KYE has entered the anti-money laundering lexicon. It is fast becoming a part of the mantra of the anti-money laundering world.
Members of the Financial Services industry are familiar with the legal obligation to carry out KYC (Know Your Customer) or due diligence on clients. This process involves verification of the name and date of birth and address of the client through scrutinizing photo identification; utility bills; letters of good standing etc. (This would have been discussed in some detail in last week’s column). There is however no legal obligation to carry out due diligence on employees.
It has been said that KYE or “Knowing Your Employee” is as crucial to a financial institution’s protection against money laundering as knowing its customers. Why is this?
Institutions have learned that an employee can pose the same or an even greater threat of money laundering as can a bad customer. For example, a criminally co-opted bank employee might facilitate money laundering.
The standard process of getting to know an employee may involve receipt of a resume; character reference and/or a police certificate.
In an era when it is very easy to have a company’s reputation destroyed through various lawsuits as a result of its negligence which in many instances involve an employee’s activity or inactivity, it is good business sense to Know Your Employee (KYE) through the scrutinizing of an individual’s background, economic resources, training, emotional stability as well as an individual’s reasons for seeking employment with your organisation.
What does your organisation do to ensure KYE before it offers a contract of employment?
Is the KYE concept strictly restricted to employees?
How to adequately weigh formal and informal recommendations?
What about a negative reference- how is this to be assessed?
What about an Employee disclosure form? What do you ask and why?
Should there be special disclosure obligations for persons dealing in higher risk activities?
Is it appropriate for your organisation to have policies for disclosure obligations and the monitoring of senior management?
Once questions are asked and consents obtained etc. how often do you check?
Merely knowing the applicant’s educational background is not enough. A character reference is not enough.
Do you confirm the existence of the tertiary institutions from which the individual purports to have received his certificates? Do you confirm any of the information that you receive? Checks that you would have done in the past may be insufficient.
Upon receiving a new employee during the probation period what does the organisation monitor? Does it monitor performance? Behaviour? Lifestyles? Is the employee properly supervised? In the Barings Brothers case millions of dollars were lost there because of inadequate supervision of a trader.
Ultimately, an organisation must be able to demonstrate that reasonable efforts have been made to eliminate or reduce the likelihood that the organization will be utilized for criminal conduct by its employees.
What constitutes reasonable efforts obviously depends on the circumstances of your organization
If your organization deals with large amounts of cash it would be prudent to ascertain the living standards and credit worthiness as well as conduct a careful assessment of any individual who is expected to fill a vacancy in a sensitive position in addition to obtaining the standard police record which provides a value neutral objective statement regarding an employee’s criminal past.
However, what about civil actions? Divorce proceedings? Don’t these have the potential to impact upon the performance of your current and prospective employees? Although every employer must be careful not to exceed cultural and legal parameters and to avoid discriminatory conduct, the employer/employee relationship is still however, akin to a marriage.
Accordingly, it is critical to enter and continue in the relationship knowing of the factors which may increase risks so that adequate controls can be put in place to eliminate or reduce them.
A financial institution has an obligation to its regulator to be fit and proper, its Policies Procedures, Practices, Board of Directors, Management and Employees are subject to scrutiny, surely then before a fit and proper declaration can be made the duty of the Employer must be to Know its Employees and if the employees are not known, the Employer has failed its fit and proper test.
A list of Red flags has been compiled as matters to be considered before issuing an offer for employment and after the offer has been accepted:
Employee exaggerates educational background, credentials, financial stability within resume
Employee lives a lavish lifestyle that is beyond the means of his salary or joint income
Employee frequently makes exceptions to company’s policies
Employee frequently overrides internal controls
Employee uses company resources for personal benefit
Employee resists serving in other areas of the company
Employee refuses to take vacations
How do you KYE non-Bahamian employees?
Clearly this is going to become increasingly important as we move closer to globalization
Do you have an original report from Interpole or some equivalent body?
Have you verified the authenticity of any letters of recommendation?
Do you as a part of your verifications, contact the purported letter writer?
Do you verify the standing of the entity on whose letterhead the reference was made?
How do you determine whether the institution, which provided the reference, is reputable or not?
How do you verify the applicant’s claimed skills levels or experience before they become employees?
What do you do if you discover that the employee has misstated their qualifications or experience after they have been hired?
Can you comfortably place them in a lower functioning position, assuming that one is available, or do you, because of the fundamental breach of trust caused by the misstatement, part company?
Do you feel that you can recommend termination or is it a situation where so much has been invested to fill the role, especially in relation to the re-location expenses and probable termination clauses typical to the contracts with expatriate workers, that it is difficult to advance such a suggestion?
Are there sacred cows in your organization?
What is your plan to challenge ‘the status quo’ when it is clear that a person who has been given ‘the blessing’ from ‘higher up’ is not a ‘fit and proper’ person and does not act in the interests of your organization or the jurisdiction?
In an effort to identify and anticipate trouble before it costs time, money and reputational damage, organizations must develop programs to look closely at the people working for them because a single employee or small group can wreak substantial damage. The Bank of New York case provides a good example of this.
In February 2000, Lucy Edwards, a former vice president of The Bank of New York’s Eastern European Division, and her husband, Peter Berlin, pleaded guilty in New York Federal Court to money laundering conspiracy linked to their facilitation of the movement of dirty Russian money through corporate accounts which Peter Berlin had opened at the bank where his wife was Vice President.
Background screening of prospective and current employees, especially for criminal history, is essential to keeping unwanted employees out and identifying those to be removed. Lawsuits will come when systems fail, but through adequate KYE procedures there should be less lawsuits as it is clearly in an organisation’s best interests to maintain the co-equal programs of Know Your Customer “KYC” and Know Your Employee “KYE”.
By: , The Nassau Guardian
