Asset Location and Due Diligence: Policy Manual Time Bombs

If you are working in a financial instruction, you will have at least one policy manual addressing Customer Due Diligence (CDD) and Know Your Customer (KYC). These manuals have probably been assembled in a perfectly perfunctory manner, recognizing at the time, current laws and regulations. If you are a securities broker dealer a CDD and KYC manuals are required, and they must address specific topics, such as client credentials and AML law to thwart criminals and terrorists. In our role we have had the opportunity to read many, many manuals addressing CDD and KYC.

A favorite quote (instruction?) from one manual was “...and to supplement our policies on terrorism, any terrorist that walks through our office doors will be shot dead on the spot!” The NASD took a dim view of this policy -- but the B/D insisted it remain. To this day, it remains the strongest policy on terrorism we have ever seen.

Most DD procedures are the result of combined efforts to address the legal and regulatory issues in an effort to standardize the approach across a large organization. In theory, policies are meant to raise the standards of CDD and KYC to a “best practice” level.

So where are the policy bombs, and how are they fused and detonated?

As policies are created out of a need to address regulatory requirements and law, a manual only represents a snapshot in time -- the time it was created.

For example ...

The original author of a manual drafted in 2000 addressed the rules and threats of the day, and no doubt it was an exemplary manual. In 2002 regulations were substantially changed -- requiring more information to be gathered, shared, and retained. In 2004 the company using this manual merged with a new firm. In 2006 the office changed locations -- not far, but to a different county. In 2007 the parent company was bought out by a private equity firm, reincorporated in a new state, and had a substantial reduction in staff. In 2008 the office added insurance and estate planning professionals. In 2009 the office manager is confronted with a warrant, and law enforcement officers gathering records. It is suspected that one of their clients has been running a financial fraud, and has been laundering money though their accounts. The good news is that the firm has not been charged criminally -- but was fined by regulators. The bad news is that the victims of the fraud view the firm as the deep pocket that can make them whole -- since the firm was a part of the scheme. It's known as scheme liability.

The victims are not accusing the firm of being a malfeasor, but as a misfeasor. They will attempt to ascribe liability to the firm for failing to follow the policies and procedures in their manual.

Maybe the original author did a great job. Problems began when the manual was revised by Mary -- who left the project to Don when she left the firm. Don made his changes, and gave the project to Eric, who began to automate some of the processes. Angelina, CFE and CAMS certified, took over when Don was made redundant. Angelina took
the process in a new direction. Was that five or six versions of the manual (ago)?

In the end, what CDD/KYC procedures were used when the fraudster’s account was opened probably doesn't matter.

What matters is whether the financial organization deviated from the manual and its own policy. Deviance from policy is what opens the door for liability. This deviation may also allow an insurance company to deny coverage for attorneys’ fees and any awards given to the victims. The polices and procedures it approved and agreed to insure were not the ones followed by the firm.

The solution is simple (but boring).

Keep a pedigree of every version of the manual, including a record of the drafting efforts, dates, participants, and content. Appended this material to the current version, and date the version on every page. Review and revise manuals as needed in response to regulations, court rulings, changes in the business, changes in jurisdiction, changes in suppliers, or any other change that should affect policies. This must be done no less than annually. If you have a meeting, and the result of that meeting that there are no changes – document that meeting and add it to the record. Send copies of your most recent version to both regulators and your insurance company -- and invite comments. It's more difficult for regulators to issue fines and insurers to deny claims when they have been included in the process.


L Burke Files
Financial Examinations and Evaluations Inc. / The LUBRINCO Group Ltd.

Global Background Checks, Know the Facts

Do Global Background Checks Really Exist? And if so, are they sufficient to meet my Due Diligence Needs?


Global background checks offered by companies on the internet are frequently nothing more than a scam. There are a few firms that actually offer truly satisfactory international investigative services to qualify... and it is estimated that up to 90% or more of the companies or websites claiming to offer global background checks are fraudulent.

That's right; a majority of such companies don't even offer a true domestic investigations, let alone global investigations. Most websites claiming to offer background checks actually often just search databases for criminal records information. This is not a Due Diligence Investigation, nor does this even qualify as a true “background check”. It is however a superficial and reckless way of dealing with risk assessment and mitigation. True Due Diligence requires professional investigation. International Due Diligence requires professional field investigators in foreign countries… by an organization that has demonstrable ability to legitimately investigate at an international level.


Authentic Due Diligence involves prudent investigation conducted by professional investigators; it is a verification and investigation process which includes searching criminal records and many other factors, including financial due diligence and an understanding of those that associate with the target of your investigation. It's important to know that criminal records cannot be checked via a database for most international cases…. nor can financial information.

True Due Diligence is much more than just checking against criminal records and various government watch lists… Information concerning the financial, social and criminal background of a target, as well as those who are known to associate with the individual or organization in question are all required in order to get a more accurate and more complete picture to then based informed decisions upon. Foreign investigations require access to information in countries where you need to gather the information. This often can only be done with “feet on the street” to gather information first hand.

If you require a Due Diligence on an individual or organization with significant operations or history in one or more foreign countries, a true global or international investigation is required to gather the necessary evidence to understand and mitigate the risks associated with the contemplated counter party.

True professional background checks and private investigations don't exist for $39.95… any more than a great top notch paint job does for your home or automobile.

Real Due Diligence is based upon investigations which assess many factors, including education and employment history, criminal and civil records, ID and passport verification, document verification, informant testimony, travel records, financial dealings, real estate holdings, known associations, etc. There is no magical global database, not even for “Big Brother”. The fact is the majority of the world is still developing, and vast regions in Latin America, Africa and Asia are still filing records the old fashioned way. If there is no field investigator on the ground who speaks the local language, is familiar with local customs, and who has appropriate contacts with police, government and others who can provide appropriate sources of information, the job simply won't get done.

To conduct an international due diligence investigation or "global background check", an international private investigator, or a company with offices of investigators in several countries is required. You can't conduct a Panamanian background or Uzbekistani background check without investigators working in Panama or Uzbekistan to gather the necessary information… It’s that plain and simple. And, while your investigator does NOT need to have a local office exist in every city or every country, the investigator does have to have a network of reliable local contacts to facilitate the investigative process. Searching databases simply isn't a sufficient option for international cases.

Fraud and scams continue to be on the rise, so it's more important than ever to know who you're dealing with, and minimize your risk. The LUBRINCO Group can assist you in such endeavors…