There have been considerable changes made to the way we do business in recent times. These changes were arguably inevitable but were accelerated as a result of lockdowns and forced home working, challenging the finance industry to consider innovative ways to continue to offer their services. The way in which onboarding of clients and customer due diligence, in particular, is undertaken has shifted. Along with "wet ink" signatures, original identification documents or "wet ink" certified copies of identification and verification documents are less frequently requested. Face to face verification and manual paper-based checks can be costly, are inconvenient to clients and sometimes, not possible. Digital methods are ultimately becoming the default choice for the identification and verification of individuals.
As the regulator for financial services in Jersey, the Jersey Financial Services Commission (JFSC) has acknowledged this shift and has recently launched a consultation on facilitating the adoption of Digital ID Systems to meet customer due diligence (CDD) requirements. This is not just by way of recognition of changing working practices, but the consultation paper published by the JFSC suggests that opportunities created by greater use of Digital ID Systems have the potential to increase Jersey's competitiveness and support its position as a well-regulated, responsible and enabling international finance centre.
WHAT IS A DIGITAL ID SYSTEM?
A Digital ID System, as defined by the Financial Action Task Force (FATF), is a system that "uses electronic means to assert and prove a person's official identity online (digital) and/or in person environments at various assurance levels." In other words, digital technology is used to confirm who someone is, based upon evidence that may be paper-based or electronic. The JFSC also includes identification and verification of an individual's address within this definition, but the consultation paper expressly states that the definition does not go as far as to verify an individual's source of wealth or any enhanced due diligence that might be required under the Money Laundering (Jersey) Order 2008 (MLO).
WHAT IS PROPOSED IN THE CONSULTATION?
The JFSC is seeking industry views on solutions to significantly increase the adoption of Digital ID Systems to meet CDD requirements. It is recognised that unless there is a critical mass take up of Digital ID Systems, the frustrations of and inconvenience to clients will remain if, for example, Digital ID Systems were used to onboard them when opening a bank account, but paper based CDD was required when approaching a trust company.
To determine the future direction of travel, views are sought by the JFSC on the following:
- Option 1: Further clarity around existing regime enhancing Section 4 of the AML/CFT Handbook, and incorporating Digital ID into law.
The JFSC will be updating the Handbook (notwithstanding the outcome of this consultation) to, amongst other things, provide Supervised Persons with further information, which could assist them in choosing a Digital ID System that is suitable for their business and provide Supervised Persons with further information that could allow them to demonstrate that the use of a Digital ID System is suitable to meet their CDD obligations. While any additional guidance is obviously welcome, under this option it would still be for Supervised Persons to form a view on whether the Digital ID System they select and their use of it is sufficient to meet their regulatory obligations.
In conjunction with the above, it is envisaged that the Jersey Government would amend the MLO to enable the use of Digital ID Systems as an appropriate method for Supervised Persons to meet their CDD obligations.
- Option 2: Establishment of a Digital ID accreditation framework for Digital ID Systems/System providers.
The intention here would be for accreditation comprising a comprehensive framework and standards which would apply to providers of Digital ID Systems, with a view to establishing a level of confidence in the reliability and independence of the Digital ID System being used by the Supervised Person. The JFSC does not at this stage identify who would determine the scope and content of the framework or who would undertake certification of those that adhere to and demonstrate conformity with the framework although the consultation paper does discuss the merits and demerits of a committee of experts/industry accreditation as against an independent accreditation by professional Digital ID accreditation firms.
When compared with Option 1 alone, this approach would provide greater certainty for Supervised Persons but will inevitably be slower and more expensive to implement. Once a framework is established, there will be delays whilst the providers of Digital ID Systems go through the accreditation process.
- Option 3: Creation of a new class of business/activity within Jersey's legislative regime whereby Digital ID System Providers become Supervised Persons and subject to supervision by the JFSC or another regulatory body.
This would result in Digital ID System service providers being subject to registration and supervision for the services they provide by an appropriate regulatory/supervisory body. By becoming a Supervised Person, such service provider would be subject to the same regulatory obligations and requirements of a Supervised Person. What could otherwise be described as an outsourcing arrangement, where a Digital ID System service provider was not subject to supervision, would evolve to become utilising the services of a Digital ID System service provider under the "Reliance – Obliged Persons" regime described in Article 16 of the MLO and Section 5 of the AML/CFT Handbook (subject to certain caveats).
This approach would also be slower than Option 1 but is also likely to be slower than Option 2 as one would expect a full regulatory approval to be a longer and more rigorous process than a technical accreditation. Whether or not the higher barrier to entry would result in a lower number of market participants, as would generally be expected, is a nuanced question as there are many businesses in this sector who may see a Jersey regulatory approval as a badge of honour they can leverage world wide.
It is clear from the consultation paper that there is a lot to consider and some of the proposals are only at the earliest stages of consideration. The speed with which Option 1 can be implemented is a clear benefit and will help early adopters avoid a potential loss of business should Jersey fall behind in this area. However, with the goal of widescale adoption in mind, it does not seem likely that additional guidance and related changes to the law alone will be sufficient and the greater certainty provided by Options 2 or Option 3 is more likely to provide the "watershed moment" we are all hoping for.
Adoption of Digital ID Systems will not be a "one size fits all" approach and will very much depend upon the size and risk profile of the business concerned and the resource available to it to introduce such technologies. The opportunity for Jersey to be a more competitive place to do business by way of introduction of more efficient, cost effective and robust CDD systems and processes is clear – but whilst all Supervised Persons will be required to comply with the same anti-money laundering legislation and regulation, the introduction and tailoring of such systems to ensure suitability and functionality will differ considerably from one business to another. Readers are encouraged to engage thoroughly in the consultation as it is not often interested parties are able to contribute to policy development at this early stage.
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