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Heightened Scrutiny On Prime Brokers Following KYC Failure at Archegos

This week, Credit Suisse announced it will exit the hedge fund business as the Swiss bank looks to revamp itself following back-to-back scandals that triggered investor backlash. In a quarterly call, Credit Suisse’s new chairman described the move, a part of a wider $440 million reorganization, as “more cultural than structural” as it seeks “the right balance between risk management and entrepreneurial spirit” in the wake of the Archegos Capital scandal, which through its collapse forced the lender to write off over $5 billion in losses. 

In the aftermath, Fitch Ratings announced the Archegos fallout signals heightened counterparty and regulatory risk and that the “event highlights the financial, reputational and regulatory risks banks face if material governance deficiencies or risk management weaknesses exist,” as Credit Suisse experienced.

In a publicly released letter, Sen. Sherrod Brown, the head of the Senate Banking Committee, questioned Credit Suisse on its Know-You-Customer (KYC) processes and how they were applied to Archegos and its founder, who had prior “civil fraud charges related to allegations of insider trading and manipulation that led to a $44 million penalty and an industry bar.” Brown further inquired about how the bank’s family office clients are on-boarded and how often periodic reviews of family offices are undertaken as family offices are currently exempt from reporting requirements from both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

With data being central to risk management, institutions can improve their early detection of misconduct by leveraging technology to scour publicly available information for governance risk. While Credit Suisse took a significant hit from its prime brokerage relationship with Archegos, others like Goldman Sachs diligently “identified the risk early,” and as a result “boasted record average balances in its prime business” crediting the “robust risk management that governs the amount of financing [they] provide for these types of portfolios.” Notably, in the week preceding Archegos’ collapse, Goldman had indicated that they had shifted away from the traditional periodic refreshes that accompany the due diligence process as they seek to implement a ‘Perpetual KYC’ approach that is now possible with advanced technology like Sigma. As it embarks on a "cultural revolution," Credit Suisse’s new chairman, who acknowledged there were “no quick fixes,” and its board of directors, will need to ensure that “compliance and risk management tools and policies are there and are properly monitored” as the Archegos collapse has demonstrated once again that risk can be hidden in plain sight. 

AML Compliance Risk Management KYC/KYB
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