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Conflicts of interest: the compliance challenges

Episode
/
July 28, 2022

Those working in professional services have a regulatory and moral duty to make sure conflicts of interest don’t interfere with their obligations to customers. Using KYC best practices for due diligence helps professionals achieve compliance and control risk.

 

There are a large number of scenarios in which a conflict of interest could arise in a professional services setting. Consider the following illustrative example: a lawyer is asked to represent a new corporate client, but the CEO of that corporation is married to one of the partners at the law firm. A conflict of interest such as this would create vulnerabilities in the business relationship that could be exploited and compromise the lawyer, the law firm, or the client.

 

Large multinational organizations are particularly exposed to potential conflicts of interest due to their extensive networks of customers and business partners. If you work in professional services it’s important that you don’t let yourself or your organization be placed in a vulnerable position. Conflicts of interest could lead to undue pressure being exerted on you or your company, to one party being unfairly disadvantaged over another, or to an environment where corruption becomes embedded.

Preventing bribery and corruption 

Globally, professional services are subject to laws designed to prevent conflicts of interest. As well as placing professionals in compromising situations, conflicts of interest can lead to bribery and corruption. Laws governing bribery include the UK Bribery Act and the US Foreign Corrupt Practices Act. Each EU member state also has its own anti-bribery laws.

 

You need to undertake due diligence processes to know who you are working with – that includes who is working for you, as well as who your customers and customers’ customers are. Without adequate KYC systems and checks in place, it’s impossible to analyze connections and make decisions about ending compromising connections or transactions with corrupt individuals or entities.

What is needed to manage conflicts of interest?

In March this year, the Financial Conduct Authority (FCA) issued a fine of more than £9 million to GAM International Management Limited after the organization failed to manage conflicts of interest correctly. In its notice, the FCA highlighted that the company’s senior leadership had failed to meet its commitments and regulatory obligations, which led to serious breaches going undetected for years.

 

What are some of the FCA’s expectations of companies when it comes to controlling conflicts of interest?

  • Within a professional services organization, you are expected to carry out business operations with skill, care, and diligence
  • You have to ensure there are effective systems and controls for the identification, management, and prevention of conflicts of interest
  • The systems and control measures should be communicated and promoted throughout the organization, so there is a culture of awareness and accountability
  • Senior leaders, including a company board of directors, should meet regularly to discuss potential conflict of interest cases

 

While these are the FCA guidelines, they define best practice for any professional services organization. Without due diligence, effective systems and controls, and sufficient awareness of the challenges conflicts of interest pose throughout a business, you are left open to the risk of bribery and corruption – and to severe financial penalties.

KYC due diligence

An important reason to conduct know your customer (KYC) due diligence is to understand exactly who is in your business network, internally and externally. This gives you the knowledge needed to uncover conflicts of interest.

 

KYC processes can screen individuals and corporate structures to uncover potential connections and areas of risk. Then, you can decide what to do – are the issues so clear cut you don’t take on the new client, or are they more marginal, meaning you escalate the issue for a decision?

 

Many professional services businesses are still using manual means to conduct KYC due diligence, but this is unsustainable in a complex global business environment. Firms are starting to use automation, which allows a greater range of data and sources to be monitored, for connections to be quickly highlighted, and for perpetual monitoring to take place.

 

KYC due diligence programs mean you are able to understand your customers and the connections they have with you, your organization, and other clients you work with. This helps you create a more robust and defined picture of risk, including where conflicts of interest lie. It helps prevent bad actors from operating within your business, and ensures compliance with audit and reporting obligations.

 

Creating KYC processes enables you to implement systems and demonstrate control over conflicts of interest. These systems help you prevent issues arising, and also empower you to report suspicious activity when it is identified.

 

KYC platforms, such as Moody’s Analytics solutions, can be used to support a compliance program with automated screening checks. Reports can be shared with decision-makers, senior managers, and auditors to review conflict of interest cases. Moody’s Analytics can also be used to maintain documentation in one place, for escalation of issues, and collaboration on cases, ensuring potential issues are flagged to appropriate people across your organization.

 

You can also view a full audit history around conflict of interest investigations, including what decisions were made, to share with internal and external auditors as well as regulators. These best practices in KYC due diligence help professionals achieve compliance and control risk.

Get in touch

If you want to control risk across your business network, including identifying potential conflicts of interest, please get in touch – we would love to help.

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