KYC in the Digital Age: Cryptocurrencies, PEPs and Due Diligence

Topics: Data Analytics, Government, Regulation & Compliance, Risk Management


There are many emerging risks for financial institutions with the proliferation of data, technology, and automation. We’ve heard about Narrative Sanctions, the ominous Ultimate Beneficial Ownership (UBO) Rule taking effect on May 11th, Fintechs and their disruption to traditional banking, and, of course, cryptocurrencies. While these technologies provide greater complexity to compliance professionals and those attempting to thwart bad actors from financial crimes, it also presents opportunities for banks to learn, adapt, and take advantage of the tools at hand to stop sophisticated crooks and enhance their Know Your Customer (KYC) procedures.

Thomson Reuters’ Kevin Bogdanov, Director in Market Development, Customer & Third Party Risk; and Greg Pinn, former Product Director for World-Check, recently discussed these issues and more with a virtual audience of Association of Certified Fraud Examiners (ACFE) during a webinar titled, Know Your Customer in the Digital Age. During the chat, many attendees had questions, particularly around virtual currencies. But, with any engaging conversation, time flies and the hour ran out quickly.

Below we’ve addressed five key questions from the audience with answers by Bogdanov and Pinn.

1)     Several countries, such as China, have banned cryptocurrencies outright. What measures do you see the US taking regarding cryptocurrency use?

While regulatory scrutiny has been directed at consumer protections pertaining to Initial Coin Offerings (ICOs) and use of credit cards to acquire cryptocurrencies, regulated Crypto-Exchanges have proliferated. Cryptocurrencies have emerged as a prominent asset class despite recent volatility, and Institutional Funds look set to follow suit. A recent Thomson Reuters survey noted that one-in-five financial firms plan to trade cryptocurrencies in the near term, which will further cement adoption.


Thomson Reuters’ Kevin Bogdanov, Director in Market Development, Customer & Third Party Risk

Overall the tone from regulators has been more focused around regulating a functional financial system, rather than suppressing crypto adoption. The tone from the US Securities and Exchange Commission (SEC) Chair Jay Clayton and the Commodity Futures Trading Commission (CFTC) Chair J. Christopher Giancarlo before the Senate Banking Committee in recent months seems to support this.

2)     In March, Venezuela officially launched the pre-sale of its new digital currency called the “Petro.” Is Venezuela’s action of launching a national cryptocoin something that other countries will follow?

Adoption of the Petro has been severely hampered by US Sanctions enforcement, and even domestically, access and usage has been limited. While it’s too early to determine if state-backed cryptocurrencies will become more prominently utilized, the Petro at least is off to a slow start. In the developed world there has been a robust debate around the opportunity. While Citigroup’s CEO Michael Corbat believes state-backed digital currencies are inevitable; others, such as the Swiss National Bank’s Governing Board member Andrea Maechler have cited skepticism by digital currencies being unable to meet necessary scalability, security, and reliability levels.

3)     Has the cryptocurrency market shown any real purchasing power? Explain how it will affect the purchasing power in the normal day-to-day market, i.e. for groceries and large ticket items. Will it lower the U.S. dollars vs the UK’s or emerging markets’ currencies?

There are a few parts to this. With respects to adoption, several retailers (think Kodak, Walmart, and Amazon) have either issued their own coins or accepted cryptocurrencies as a payment method. That said, broad adoption has yet to take off and the use of cryptocurrencies for purchasing and transactional purposes is still limited. Cryptocurrencies such as Bitcoin suffer from volatility, volume, and scalability issues, as well as slow processing, all of which do not meet broad consumer expectations as compared to fiat currency. That may change over time as scalability, speed, and access are improved.

The second major piece ties to the coupling or decoupling of crypto-valuations and the US dollar. One interesting measure is the Bitcoin Purchasing Power Index, which measures the value of the currency against the Big Mac Hamburger. The idea is that Big Macs are universally available and a soft indicator of worldwide purchasing power. It is foreseeable that a further decoupling with a fiat currency takes place in cases of heightened inflation, or a notable deterioration in economic conditions, which could further spark the flight of capital to alternative investments (such as cryptocurrencies, possibly).

4)     What is the danger of a politically exposed person (PEP) when it comes to money laundering? Can you give some examples?


Greg Pinn, former Product Director for World-Check

By virtue of relationships with government agencies, decision-making bodies and other influential persons, PEPs may have increased influence on public policy, award of contracts, permits, and other material decisions. Being a politically exposed person does not suggest risk or wrongdoing. It is just a designation, acknowledging that such persons may be a target for payment of bribes and other corrupt business practice.

5)     Regarding due diligence, will self-certification by companies or individuals regarding ownership help to save on the level of research required? Or are self-certifications dangerous if there is no follow-up or additional background investigation going forward?

A robust due diligence process that collects data and documentation from customers and third parties is essential. From proper registration documents, to ownership and beneficial ownership, this is a staple of customer and third-party due diligence.

That said, businesses must also take a risk-based approach and leverage appropriate data-sets to independently screen potential risks outside the self-certification process, ensuring mitigation of key risks including sanctions, watch-lists, organized crime, and more.