News & Insights

Managing the Due Diligence Challenges of Global UHNW Individuals

Among the many unanticipated consequences of the pandemic has been an explosion of wealth that occurred during the recovery period. A record 218,200 people entered the ranks of “ultra high net worth” (meaning assets over $30 million) in 2021, an increase of 46,000 people, according to a report by investment bank Credit Suisse. In fact, the number of people in the UHNW bracket swelled by more than 50 percent over the past two years. The report cites a surge in the value of financial assets during the Covid-19 pandemic as the chief contributor to the growth in wealth.

The report states that “the recovery of macroeconomic activity in a low-interest environment produced exceptionally favorable conditions for household wealth growth during 2021.” In the US alone, the number of millionaires ballooned by 2.5 million, a number comprising almost half of all new millionaires across the world, the report said. The second most dominant country in terms of concentration of UHNW individuals is China, which accounts for 38 percent of the total membership, compared to 9 percent from India, 7 percent from Latin America, and just 4 percent from Africa.

While the lion’s share of the latest UHNW individuals came by their wealth honestly, sprinkled among them are reports of less savory individuals who amassed their wealth through fraud or other illicit means. And even those who legitimately earned their UHNW status remain vulnerable to scammers, cybercriminals, and charlatans. This unprecedented tsunami of UHNW clients poses a number of unique challenges in terms of high net worth due diligence to financial institutions and wealth managers.

The Challenges of UHNW Due Diligence

Addressing the rising crypto challenge

Verifying the sources of outsize wealth among post-pandemic clients in the UHNW category presents new hurdles for advisors in the age of cryptocurrency and blockchain technology as a new asset class. The lack of transparency inherent in the world of crypto and blockchain makes them uniquely appealing to perpetrators of fraud and other illicit activities, calling for a higher standard of high net worth due diligence.

Contrary to the popular conception, crypto-based transactions can usually be traced via the blockchain. But criminals can use an anonymizing service (under the guise of protecting personal privacy), which dissolves any links between crypto transactions and effectively conceals the source of the funds. One popular illicit technique, for example, is to launder the original cryptocurrency by using it to purchase a different digital currency as part of an Initial Coin Offering (ICO). When asked, money launderers will often claim that they came into possession of the latest digital currency as a result of a profitable venture or other currency appreciation.

Identifying offshore concealment

One of the most common techniques used to conceal the provenance of ill-gotten wealth is the off-shore shell company. For wealthy individuals who want to operate in secrecy, the deft use of shell companies is a significant challenge to overcome for both regulators and institutions needing to verify client wealth. These pose a material risk when dealing with UHNW individuals (as well as multinational firms) seeking to launder illicit assets and minimize their tax liabilities in a particular jurisdiction.

In 2016, a leak of confidential documents (dubbed the Panama Papers) revealed the holdings of Panamanian law firm Mossack Fonseca, exposing the far-flung scale of untraceable companies and the complexity of structures.

Early in 2022, a massive leak from a global investment bank cast a harsh light on the hidden wealth of clients involved in torture, drug trafficking, money laundering, corruption, and other serious crimes. In that case, the leak exposed widespread failures of due diligence by the bank. But it also illustrates the difficulties faced by law-abiding firms and advisors trying to ascertain the origins and disposition of a potential client’s exceptional wealth. The Financial Times reported Credit Suisse struggling in February to verify wealth for over 600 High- and UHNW individuals, with up to eight-month wait times in more opaque Asia-Pacific jurisdictions; in November, the FT reported the bank saw net wealth management outflows, within just six weeks, equal to 10 percent of assets.

Operating in less familiar geographies

Expanding into new markets with unfamiliar risks and regulations can also present unique challenges for financial institutions. These challenges are only further amplified when an individual with millions of dollars in investable assets comes into play.

One such instance of this challenge is apparent in the Monetary Authority of Singapore’s S$ 1 million fine against Safra Bank’s Singaporean subsidiary J. Safra Sarasin Singapore for violation of anti-money laundering and terrorism financing regulations.According to the Monetary Authority, the Safra subsidiary failed to establish the source of wealth of its customers and lacked any control mechanism to monitor large or unusual patterns of customer transactions.

Similarly, in October of 2022, London-based Gatehouse Bank received a 1.58 million pound fine from the U.K. Financial Conduct Authority (FCA) for lapses in anti-money laundering checks from 2014-2017. Among what was described as “significant weaknesses” in Gatehouse’s KYC processes, was a distinct failure to conduct proper due diligence and source of wealth verifications on customers located in countries with a higher risk for financial crimes including money laundering and terrorist financing. One example cited by the FCA, focuses on an instance of Gatehouse establishing an account for a Kuwait-based company to aggregate customer funds; however, the FCA reported that “…Gatehouse Bank did not require the company to collect information about customers’ source of funds or wealth.”

Unmasking the pretenders

Closely related to UHNW individuals who have acquired actual wealth through criminal activities are bad actors who employ social media and other techniques to conceal fraudulent activities behind a façade of apparent UHNW status. In the last few years, there have been several glaring cases of banks and other financial institutions that found themselves unwittingly entangled with criminals who did so.

One of the best-known recent examples is that of Russian-born Anna Sorokin. The high-profile case of Sorokin focused attention on the ease with which scammers can deceive legitimate businesses by pretending to be wealthy. Operating in New York social circles under the guise of heiress Anna Delvey, Sorokin crafted an online identity as a German heiress, principally using social media. She used her bogus persona to bilk banks, hotels, exclusive restaurants, and other businesses out of more than $250,000. In 2019, Sorokin was found guilty of a host of charges, including attempted grand larceny in the first degree, grand larceny in the second and third degrees, and theft of services.

In these and other scenarios, the onus on compliance professionals is clear: due diligence practices that successfully address the unique challenges of serving UHNW individuals need to take into consideration a range of factors that are unique to this market.

How to Answer the Call for a Higher Standard of UHNW Individual Due Diligence

Banks and financial institutions need to take extra steps in the due diligence process to build a holistic picture of the potential risks that could be lurking in a potential UHNW client. From source-of-wealth checks to in-depth searches of public domain sources to comprehensive screening of business activities, financial institutions as well as investors in private enterprises, must develop a 360-degree assessment of who they are considering working with.

As the percentage of UHNW individuals continues to grow, source of wealth inquiries are likely to become increasingly complex and difficult for companies to navigate on their own. Organizations engaging in businesses with this newest class of UHNW clients need not only robust research tools that create an exhaustive view of a subject’s source of wealth background, but also a trusted and experienced partner to offer actionable intelligence and crucial facts about client sources of wealth. That’s why IntegrityRisk’s WealthCheck covers the entire spectrum of UHNW due diligence to provide these companies with the information they need, when they need it.

To learn more about WealthCheck or the growing risks associated with UHNW individuals, contact the experts at Integrity Risk International today.