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Can one whitelist potential customers via a central register?

Nigel Morris-Co...

The Basel Institute on Governance has had an interesting idea. Is it more than a pipedream?

3. If such a database is feasible, why not extend it to wider financial crime matters. As the globalisation, perhaps better described as cross-border and inter-jurisdictional, of the financial services industry with more and more "apps" taking the place of dealing directly with banks or payment card providers, etc., takes hold, one of the biggest challenges is performing any kind of KYC on on-line applicants. Why not create a full-scale global verification system? More than a decade ago, Germany proposed a comprehensive, central register of bank accounts. That has been all-but achieved in OECD countries (and they continually push others to follow suit) with the Tax Information Exchange scheme. That scheme can only work with comprehensive reporting by banks. Even that was not new: Sweden implemented something similar in the 1990s so that it could assess wealth tax on offshore accounts. And, of course, the USA's The Foreign Account Tax Compliance Act (FATCA, not to be confused with FACTA, the Fair and Accurate Credit Transactions Act, a consumer protection measure) which is an extension of the USA's Qualified Intermediary system that had proved reasonably successful in obtaining records relating to offshore holdings of US citizens.

4. Who is going to pay for it?

Initially, the Basel Institute, says "This project is supported by the KBA-NotaSys Integrity Fund. The fund, an initiative of KBA-NotaSys AG, supports research and non-profit projects that aim to promote business integrity and compliance in the economy." But there's a snag: the fund receives a grant of euro one million per annum and it has to do lots of things with that money. Its website lists a number of projects which are primarily research with one for drafting guidelines for small to medium size enterprises (SMEs) in Switzerland. No completed projects are listed. If it is to have any chance to succeed in designing a genuinely global system, it's going to need a bigger budget.

That begs another question: where does its funding come from. So far it is funded by KBA-NotaSys AG which is a commercial printing company specialising in high-security paper goods like bank-notes. The KBA-NotaSys Integrity Fund was created in 2017: the same year that KBA-NotaSys AG paid a nominal fine of SF1 and agreed to pay substantial penalty to settle self-reported "failure to prevent bribery" actions relating to corruption in several markets in which the company operates. The facts were uncovered during an internal audit after the company signed up to the Banknotes Ethics Initiative in 2012. And it's not out of the woods: in July this year the company issued the following statement: "For legal reasons, Koenig & Bauer informs on proceedings initiated against the Swiss subsidiary KBA-NotaSys by the Brazilian government (Controladoria-Geral da União), notice of which has been published on the internet but not yet received by the company. The situation in Brazil was already part of the legally completed self-disclosure proceedings which the Swiss subsidiary initiated at the Swiss Office of the Attorney General regarding shortcomings in corruption prevention. This was already reported in an ad hoc release dated 20th February 2017 and at the Annual General Meeting on 22nd May 2019. From today’s perspective, this will not have an effect on the group’s earnings and finances."

Again, this leads to another question, quis custodiet ipsos custodes or, ....

5. Who is going to assess the assessors?

The answer to this last question might be found in the launch notes; "The International Centre for Collective Action (ICCA) is launching a new project that aims to : identify excellent locally based certification Collective Action initiatives in emerging markets; work with those initiatives to improve reliance on local company certifications by those seeking to hire or partner with certified companies; work with locally based Collective Action initiatives that are seeking to improve their certification processes to attract investors looking for partners in the local market." (edited for grammar)

The term "collective action" is a strange expression to use outside the arena of socialism where it is more commonly to be found as the pseudo-intellectual buzzword for strikes, go-slows, etc. That aside, the proposal is that there should be local assessors.

That has not worked well in other areas. For example, there is and has long been widespread corruption in the customs import, inspection and certification departments in many countries. A blind eye is turned to quantities, standards, even smuggling. In one Asia-Pacific country, a charity organiser said "the only people with big cars are the customs officers." On certification company sells itself as being based in Singapore which it describes as "a remarkably open and corruption-free business environment." They do claim to have a Singapore registered company. But their headquarters are in Bangalore, their overseas offices appear to be heavily based on serviced or virtual offices and the telephone number provided is only for India. In relation to Malaysia, where it claims to operate but does not disclose any address, the company says "Malaysia is one of the well known islands companies to the southern Asian region." The inspection and certification system in Nigeria was, in the 1980, so corrupt that companies used to build in "dash" payments in every sale to the country.

What the Basel Institute is planning starts with this:

the first phase is focusing on:

Consultations with companies on their challenges in conducting due diligence on business partners in emerging markets.
Under what circumstances/conditions companies would be willing to rely on local certification Collective Action initiatives in emerging markets as part of their due diligence processes.

The second phase will involve building on our desk reviews of such initiatives and convening those that look most likely to offer the best chances for companies to actively rely on their certification standards.

The project also foresees the opportunity of launching a pilot certification initiative in an emerging market. The pilot would build on the needs-based analysis of companies and best practices identified from Collective Action initiatives operating in emerging markets.

That suggests that the new body will itself assess the viability of its certification agents which, no doubt, someone will at some point mis-describe as "partners".

Wilder proposals have, after long gestation periods come to fruition. But this one seems to be viable only if one ignores the problems that it will encounter during development. Will it be a project built in shifting sands?

Sadly, as it currently stands, that's exactly what it looks like. As noted above, there are simpler, quicker, cheaper things that can be done first and which will provide an immediate and tangible benefit in relation to due diligence, especially in relation to government contracts which, ultimately, is what most international anti-corruption initiatives are aimed at with a view to both saving money and removing market distortion. Perhaps it would be better to focus on those first and then to think about ways to expand the system to include, for example, due diligence on individuals taking up services via so-called FinTech where the entire KYC approach is deeply flawed, unreliable and open to abuse, but that's a different subject.

But as always, there has to be an over-riding caveat: what about security?

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