Is your bank still holding onto questionable customers or assets that pre-date today’s world of increased due diligence and risk management? One Utah community bank found out that it may be thanks to the so-called Paradise Papers, confidential documents from offshore law firm Appleby that were leaked to a German newspaper.
For years $1.1 billion-asset Bank of Utah has made millions in fee income from its niche business line of helping foreigners legally register their aircraft in the United States. According to The New York Times, “Bank of Utah manages more than 1,390 aircraft trust accounts, most of them for foreigners, generating millions of dollars in fees and making it the second-largest holder of such accounts in the country."
This week the Paradise Papers leak revealed that one offshore company the bank was serving since 2013 belonged to Russia’s wealthiest oligarch and friend of Russian President Vladimir Putin, Leonid Mikhelson. The Treasury Department’s Office of Foreign Assets Control sanctioned Mikhelson’s energy company (but not Mikhelson himself) in 2014 after Russian military interference in Ukraine. The bank says it knew the company’s owner “was Russian” but didn’t know much else since it was registered under Panamanian company Golden Star Aviation, the Times reports. The bank had renewed the F.A.A. registration last year.
Bank executives told the Times “that Mr. Mikhelson’s case escaped scrutiny during an earlier period when their internal review process was less rigorous, and they vowed to review it.
"'Russian involvement would score as a high risk by itself,' Mr. Hansen [Branden Hansen, Bank of Utah chief financial officer] said. ‘It’s highly unlikely that something like this would have been approved in today’s climate.’”
This raises an important point about risk management and how we need to make sure past decisions match up with today’s standards, especially if those decisions are still the last word on existing products, services and relationships. Risk management has evolved dramatically over the past decade, and the world that influences our decisions has changed even faster. We are constantly learning about new threats, challenges, and opportunities. A successful institution needs systems in place to ensure that addressing these developments is baked into the way it does business, not an afterthought to be brought up when a problem is found.
It’s not the first time Bank of Utah has thought about adjusting its business. In fact, it considered closing the niche in 2014, fearing the reputation risk after one of the planes it registered touched down in Iran, The New York Times reports, but decided to continue with increased due diligence and staffing.
The risk management lessons here are clear.
- Make sure you are comfortable with the risk.
- Have periodic and regular reviews to evaluate the risk in light of new information.
- If you’re going to engage in a high-risk activity, make sure you have controls and due diligence in place to mitigate those risks.
Chances are you don’t have a Russian oligarch on the books, but you may have other customers or issues where stale due diligence could be covering up a potential hiccup. Be proactive with risk management and due diligence.