Compliance

REFLECTIONS ON CURRENT COMPLIANCE-VETTING PROCEDURES
AT A MAJOR SOUTH AFRICAN LAW FIRM,
WITH SOME SUGGESTIONS OF POSSIBLE IMPROVEMENTS
by Ingo Porada
MMVIII
The Financial Intelligence Centre Act of 2001 obliges many financial institutions,
including law firms, to operate a 'Know Your Customer' policy for the ends of
stemming money laundering activities and of foiling the crimes which are financed
by, or generate, the funds that are - inter alia, and in that context - the concern of
that legislation. FICA, as well as practice and precedents which have arisen
through the implementation of the act, have become the basis for the operation of
the 'Know Your Customer' policy according to certain guidelines and within certain
parameters.
The law allows individual institutions which are accountable in terms of FICA
some leeway in determining how best to implement it with regard to the nature of
their clientele or services, or products, on the one hand, and their logistical
possibilities on the other hand. Furthermore, there are also variations between
industry sectors in the relative significance of FICA to their business purposes,
and accordingly in the manner and extent to which the act is taken account of in
their day-to-day business processes.
Another aspect of FICA is that it does not compel accountable institutions to
implement it across the board vis-à-vis each of their clients, or in each and every
one of their business transactions. There are exemptions from the requirements of
FICA for certain types of vendors of services or goods, as well as for certain types
of their clients, as well as for certain types of business transactions; and in turn
there are also exemptions from the exemptions, et c., which may qualify or temper
the rigour with which the 'Know Your Customer' policy has to be applied, so that
thus accountable institutions may legitimately interpret their duties in terms of the
act to a certain extent.
From the individual perspective of each accountable institution, this room for
interpretation for which FICA provides is in its turn a variable among several
others that determine its procedures, with regard to implementation of the act,
both internally and in its conduct of transactions with clients. I. e., in terms of its
internal needs and possibilities also, the modus operandi of each accountable
institution, in the application of a 'Know Your Customer' policy, is neither solely nor
rigidly determined by the letter of the law, but also by considerations of logistical
capacity, risk and practicality, respectively on their own account and relative to
one another.
While, before this background, it is evident that there is, at least conceptually,
much scope for FICA implementation by accountable institutions, in relation to
their clients, on an individualised, ad hoc, or custom basis, such an approach
would in fact be unrealistic in terms of budget and efficiency considerations, as
well as probably – in many particular cases – practically impossible. It follows from
these considerations that any accountable institution has to reconcile its
prerogative for discretion in the manner in which it complies with its duties in terms
of FICA with the need to devise standards and procedures which are both
appropriate to the greatest number of cases as well as economical in terms of
work effort and cost.

Reflections on Current Compliance-Vetting Procedures
at a Major South African Law Firm
Ingo Porada, MMVIII
Any accountable institution is aided in the adoption of such a striving for
uniformity in procedures for FICA implementation by its own need to be able to
identify and locate its clients, as well as to determine their solvency and
professional credentials, et c., which to do, in the normal course of events, is good
business practice in any event and therefore, in many cases, coincides with the
obligatory aspects of the 'Know Your Customer' policy in terms of FICA. Other
factors in the efforts of accountable institutions to operate a 'Know Your Customer'
policy which addresses both their own need to establish the credentials of clients
as well as their obligations in terms of FICA, are – respectively - considerations of
diplomacy, client goodwill and public relations, in their interactions with individual
clients, on the one hand, and the morale, comprehension and competence of
support staff in its role of facilitating 'Know Your Customer' procedures on the
other hand.
* * * * *
The mundane routines of ensuring 'FICA compliance' are conceptually classed
into three key activities, namely verification, record-keeping and reporting, but in
the everyday practice of implementation, only the first two of these activities
feature prominently; the need to report any observations to the Financial
Intelligence Centre arises only rarely. The image and experience of those FICA
routines, both on the part of those who operate them and those who are at their
receiving end, is generally a negative one.
I. e.:
- Clients of accountable institutions perceive the procedure of being made
FICA compliant as petty, intrusive and irrelevant, and often – as to its
purpose - as futile as well.
- Support staff in accountable institutions who are tasked to ensure FICA
compliance of clients experience their duties in that respect generally as
tedious, irritating and embarrassing, as well as often as an unwarranted
and implausible, or even incomprehensible, extra burden.
- Professional staff in accountable institutions generally view their
responsibilities in terms of FICA as a bureaucratic impediment to their
proper work, an impediment – moreover – which as such encumbers and
'hamstrings' them with reputational and financial risks that are not obviously
inherent in their services per se, but are, rather, a feature of an artificially
imposed regulatory environment that is not attuned to commercial
principles and economic imperatives, et c.
* * * * *
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Reflections on Current Compliance-Vetting Procedures
at a Major South African Law Firm
Ingo Porada, MMVIII
The procedures which are in place at this major South African law firm for
ensuring clients' FICA compliance, like comparable procedures in many other
accountable institutions, are essentially inefficient. It is not only in an objective
sense that FICA procedures are inefficient at this major South African law firm, as
elsewhere, but they are also subjectively experienced as such by professionals
and support staff, partly for the reason that they are considered to be additional
and extraneous to the work which is the raison d’être of the firm, and that
therefore there is no 'objective measure' of efficiency for FICA-related efforts –
they are eo ipso an organisational liability.
To change the way in which a necessary bureaucratic process is experienced is
not only an organisational challenge, but it is also a psychological challenge. In
order to identify possibilities for change, one has to analyse current procedures
from both these perspectives.
The 'ideal procedure' for ensuring FICA compliance of clients, as it is currently
conceptualised at this major South African law firm, is that their credentials, in
terms of the 'Know Your Customer' principles, are established at the first
consultation. At that time, clients should be requested to complete a record form,
and to present documents for photocopying in the firm's offices, and subsequent
internal evaluation and filing, which suitably verify their individual or / and
corporate credentials, including identities and addresses. The types of documents
which satisfy these purposes, and the features which establish their validity, are
relatively defined, both by law, and also by considerations of practicality, as not
every bundle of documents which establishes client credentials can be analysed
individually in terms of the complex exemptions and provisos that exist in the law.
One important and plausible consideration of the firm in preferring this sequence
of processes in the effort of ensuring clients' FICA compliance is that client
cooperation in this procedure is partly dependent on the 'personal relationship'
that exists between the advising attorney and client. The actual practice of
ensuring clients' FICA compliance at this major South African law firm, however,
deviates both in procedural detail and in the nature or quality of the 'personal
relationship' from which goodwill for implementation of the 'Know Your Customer'
policy is intended to be derived.
Thus, as for the actual procedure that is mostly followed in the firm for ensuring
clients' FICA compliance, it is in many cases neither simultaneous nor contextual
with the first consultation. It is often the case, rather, that clients receive a request
for FICA documentation from their advising attorney's secretary when the
substantive work for the client is already in progress or even nearing its
conclusion. At that time the incentive, for both the client and the advising attorney,
to give consideration to a the need for complying with a requirement that is even
at the most opportune moment already perceived as futile and vexatious 'red tape'
is often already lost completely.
With regard to the 'personal relationship' from which the clients' goodwill can
supposedly be harnessed to cooperation in the FICA procedures, it is by no
means the case that that goodwill can be counted upon in a sufficient number of
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Reflections on Current Compliance-Vetting Procedures
at a Major South African Law Firm
Ingo Porada, MMVIII
cases to vindicate such an assumption. Furthermore, the possible benefit of client
goodwill that can only sometimes be derived from the 'personal relationship,' and
as such capitalised on for moving smoothly through the FICA procedures, is in
almost all cases far outweighed by an erosion of the firm-internal goodwill that is
needed to make cooperation between the support staff who are involved in the
implementation of the 'Know Your Customer' policy as productive and mutually
accommodating as it should be. Often, also, to speculate on client goodwill, as
derived from a 'personal relationship,' for cooperation in a bureaucratic procedure,
can take the edge off substantive priorities in the client's actual transaction with
the firm or / and disturb a delicate rapport which in many cases has previously had
to be built over time with much patience and diplomatic skills. Conversely,
however, there may be many transactions which are in themselves so formal,
procedure-oriented and prosaic that the very dimension of 'client goodwill' hardly
has a place in them at all. For these reasons, client goodwill is too uncertain a
variable to be counted upon to facilitate FICA procedures. Moreover, there is an
assumption, which is not borne out by experience in practice, that – as for
implementation of the FICA procedures – the 'personal relationship' between
attorney and client exists derivatively also between the client's colleagues and the
attorney's support staff who are administratively involved in the substantive
transaction. And finally, there is an implied premise, which is possibly not valid,
that there can not be a 'personal relationship' between the FICA Administrator and
the client or / and the client's administrative colleagues, from which goodwill might
be generated for efficient cooperation in the FICA procedures. As a matter of fact,
the quality of 'personal relationships' between a client's administrative colleagues
and the advising attorney's support staff may in many cases be more dependable
and easy to nurture, as well as less fraught by possible complications in the
substantive transaction, than the quality of the 'personal relationship' between the
client and the advising attorney.
* * * * *
For all these various reasons, some significant changes in the firm's modus
operandi with regard to ensuring clients' FICA compliance should be considered.
In particular, the supposedly 'ideal' – because simultaneous and contextual -
procedure of clients' FICA credentials being gathered at the time of the first
consultation, which is rarely followed in any event, might actually in itself be
relatively too bureaucratic, intrusive, vexatious, and cumbersome, et c., in
comparison to a probably still more simultaneous and contextual, and thus
probably more efficient and painless procedure that might instead be
implemented.
One concept of an alternative approach to operating 'Know Your Customer'
procedures is the FICA Vault concept, which potentially turns the FICA
procedures into a revenue-generating operation. Among the drawbacks of the
FICA Vault concept, however, are – firstly - that it attains a meaningful level of
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Reflections on Current Compliance-Vetting Procedures
at a Major South African Law Firm
Ingo Porada, MMVIII
efficacy only when a sufficient number of subscribers participate in the scheme,
and secondly, that its almost exclusive reliance on digitalised / electronic data,
after the moment of initial compliance-vetting of a party, tempers, and possibly
trivialises, as well as perhaps ultimately dilutes, the fundamental objective of the
'Know Your Customer' principle which is central to the notion of compliance as
such.
However, a positive concept that is at work in the FICA Vault concept is that, by
its manner of working, it places the onus of 'being compliant' more squarely, and
at the same time more painlessly, on the parties – individuals as well as juristic
persons – who are at the receiving end of compliance-vetting. This concept gives
compliance-vetting a self-service dimension, because it inherently spares
administrators, as well as the parties whose compliance has to be ensured, the
chores and irritation which are now an almost inevitable feature of every instance
of compliance-vetting.
This possible 'self service' aspect of compliance-vetting should be developed.
Possible routes to this end are, for example, an online FICA checklist with some
interview, risk assessment and second-level processing features, for - possibly
incentivised - completion by a client prior to the first consultation, and with scope
for automated integration with the client database. Such a manner of operating
would not only impersonalise compliance-vetting and thus limit the uncertainties of
goodwill, but it would also free support staff resources for other work that should
be logistically integrated with the operation of the 'Know Your Customer' policy,
such as database maintenance and housekeeping, but is now done separately,
and somewhat un-systematically as well.
Furthermore the records which establish a client's FICA credentials should
preferably be kept in the advising attorney's transaction files, as only at that end
the necessary information is to hand as to whether a client's records need to be
complemented or updated in the light of current activities in the substantive
transaction. Thus, after evaluation in the firm's FICA office, the client's identity,
address, and company registration records should be passed back to the advising
attorney, possibly after being scanned into an electronic file, as happens in other
accountable institutions, and only the client's record form should be kept in the
FICA file. Such a change in the filing procedures and logistics would also reduce
the firm's risk from consequences of official inspections of its clients' FICA
records, as in such exercises only spot-checks are made; and such official spot
checks might be more easily moderated by the firm's staff if the FICA records are
kept by each advising attorney.
Lastly, the evaluation of complicated sets of clients' FICA records, where
compliance is not immediately apparent, should be done by a specially trained
and knowledgeable FICA expert in terms of the afore-mentioned exemptions and
provisos for discretion, et c., and taking into consideration also specific 'risk
profiles' of the transaction with the given client. Refinements and standards in this
particular step in the suggested sequence of compliance-vetting can be developed
in the course of actual practice.
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