The SmartSearch Index Electronic Verification Uncovered ii

Setting the scene

Money laundering seeks to legitimise the proceeds of some of the world’s worst criminals – people traffickers, drug dealers, fraudsters and corrupt officials. Their victims are often the most vulnerable in society.

Electronic Verification Uncovered 2022 is the second whitepaper in a continuing campaign by SmartSearch, a leading UK provider of anti-money laundering (AML) software which is driving the digital compliance revolution.

The campaign argues that – as recommended in the 2020 Money Laundering and Terrorist Finance Act - regulated businesses should use electronic verification to reduce their risk of AML breaches and help to stem the flow of dirty money into the UK economy.

For the second consecutive year, SmartSearch surveyed decision-makers in 500 regulated UK businesses across the legal, property and banking and finance sectors on a range of AML compliance issues¹.

Their answers revealed continuing shortfalls in the way some regulated firms check on new and existing customers and continue to rely on easily forged, hard-copy documents rather than more effective digital checks.

The growing threat of money-laundering

Organised criminals are increasingly active, and the threat of financial crime is tangible. Almost half of regulated firms have seen a rise in criminals attempting to launder money or commit financial crime through their businesses in the last year.

And more than one in ten firms says they have been the victim of money laundering or financial crime in the past six months.

Despite the increased threats, up to a quarter of firms admitted to still carrying out flawed manual checks using easily forged hard-copy documents such as passports and utility bills.

Electronic verification verifies new and existing customers without the need for official documentation.

Sanction Russian roulette

Almost half of regulated firms admitted to not changing their approach to onboarding new customers since sanctions were imposed on Russia after its invasion of Ukraine.

The Know Your Customer (KYC) process has come under closer scrutiny since the sanctions - which placed restrictions on individuals, entities, and their subsidiaries, and introduced legislation to limit deposits held by Russian nationals in UK bank accounts – were introduced.

Thousands of ever-changing sanctions exist against Russian nationals and entities - and firms who breach sanctions rules risk increasingly large fines and reputational damage.

Electronic verification includes almost instant sanctions and politically exposed person checks on new customers. 

The ghosts that get away

Almost half of regulated firms fail to spot “ghost” firms - false entities created as part of a corporate infrastructure to hide the connection of a criminal beneficiary.

They are often used by sophisticated criminals to obscure the real recipients of money laundering activity. And they can escape detection if regulated firms do not carry out ultimate beneficial owner (UBO) checks as part of their due diligence on new business customers.

Electronic verification includes fast and robust UBO checks.

Trust your clients– but monitor them, too

Almost half of regulated firms have not changed their approach to monitoring existing customers since Russia invaded Ukraine - mainly because they either trusted them or had worked with them for a long time.

However, an unprecedented 7,200 individuals have been added to the thousands of sanctions already affecting Russia since the war in Ukraine began.

Not monitoring existing clients leaves companies open to the fines and reputational damages which come with sanctions breaches.

Electronic verification is the most robust and effective way to monitor existing clients. It can even retro-screen them.

The big switch to AML technology

As a growing number of regulated firms feel the increasing weight of AML compliance, more than three quarters of them are considering a switch to electronic verification. 

The trend towards electronic verification (EV) comes amid a sharp increase in the number of companies fined by regulators for breaches of the rules.

HMRC fined and named 85 firms last year for breaches of compliance regulations, there has been a six fold increase in the number of legal firms fined by the Solicitor’s Regulation Authority since 2017 and the Financial Conduct Authority recorded financial penalties totalling £568m for firms in the financial sector in 2021. 

Misplaced trust in hard-copy documentation

Almost two thirds of regulated firms believe hard copy documents provide the reassurance that a customer is genuine.

Despite the fact that documents are easy to forge, nearly half of all firms questioned still use hard documents like passports, IDs and utility bills as part of their verification process for new business customers. 

Electronic verification can verify official documentation more effectively – and verify customers without the need for formal documents. It is also more-cost effective than manual procedures.

Wasting hours of business time

Regulated firms using manual methods of verification to onboard new individual customers are wasting hours of business time in the process. At the same time, many of them also acknowledge that those manual checks are less secure.

As well as being easy for criminals to forge, documents can take days or even weeks to process – depending on  transit and response times. Digital onboarding is more reliable and can be done in as little as a few seconds.

Electronic verification combines credit reference data with other reliable sources and is almost impossible to fake.