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How does Brexit impact your KYC approach?

The European Union’s chief Brexit negotiator Michael Barnier (R) and Britain’s Secretary of State for Exiting the European Union David Davis speak at the European Commission after the first day of Brexit talks in Brussels, Belgium, June 19, 2017. Photographer: Francois Lenoir

A year after Britain’s vote to leave the European Union, how is ongoing Brexit uncertainty impacting on compliance teams and their KYC requirements?

With regulators around the globe continuing to flex their enforcement muscles, it has never been more important for organizations to understand exactly who they are doing business with.

Know Your Customer (KYC) due diligence procedures need to be thorough and rigorous enough to root out the many risks hiding in human and business networks, exposing them before a new business relationship is established.

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So with these pressures in mind, and with the exact nature of the UK’s future relationship with the European Union far from clear, Brexit has added another layer of uncertainty to already-complex KYC considerations.

Added uncertainty

Theresa May, the UK Prime Minister, started the formal two-year process for ending the 44-year relationship by triggering Article 50 of the Treaty of Lisbon in March.

British Prime Minister Theresa May and European Council President Donald Tusk pose during a EU leaders summit in Brussels, Belgium June 22, 2017. Photographer: Francois Lenoir

The negotiations between the UK and EU in Brussels are now underway, signaling the start of a time-consuming and complex period for compliance professionals as a new wave of regulatory change and challenge unfolds.

What will Brexit look like?

Britain will be the first member state to leave the EU, meaning that there is no pre-existing formula to follow.

Formal negotiations have only just begun and there is much uncertainty around how Brexit will eventually look. For example, will there be a ‘hard’ Brexit or a ‘soft’ Brexit?

A hard Brexit will mean the loss of access to the single market, but will allow the UK complete control over immigration and will remove obligations such as paying into the EU budget or remaining subject to EU regulations.

A soft Brexit, on the other hand, will leave wriggle room for some version of a free-trade arrangement with the EU, but will also likely mean that the UK must accept the EU’s ‘four freedoms’ — the movement of goods, services, capital and people.

Either way, there will be a significant impact on the relationship between the UK and the EU going forward, with real implications for the UK’s future regulatory framework and knock-on implications for organizations as they strive to keep up with anticipated changes.

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Your best response

While the final terms will emerge in the coming months, the implications of Brexit for the fight against money laundering (AML), terror financing, bribery, and corruption may not be huge.

For instance, it is unlikely that the UK will depart from the anti-money laundering and counter-terrorist financing recommendations of the Financial Action Task Force, whose standards are reflected in the EU’s 4th AML Directive.

Regarding bribery and corruption, the UK’s Bribery Act is already widely considered among the strictest legislation of its kind globally.

Thomson Reuters Country Risk Ranking, view of anti-corruption data

Due diligence demands

However, as the scenario completely unfolds, organizations need to ensure that they leave no room for error in their KYC due diligence.

Information must be complete, accurate and up-to-date at all time.

Thorough KYC procedures at the time of onboarding a new client are not enough, as information can quickly become stale and must be continually maintained.

The consequences of non-compliance with the plethora of regulations already governing AML and Counter-Terrorism Financing are becoming more severe.

Background and integrity checks are a crucial feature of today’s fast-paced, globalized business environment

In addition to hefty fines and often severe reputational damage, personal liability is now also a reality. At a time when it’s all change, do not underestimate the importance of comprehensive KYC. Whatever you do, do not take your eye off this particular regulatory requirement.

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