the increasing regulatory pressure faced by firms. He highlighted the challenge for businesses to comply with the law while mitigating financial and reputational risks for themselves and their clients.

Martin Cheek suggested a practical solution through the adoption of electronic verification (EV) and a perpetual Know Your Customer (KYC) model to support daily customer due diligence (CDD). The perpetual KYC approach employs real-time data and intelligence, including robust screenings for sanctions and politically exposed persons (PEPs), to create a dynamic and continuously updated client profile. This proactive approach allows firms to assess the risk posed by individual clients or businesses continuously, with any anomalies promptly flagged.