Customer Due Diligence/ Know Your Customer

Customer Due Diligence/Know Your Customer

Building Financial Market Integrity in Afghanistan: Anti-Money Laundering

AML Regulation and Compliance Requirements, April 17, 2006

Emiko TodorokiThe World Bank

Table of Contents

1. Concept of Customer Due Diligence (CDD)2. CDD and Financial Institutions3. CDD in FATF Recommendation4. Customer Acceptance Policy5. Customer Identification6. CDD and Tipping Off7. On-going Monitoring of Accounts and

Transactions8. Risk Management9. Recap

1. Concepts of CDD

CustomerIdentification

OngoingMonitoring

Know YourCustomer

(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:– 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. Collecting the identification informationii. Screening the customeriii. 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. Obtaining additional informationv. 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)


Screening customers new customer applications existing customer base against lists of known or suspected money

launderers/terrorists


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:

– 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)


Reconfirming the Identification Confirming the date of birth from an official document (birth

certificate, passport, identity card, social security records) Confirming the permanent address

– Utility bill, tax assessment, bank statement, a letter from a public authority

Contacting the customer by telephone or by letter to confirm the information supplied after an account has been opened

– 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

– 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)


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

– Is the legal person/arrangement regulated?

– Is the legal person/arrangement required to observe AML/CFT controls?

– Verification of the type of legal form and business purposes



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.


Business Elements of the Customer Identification1. Annual audited accounts, copies of business plan.2. Location of the headquarter, branches, plants, warehouses,

overseas offices.3. Major customers/suppliers.4. Other financial institutions the legal person/arrangement has

business relationships.5. 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.


Company C

Company A

Company B

Company D Mr. WMr. V

Ms. UMr. T

Mr. X Mr. Y Ms. Z

Company E

Company F

Mr. S

Ownership/Identification

Company A requested a new account. Which entities should be identified?

Bearer Shares?

5. Customer Identification (Specific Identification Issues)

A. Private Banking Customers What is private banking? The additional customer due diligence is required

– Current address and telephone number– Business information– Reasonable estimation of net worth– Document the substance of discussions that take place

?


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

?


C. Politically Exposed Persons Who are politically exposed persons? Why are they risky? FATR Rec 8:

a) To have appropriate risk management systems to determine the customer is a PEPs

b) To obtain senior management approval for establishing business relationship with such customers

c) To take reasonable measures to establish the source of wealth and source of funds

d) To conduct enhanced ongoing monitoring of the business relationship

?


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

?


E. Corresponding Banking What is corresponding banking? Why it is risky? Due diligence:

– 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-your-

customer 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

– 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

– Allocation of relevant responsibilities

– The channels for reporting suspicious transactions

– Internal procedures for assessing the compliance

– 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 [email protected]: +1-202-458-9466

Customer Due Diligence/ Know Your Customer

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