Legacy Business and CDD: The devil and the deep blue sea!

aml/cft cdd compliance customer due diligence due diligence done differently financial services legacy business regulation Oct 03, 2021
Legacy Business and CDD

One of the challenges that continues to bedevil long-lived regulated firms is their legacy business – the portfolio of clients whom regulation grew up around. Let's dive into the impact of legacy business on customer due diligence!


Familiar Places, Familiar Faces

Legacy business is often known and treated as a familiar place. It’s like a beach you visit often. You know all the good spots to take a swim, what areas are a bit riskier and when it is too rough to venture in.  

Like this familiar beach, you can speak to all of its features and the spots to look out for, but could you map that knowledge out precisely for someone who has never been? Could you say how many feet or meters your favourite spots are located? The average depth at low and high tide on a good day? Knowing the clients intimately is often like mapping out that intimate knowledge of a favourite place to someone unfamiliar with it. It’s not that you don’t know the client, but rather, that knowledge may not be in a form that translates well for compliance purposes.  


The Passage of Time and the Erosion of Knowledge

I had a favourite beach growing up in Barbados. Visiting that beach for over 40 years allowed me to become familiar with its features and how they changed. Over the years, some of those changes were subtle and, others were not. The favourite spots looked essentially the same to the eye, but I was warned that one area was now considered deadly. Over time, erosion allowed that area to become a dangerous spot.  

Legacy business is often like this! Familiarity of pleasant, productive and profitable relationships that were parallel to my beach. The preferences of long-standing clients are known and catered for. Engagement with the clients on family developments over decades, particularly in investment banking and fiduciary services, gives insight into the multifaceted dynamic that happens in generational changes. That fondness for a client you understand and that comfort in providing products and services for decades is very much like the nostalgia that may cloud your ability to see shifts in the sand.    

Often, firms are slow to recognise the risks that may have subtly evolved – that the erosion of true knowledge of a long-held client has occurred and that you have been pulled out to sea. At times, it is only when they ‘look for the shore’ - perhaps, during an onsite inspection by the regulator - do they realise the horror. The horror that not only have they been pulled out by a riptide, but that they are so far out that the continental shelf has dropped off beneath them!  


A Cry for Help and Brave Sailors to Rescue those Lost

Stories of persons rescued after being pulled out by a riptide are harrowing. Those that were lost in the vastness of the ocean only to be blessed by rescue are rare. In the case of the former, even the best swimmers were rescued after making a cry for help. In the case of the latter, their rescue rested on a few or many factors – one common factor is that they were known to be missing or in need of rescue. Whether through methodical search patterns, luck or a combination of both, the people are located and rescued, but not the ship they clung to.  

Legacy business can have the same effect on a regulated firm. In a realised risk in their legacy client portfolio, a few senior persons can find their way out to sea where the safest way back is to cry for help and hope to be rescued. Sadly, a few persons can be taken under by a legacy client they blindly trusted. Senior staff are often the ones that shielded key legacy clients from the scrutiny that is often needed. It is only to have a massive unmitigated risk uncovered - sometimes not as the result of a regulatory inspection but from a law enforcement investigation due to years of sanctions-busting, for example. Uncovering such ends up taking the firm down to the crushing depths of the waters they did not realise they were in. The people lost at sea may be rescued but, the vessel is often left to be claimed by the unforgiving depths of the ocean.


Shifting Sands and Navigating Change

Legacy business is a challenge for any firm. It is often compounded by changes of ownership, management and staff within the firm over time. Institutional knowledge that could aid in identifying nuanced risks and what is ‘normal’ for legacy clients often shifts, like sand, over time. Adding to the challenge is the pace of changing regulatory requirements – both existing and new. The challenge can be surmounted! It takes time and, it takes different mindsets. 

Compliance professionals are still transitioning to better meet these challenges. They are becoming the old, weathered sea-dog navigators. They are learning where the rocks and whirlpools are, what stars to focus on for direction on the darkest nights and, when storms blow in, which harbours can provide safe shelter. These intrepid professionals cannot captain the ship – the job of captain still rests firmly with the Board of Directors! The under-appreciated navigators are often demanded to be engineers, boatswains, and deckhands in addition to their core role. The compliance professional knows the speed needed to reach a destination at a given time. But they should not be called on to fix hydraulic pumps or running the riggings on the ship! 


Beyond the Value of Familiarity  

Profits earned through legacy business can be a reliable source of profits - the familiarity that pays! However, professionals who are dedicated to compliance appreciate how quickly things can shift. In the face of familiarity and steady profits, compliance professionals are often viewed as doomsayers… until the worst comes to pass! Someone is pulled out into the depths, or the vessel is lost at sea, and the firm is in a position it never expected to be in. Before the worst happens, the crew needs to work together to navigate changing seas safely because even a day at the beach can have deadly consequences.


Want to learn more about Customer Due Diligence? Check out our courses