Customer Due Diligence/ Know Your Customer AML Regulation and Compliance Requirements,

Customer Due Diligence/
Know Your Customer
Building Financial Market Integrity in
Afghanistan: Anti-Money Laundering
AML Regulation and
Compliance Requirements,
April 17, 2006
Emiko Todoroki
The World Bank
Table of Contents
1.
2.
3.
4.
5.
6.
7.
8.
9.
Concept of Customer Due Diligence (CDD)
CDD and Financial Institutions
CDD in FATF Recommendation
Customer Acceptance Policy
Customer Identification
CDD and Tipping Off
On-going Monitoring of Accounts and
Transactions
Risk Management
Recap
1. Concepts of CDD
Customer
Identification
Ongoing
Monitoring
Know Your
Customer
(KYC)
Customer Due Diligence (CDD)
2. CDD and Financial Institutions
Why Customer Due Diligence?
–
–
–
–
Reputation risk
Operational risk
Legal risk
Concentration risk
3. CDD in FATF Recommendations
FATF Recommendation 5 (Customer due diligence)
1. No anonymous accounts or accounts in obviously
fictitious names.
2. Need for CDD measures, including identifying and
verifying the identity of their customers.
3. Application of CDD on a risk sensitive basis.
4. Application of CDD both to all new customers and
existing customers.
3. CDD in FATF Recommendations

How is CDD applied in other FATF
Recommendations?
–
FATF Recommendation 6 (politically exposed persons)
–
FATF Recommendation 7 (correspondent banking)
–
FATF Recommendation 8 (non-face-to-face customers)
–
FATF Recommendation 9 (intermediaries)
–
FATF Recommendation 10 (Record Keeping)
–
FATF Recommendation 11 (complex/large transactions)
–
FATF Recommendation 12 (DNFBPs)
4. Customer Acceptance Policy

“Banks should develop clear acceptance policies and
procedures, including a description of the types of customer
that are likely to pose a higher than average risk to a bank”.

In preparing such policy, following factors should be included:
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–
–
–
–
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Customers’ background
Country of origin
Pubic or high profile position
Linked accounts
Business activities
Other risk indicators
4. Customer Acceptance Policy
Graduate Customer Acceptance Policy


The most basic account opening requirements for an individual
with a small account balance
Extensive due diligence for an individual with a high net worth
whose source of funds is unclear
Note
 “It is important that the customer acceptance policy is not so
restrictive that it results in a denial of access by the general
public to banking services, especially for people who are
financially or socially disadvantaged.”
5. Customer Identification
(Key Issues for Supervisors)
National supervisors should develop:


customer identification program
guidelines and best practices reflecting the
various types of transactions that are most
prevalent in the national banking system.
5. Customer Identification
(Process of Customer Identification)
i.
ii.
iii.
Collecting the identification information
Screening the customer
Assessing the customer’s risk profile
(if general due diligence is believed to be enough)

Reconfirming the identification information
(if enhanced due diligence is believed to be required)
iv.
v.
Obtaining additional information
Reconfirming the identification information
5. Customer Identification
(Natural Persons)
Identification Information









Legal name and any other names used (such as maiden name)
Correct permanent address (the full address should be obtained: a
Post Office box number is not sufficient)
Telephone number, fax number, and e-mail address
Date and place of birth
Nationality
Occupation, public position held and/or name of employer
An official personal identification number or other unique identifier
contained in an unexpired official documents that bears a photograph
of the customer
Type of account and nature of the banking relationship
Signature
(source: General Guide to Account Opening and Customer Identification, BCBS)
5. Customer Identification
(Natural Persons)
Screening customers



new customer applications
existing customer base
against lists of known or suspected money
launderers/terrorists
5. Customer Identification
(Natural Persons)
Obtaining Additional Identification Documents

If the financial institution believes that enhanced due diligence
is required after the initial assessment of the customer’s risk
profile, it should obtain additional information, such as:
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–
–
–
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Evidence of an individual’s permanent address sought through a
credit reference agency search or through independent verification
by home visits
Personal reference (i.e. by an existing customer of the same
institution)
Prior bank reference and contact with the bank regarding the
customer
Source of wealth
Verification of employment, public position held (where
appropriate)
5. Customer Identification
(Natural Persons)
Reconfirming the Identification


Confirming the date of birth from an official document (birth
certificate, passport, identity card, social security records)
Confirming the permanent address
–

Contacting the customer by telephone or by letter to confirm the
information supplied after an account has been opened
–

Utility bill, tax assessment, bank statement, a letter from a public authority
A disconnected phone or returned mail should warrant further investigation
Confirming the validity of the official documentation provided
through certification by an authorized person
–
Embassy official, notary public
5. Customer Identification
(Legal Persons/Arrangements)
Legal Elements of the Customer Identification
1.
Verify that any person acting on behalf of the legal
person/arrangement is so authorized.
2.
Identify any person acting on behalf of the legal
persons/arrangements.
–
Verification of the identity of directors/signatories
–
Directors: A directors exercises control over the business and thus
over funds passing through the account
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Signatories: A signatory to an account is able to exercise control or
authority over funds passing through the account
5. Customer Identification
(Legal Persons or Arrangements)
Legal Elements of the Customer Identification
3.
Identify the legal person/arrangement
–
Verification of the lawful existence of the company
–
Verification of the license if it is required in operating such
business
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Is the legal person/arrangement regulated?
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Is the legal person/arrangement required to observe AML/CFT
controls?
Verification of the type of legal form and business purposes
5. Customer Identification
(Legal Persons/Arrangements)
Legal Elements of the Customer Identification
4. Identify the beneficial owners
–

Verification of the identity of major share holders/beneficial
owners
–
Share holder/beneficial owners: Any person who owns a
significant proportion of shares in the business (say more
than 20 percent) is able to exercise control in other way
–
Note: bearer shares, corporate vehicles
It is important to obtain sufficient documentation to prove or
establish that the legitimacy of legal person/arrangement.
5. Customer Identification
(Legal Persons/Arrangements)
Business Elements of the Customer Identification
1.
2.
3.
4.
5.

Annual audited accounts, copies of business plan.
Location of the headquarter, branches, plants, warehouses,
overseas offices.
Major customers/suppliers.
Other financial institutions the legal person/arrangement has
business relationships.
Likely level of account activity and format (cash, checks,
wires)
It is important to obtain sufficient documentation to prove or establish
that the business exist.
5. Customer Identification
(Legal Persons/Arrangements)
Ownership/Identification
Mr. T
?
Company E
Mr. S
Company F
Ms. U
Company D
Mr. V
Company C
Company B
Company A
Mr. W
Mr. X
Bearer Shares
Mr. Y
Ms. Z
Company A requested a
new account. Which entities
should be identified?
5. Customer Identification
(Specific Identification Issues)
A. Private Banking Customers


?
What is private banking?
The additional customer due diligence is required
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–
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Current address and telephone number
Business information
Reasonable estimation of net worth
Document the substance of discussions that take place
5. Customer Identification
(Specific Identification Issues)
B. Intermediaries

?


Introduced business
Client accounts opened by professional
intermediaries
FATF Rec 9: allows intermediaries or other
third parties to perform some elements CDD
process, provided that the criteria set out are
met
5. Customer Identification
(Specific Identification Issues)
C. Politically Exposed Persons

Who are politically exposed persons?
Why are they risky?

FATR Rec 8:

?
a)
b)
c)
d)
To have appropriate risk management systems to determine the
customer is a PEPs
To obtain senior management approval for establishing business
relationship with such customers
To take reasonable measures to establish the source of wealth and
source of funds
To conduct enhanced ongoing monitoring of the business relationship
5. Customer Identification
(Specific Identification Issues)
D. Non-face-to-face customers
?




What are non-face-to-face customers?
Why are they risky?
FATF Rec 8
Basel Committee on Banking Supervision
5. Customer Identification
(Specific Identification Issues)
E. Corresponding Banking

What is corresponding banking?
Why it is risky?

Due diligence:

?
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The respondent bank’s management, control (ownership), reputation
Bank license
Major activities and services provided to clients
Location and organization
Detail of AML/CFT procedures and controls, including know-yourcustomer procedures
Details of any third-party entities that will use the correspondent
banking services (including other financial institutions)
Note: Shell banks
6. CDD and Tipping Off
FATF Rec 14 “tipping off” is prohibited.
But…
if financial institution reasonably believes that
performing the CDD process will tip off the customer
or potential customer, it may choose not to pursue
the CDD process and should file an STR to FIU.
7. Simplified or Reduced CDD
Measures

A country may allow its financial institutions to apply simplified
or reduced CDD measures when identifying and verifying the
identity of the customer and the beneficial owner (Interpretative
Note to FATF Recommendation 5).
–
Financial institutions
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Public companies that are subject to regulatory disclosure
requirements
–
Government administrations or enterprises
–
DNFBPs and pooled account held by them
7. On-going Monitoring of Accounts/
Transaction and Know Your Customer
1. Monitoring and Screening of Customers

Ongoing monitoring is an essential aspect of effective KYC procedures.
2. Intensified Monitoring for Higher Risk Accounts

Senior management knowledge on clients

policy and guidelines
3. Adopting Risk Based Approach

Geographical Factors

Customer Types

Product Type
–
8. Consolidated KYC Risk Management

The board of directors of banks should be fully committed to an
effective KYC program by establishing appropriate procedures
and ensuring their effectiveness
–
A clear bank’s KYC policy in accordance with local supervisory
practice
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Allocation of relevant responsibilities
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The channels for reporting suspicious transactions
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Internal procedures for assessing the compliance
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Ongoing employee-training program
9. Recap

What is customer due diligence?

What is ongoing monitoring?

What is know your customer?

What is customer acceptance policy?

What are the difference between natural person
and legal person in customer identification.

When do you need to perform enhanced due
diligence?
Thank you
Contact:
Emiko Todoroki
[email protected]
phone: +1-202-458-9466