#37 – RegTalks with Gaetan Rio, Daxian

Transcript

Welcome to RegTalks, a podcast dedicated to the latest trends on the world of Regtech, Fintech, and Financial regulations.

My name is Claus Christensen, and I’m the CEO and Co-Founder of award winning Regtech provider, Know Your Customer.

Today, it’s my great pleasure to welcome Gaétan Rio, founding partner and director of compliance at Daxian as my guest.

Gaétan gained his comprehensive compliance and sanctions expertise from many years working in both regulated and unregulated companies in the financial system. Before cofounding Daxian, he was a compliance and risk manager for private investment group. He has worked as a compliance consultant with a big four consultancy, both in the UK and Luxembourg, working on several high level compliance projects for financial and supernatural institutions.

Gaetén holds an MA in international political economy and is a certified anti money laundering specialist comes. Gaétan, thanks so much for joining us today for our Reg Talks episode.

Thank you very much, Glass, for inviting me. It’s a pleasure to be here.

For me, it’s always interesting to meet a fellow entrepreneur and cofounder in our space. Could you tell me a bit more about your personal journey and how you came to start Daxian?

Sure.

So I always had this entrepreneurial spirit in me. I think this comes from having had the chance to have lived across many countries, my youth, mainly in North America and Europe. After my studies, I decided to gain the skills I needed, and I think big fours are a great school for learning. So I stayed a couple of years in the big four, as mentioned.

And after this, I decided to move towards a private equity firm where I managed to gain a lot of unique experiences, in the sanctions area and managing compliance for a large multi billion firm.

And, at that time I also met my two co founders for DxM in that private equity firm. And, it felt like the right time and, you know, the stars had aligned for Daxian to be created.

So we thought it was the right time to create a sort of boutique and unique, compliance firm, here in Luxembourg.

Yeah. It echoes a bit our story as well. You see the problem in a different environment.

You think you can do something. The right people get together, and you start a company. That’s, like, the story of so many.

Exactly.

Our company, KYC, started in Asia. And most of our tier one clients at least are still from Hong Kong and Singapore. But we’re also very active in Europe and noticed early on that we got a lot of interest from Luxembourg, more than you’d think considering the size of the country. What’s your take on the compliance space in Luxembourg and beyond, particularly in the financial markets?

Absolutely. Lots is, happening at Luxembourg. I think the country’s motto is let’s make it happen, and that is certainly what they’re trying to achieve. And it’s true in the compliance space as well. Luxembourg has been booming for, the last twenty, twenty five years. They’ve had uninterrupted growth at a very fast pace.

Nowadays, things are a bit more complicated because of the global geopolitical situation that every country is concerned by this. So with that enormous growth that’s mainly come from financial markets and the expansion of this financial sector, Compliance needs have just exploded in Luxembourg. And as the compliance professional, it is a very attractive place because it’s very easy to work. There’s a lot of work in in compliance, a lot of needs in terms of compliance.

Mainly, what I would say is Luxembourg in terms of compliance is becoming the common sense, person in the EU at an EU level. The the government is really pushing very hard to have, of course, regulation, of course, you know, preventing AML and reducing risk. But at the same time, they recognise that we cannot be in contradiction with business expanding and that compliance shouldn’t be a hindrance to business. It should be there to protect businesses.

And I think it’s a very unique voice in the EU at the moment where we see a much heavier regulation imposed, and, Luxembourg is sort of trying to find the right balance, which is quite interesting.

That is indeed very interesting. It feels a bit like Luxembourg is playing this role inside the EU that other places, like, let’s say, Dubai or Singapore play on a global scale as well, where they are still places where people from very different backgrounds can do business together and connect. And I think that is super important in this world that seems ever more fractured.

If Luxembourg can do that inside the EU, that would be an amazing feat, really.

It it would be.

And I think they are, to a large extent, already managing to do this. Almost half of the population that lives in Luxembourg isn’t Luxembourgish. It’s, people from all around the world, mainly Europe, but we’re seeing a growing population, from China, for example, a growing population from India and South America as well. So, even emerging economies have the, a place in Luxembourg, and, that’s very exciting.

Indeed. Yeah. Well, it’s those small open economies in Europe that, really push things forward. There’s always this little tension in Europe between the big established economies of France and Germany, and then the small, nimble ones, that that, yeah, have models that deviate from the standard European one, but for push things forward. I think this is really, really exciting. I’m glad to hear that. Yeah.

You mentioned that the government and regulator are really forward looking. How did you go about developing relationships and collaborating with your regulators there? What’s that process?

Absolutely.

It’s very different to any other country because, you know, it’s not uncommon for us to bump into the prime minister or a very senior minister of the government just having a coffee, you know, at, at their local cafe because it’s it’s a small city. It’s a small country, so everyone knows each other. So it’s very easy to get the right contacts in Luxembourg. And on my part, it was partly due to my previous roles where we had a necessity to build strong relationships with regulators and governments in the EU. So not only Luxembourg and outside the EU as well, in the US, and the UK. So the great thing about Luxembourg is because there’s this ease of contacting and meeting these people, they also allow you to open the doors of other countries because they have diplomatic relations, they have partnerships with other countries. So we can very easily start of growing a network of contacts, among regulators.

And the main thing to to build on those relation is trust. It’s, building a rapport with these people all across different countries and being honest about what you’re trying to achieve for your company and being honest in in what you’re telling them and basically making them comfortable with who you are and having no secrets. It’s the main reason why we’ve been successful at building this network of contacts across multiple jurisdictions. So it’s honesty, being transparent.

You make it sound easy.

It’s not. It’s, it’s something that is built over a number of years. It takes time as there are setbacks. You know, we, for geopolitical reasons, there are countries that just don’t want to talk to us and, where it’s much harder for other countries where compliance is not really something they they do. So or where it’s very new to them, so they’re still not sure how to approach certain subjects.

So it can be very delicate if, you know, one of the many hats you have to put on as an entrepreneur. I’m sure you know. It’s I do. Also being a bit of a diplomat sometimes.

I have to say, though, that our success with regulators has been mixed, and we have had better progress in Asia, actually.

The regulators of Hong Kong and Singapore are really engaging with technology companies where a lot of European you’re in different area of it, so you’re not seen as a technology company, Sarge.

But in Europe, we struggled with connecting to with the regulators, in in a meaningful way.

The the answer is always close. You’re not regulated. We regulated your users. So bring us one of the big banks, and then we talk, not the other way around.

That has been reversed to a degree in Asia where the Central Bank of, Hong Kong, the Hong Kong MA, and MAS, the Singaporean regulator, for example, are really forward looking and look towards technology as a means to increase regulations or get better regulating their authorised institutions as I call them. And we haven’t seen that so much. It’s a bit of a missed opportunity here in Europe for me, I’d say, in terms of working with tech, especially since rag tech is always very near. SupTech, supervisory technology, they could use it for their own ends.

We haven’t seen that a lot here. But I think it’s more, yeah, a question of time. At least in Europe, we have had incredible movement on making anti money laundering regulations more specific and broadening it and bringing it in different verticals and all that. You’ve you must have seen that.

Yeah. Oh, absolutely. And I would add to your point, saying, I think the Asian market is a lot more mature when it comes to the willingness of adopting new technologies, especially in compliance and finance in general. In Europe, we’re still a bit stuck in our old ways sometimes. You know, as part of my work for, like, four firms, I was sent to many companies as as late as twenty twenty. And and would you would be surprised by the amount of companies, multi billion companies who still, hundred percent manual processes when it comes to their their compliance here in in Europe. It’s it’s staggering that the fact that, they leveraged virtually no technology that is available.

So I think it’s also that the problems you’ve had with regulators reflect the market where we don’t, in Europe, still leverage anywhere near enough the available technology, and we’re still very suspicious of the technology. It’s like, oh, can AI or or can a automated tool do a better job than a person?

Well, yes, to a large extent. Obviously, you still need human input, but it can cut, you know, significantly times of completing a task. But we’re still very suspicious of that in Europe.

Yeah. I do remember that our first success with a large bank in Germany, for example, to say Kovaa, was when that bank was acquired by an American p fund. And the Americans came in and pushed the Germans and said, now set up some technology and start with onboarding and credit origination, those areas, and onboarding was our area. We got in with them because very early on, they were under pressure to automate, which they wouldn’t normally from their own have done. But difference in speeds and adoption. Yeah. I see that too.

I’m not surprised.

Yeah. Then you’ve your firm does something really interesting. I found it absolutely fascinating when I heard it from for the first time. You’re dealing in situations where compliance is difficult, and you share maybe a couple of interesting higher risk situations. And how do you deal with such situations?

Absolutely.

Well, listen. I like to solve complex puzzles and complex things. It makes life a bit more interesting than having an easy task. So yes.

We wouldn’t we wouldn’t have started our companies if we weren’t into solving difficult puzzles.

Exactly. So I think that that comes with the, entrepreneurial spirit is, this willingness to challenge yourself and and face difficulty as it’s, part of the job. So we are specialised in, what we call special situations, which are situations that are usually severe enough that banks or financial institutions in general will not really want to onboard you initially, not really look into you because they see you as much of a high risk. So we’ve had situations where it might just be a geographical risk with companies, from certain countries in the Middle East, or it might be a minority shareholding that is on a sanctions list.

It could be situations, a UBO with quite a lot of adverse media.

And, basically, we come in, and we are sort of the solution of last resort for a lot of these companies where they struggle to be onboarded by banks, struggle to keep open bank accounts.

And our role is to reengage usually because the the main problem is those companies usually have a dialogue that has broken down with their financial institutions.

So our role is really to rebuild that dialogue to start with as a starting point. Then the second phase is really demonstrating to that financial institution or regulator or whoever it may be that our client does not pose a severe risk to them, and they have no valid reason not to onboard.

That goes that the way we do it is we will start by looking internally at our clients. So we ask total transparency on the side of our client because we need to know where the problems lay and what we can do to remediate that or mitigate them. So it could be internal restructuring. It could be reviewing completely new policies. It could be implementing new requirements internally for that company. So we’ve done things like force every employee to sign attestations every month.

So every com employee in that company had to sign an attestation every month to, ensure that, and improve that there was no sanctions breach and things like that or communicating every transaction in advance to financial institutions so they would just be comfortable with any financial transactions going on in a company. So things like that. It’s simple.

That’s common sense steps in a way, but that are sometimes difficult to put in place. But also, and are admin heavy for the companies, but it’s you also are not in this situation if you are one of those companies where you can afford to do business as usual.

So by doing that restructuring, reviewing everything internally in terms of procedures, And then having had this new dialogue open with the financial institution, we can go to them with a large pack of information, documents, statements, and which demonstrate that there is a no risk, material risk to the bank.

And that usually is what works.

It’s not a hundred percent approach because, you know, there are also geopolitical situations that are out of our hands, but, more often than not, it’s it works, and we will get a positive outcome for our client.

It sounds like something I might need. Because if you Google my name now, all these money laundering articles come up. And money laundering is just like is mentioned in every second thing that I do online, and I wonder when I will be rejected for my next account. Currently, there hasn’t been a problem. But I have to say, even our limited structure where we have, for example, a a UK subsidiary that is owned by our Hong Kong main company and there’s couple Hong Kong shareholders and, there’s the Richard maybe cofounders, there’s investors.

Even that structure is slightly complex, and it doesn’t go in anywhere in really dodgy territory.

But even involving Hong Kong, which, like, such a rule based economy and and all that, that, caused severe delays here in Europe to get bank accounts for a subsidiary.

It’s the you could just hear it clicking into EDD.

This is no longer simple. This is now more extensive due diligence, and the whole process slowed to a crawl. Or maybe if this goes on more, we need your services too.

Do do tell them if you need anything up in that front. Absolutely.

Happy to work with you. When we talk about technology adoption, that’s another thing we had earlier. That usually comes with automation, increased efficiency, lower manual costs sounds all good.

Does cutting costs equate to cutting corners well?

Well, that is certainly the prevailing opinion, I see here in in Europe. There is a definite equation of if you spend less, it’s probably of the worst quality when it comes to the compliance and the technology space in complying.

Right.

That’s not necessarily true. And frankly, you know, compliance is still a, an industry in its teens. It’s not a, a mature industry.

The main regulations here in Luxembourg are twenty years old, really, since we’ve seen, like, major regulations in terms of it. So it’s still very young.

And what comes with that is we don’t really know how much compliance should cost.

And we’ve had twenty years really where we’ve seen a lot of consultancy companies charge whatever they felt like charging to clients to provide services, that, yes, it is a unique set of skills to be in compliance, but, frankly, they’ve been charging very hefty fees, for something that can be done nowadays with technology for a lot less.

However, cutting cost doesn’t mean losing quality. I think the technology is enables us to have much higher quality and, crucially, consistency. And that is something that is very much appreciated by regulators is to see, you know, the same format, the same document for every client.

And so this consistency is best achieved through the leveraging of technology.

And I think there is also a fear within the industry automation means no more jobs. I mean, no. If you look at Luxembourg, you can go on LinkedIn or wherever, and you’ll see the sheer number of jobs that are available. It’s it’s massive, and they won’t just disappear because we’ve leveraged technology.

The role will change, maybe greater efficiency will be requested of compliance officers. So where, you know, you’d have targets of maybe two or three cases a day. Thanks to the use of technology, you might need be at ten cases a day, but that’s good for everyone because it means lower cost per case, which means that banks and financial institutions can continue serving their customers to reduce costs. What we’ve seen, and it’s been quite a rock, the Luxembourg financial market the, ING here in Luxembourg had to, off board a significant amount of customers in the last couple of weeks. And the main reason for that was the cost of compliance doesn’t justify the account being open. So if you do not leverage the technology, if you do not leverage all the tools you have out there, you end up in a situation where it doesn’t make sense to continue operating a business, and that’s bad for everyone.

Yeah. Absolutely agree there. We see that so often with the companies we work with. There is never a reduction in staff, and it is an absolute pleasure to see compliance staff redirecting their efforts from being just document chasers to their actual function.

I mean, later you learn at accounts for whole science of anti money laundering and to the higher levels.

And if you didn’t have time for it, you would be stuck in just, oh, let me get another document here, and let me get another document there. We see that very often that the function of the compliance team is operating a much higher level after the introduction of technology than before because they literally have more time for that.

So yeah.

I fully agree. This notion of compliance officers becoming document chasers is one hundred percent active. I’ve just done projects for big companies where literally our only role was to send reminders to clients or relationship managers to provide us with documents, and that’s what we did for a year. Those were companies with virtually no technology being leveraged in the compliance space.

So I can say having done it for a number of years, it’s not the most interesting part of the job, to put it politely.

Yeah. I guess. Yeah.

So if we’re talking about the, advanced technologies, like data analytics, AI, and other new technologies, what role do they play in Daxian’s compliance risk management services? Are you using those?

Absolutely. Yeah. So we are Luxembourg based, but we are a global company at heart. We aim to service our clients all across the globe, wherever you are, But well, no, a certain level of risk because, not everyone works in an environment like Luxembourg or Hong Kong, where there’s a rule of law and there’s very clearly defined rules.

So we use your platform. We use other technology to ensure that we know everything there is to know about the people we deal with.

And, basically, we see technology as this is the tool that will allow a compliance officer to make an informed decision.

The decision always will lie with a human. I don’t believe that one day we will have a full automation where KYC will be one hundred percent done automatically. I don’t think that’s a good thing either necessarily, but you can cut out ninety nine percent of the work and do that through technology.

And, really, the role of technology is to give and highlight the relevant information to the compliance officer. So you see a file, and within a few seconds, you can already determine basically the level of risk that it poses. Do you need to escalate? Do you need to file it? Do you need more information?

And that is really where technology is. It is just a huge added value for us and as compliance people is it saves us a huge amount of time. I remember when I started quite a while back now, we had to go on Google and manually search everything.

And, you know, we had to go through, I think it was, our standard was the first fifty results that we had to review manually.

So, you know, the sheer amount of time that it would take is just incredible.

Nowadays, thanks to new technology and AI, you can have that done in seconds.

So the time saved is huge.

And for us at Action, as you mentioned earlier, it allows us to focus on what we do, our real role, which is make decisions, assess risk, and protect our clients.

That’s our main role. So we can do that fully. We don’t need to be chasing information. We don’t need to be running around the Internet and registers for days on end to find that little piece of information or that tiny piece of adverse media that, you know, we could easily miss because of the sheer amount of manual work. No. It’s immediately highlighted to us within a matter of seconds.

Hey. There’s an article from a few years ago saying this bad thing, what should we do about it? And that’s where we can come in.

Very good. I absolutely agree. We built our own platform also on the belief that the compliance decision is with humans in the end, but we push automation all the way the most we can do up to that point. Have you tried asking ChatGPT, is it okay to onboard this person or this company?

I have actually. Yes. Not really a hundred percent return on that for those questions.

Usually ChatGPT will it’s very interesting because it will give you information. It will, won’t give you a decision. It won’t say, oh yes, of course it can onboard. It will say, well, this is what I could find on this company, which is a good first step.

But It also has hallucinations.

Like, you can try I did try, like, really wild things, like, get me the shareholders and directors of know your customer limited.

And it did start right because it took like, there’s so much public about the company. It took, my name as CEO and put it in there as a as one of founders, which is correct in this case, but just by chance.

And then it just deviated wildly hallucinating. It sounded all quite when he read it, it was believable.

Because these names all sounded like they came from the banking world, and they weren’t just random names. They were names seem to fit.

That is, like, the the true problem.

But you can, of course, use AI in in very specific circumstances, like, to extract a specific point of data from a specific document that you feed in. And there, they can be incredibly efficient, and that’s where we use. There’s an increased usage of over the years for all sorts of technologies in our platform.

And, the possibilities with OpenAI’s new platform, LLMs, to understand and extract meaning from relatively unstructured documents, like, not like the forms in the company registry, but, for example, the constitutions of companies where you can find specific provisions that limit the decision power of a board, for example, with this technology is absolutely amazing, and and that’s where where we use it. Yeah. One more question for you that, we do ask every guest here on the podcast, and that is if you were to switch roles tomorrow and become the global regulator, what would you do?

Well, that’s, that would be a lot of fun. I think it’s something that I would do something that really I find is crucial in terms of future of the compliance industry globally is, and that is to reconcile really the business development side with the compliance side, especially in Europe and Western countries, we’ve regulations have been built in a certain way that it built a wall between the two where, you know, communication is very difficult.

I’ve been in many companies and the view everywhere is from relationship managers is compliance is only here to stop us doing business.

And on the compliance side, the view for a business relationship managers was, oh, they’re just out there to destroy the company.

So the problem is the regulations are built that way where there is sort of this separation total separation between the business side and the compliance side, whereas it should be working together.

In my view, it should be, a situation where we have the same interests at heart. We need the company to succeed, but we also need to make sure we’re not breaking any laws or putting the company at risk of any reputational risk or sanctions risk or whatever risk.

So I think my main job, if I was the global regulator, would be to break down that wall at least partially so that the interests of business developers and compliance sort of align again and communication is reinstalled, internally in companies, but also externally.

Too often, compliance departments are sheltered from their customers, from their business development managers, and that’s not a good thing, I think, in the long term. We need everyone to talk to each other. And I think if everyone has open dialogue about what they need and what they require of each other, you could see quite a big boom in business.

I absolutely agree. It’s a very interesting take and very good take. I absolutely agree there. What we see is the best compliance heads are those that have that attitude already, that have the attitude.

Here’s a puzzle. I do need to be completely compliant, and that’s my goal here. But I also want to enable business how I can get these two together. And if you come with a mindset, there’s there’s very different outcomes.

Yeah. I’d I’d love if Regulator would support them more. I suspect they would have been kind of comfortable in this world where these are two completely separate things, and they don’t need to deal with the business side so much. But that’s obviously an illusion because the companies they regulate will have to do business or they’re gone.

So they’re they built in this tension. They just get rid of that tension from in their viewpoint to in the company. Yeah? Super interesting.

Thank you so much. It has been a really interesting chat here. Thanks for taking part in RegTalks.

No problem. Thank you for having me, Claus.

Thank you for listening to this episode of RegTalks. My name is Claus Christensen, and I’m the CEO and Co-Founder of award winning RegTech provider, Know Your Customer.

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