Application of know your customer process within regulatory regimes, risk management, enhanced due diligence, links to PEPs, and regulatory reporting.
Verification of counterparties can have several meanings. In this article, this term is used in the sense of customer identification. AML – anti-money laundering, laundering of funds obtained through criminal means; CTF – counter terrorist financing, combating the financing of terrorism; PF – proliferation financing, combating the financing, storage, transportation, production of weapons of mass destruction.
The purpose of customer due diligence is to take steps to understand your customers and verify that they are who they say they are.
Practical approach
In practice, this means obtaining from the customer:
- name
- a photo on an official document that confirms their identity
- residential address and date of birth
The best way to identify someone is to ask for a government-issued ID, passport, as well as utility bills, bank statements, and other official documents. Other sources of customer information include the electoral roll and information held by credit reference agencies such as Experian and Equifax. You may also need to identify the ‘beneficial owner’ in certain situations. This may be because someone else is acting on behalf of the person in a particular transaction, or it may be because you need to establish the ownership structure of a company, partnership, or corporation. Typically, the beneficial owner is the person behind the customer who owns or controls the customer, or is the person on whose behalf the transaction or activity is being conducted. If you have any doubts about the identity of a customer, you should stop doing business with them until you are sure.
When to apply customer due diligence measures
Counterparty verification must be applied:
- when you establish a business relationship with a client (or other party in a real estate sale)
- when you suspect money laundering or terrorist financing
- when you have doubts about the customer identification information you have previously received
- when necessary for existing customers – for example, if their circumstances change
- unless you are a high value dealer, when you make a transaction worth €15,000 or more
- as a high value dealer when you:
- make a payment to a supplier worth €10,000 or more
- make a random transaction worth €10,000 or more
When establishing new business relationships, you need to obtain information about:
- purpose of the relationship
- the intended nature of the relationship – for example, where the funds come from, the purpose of the transactions, etc.
You also need to conduct due diligence when your business engages in occasional transactions. These are transactions that are not part of an ongoing business relationship, where the value:
- €15,000 or more unless you are a high value dealer (or equivalent in other currencies)
- €10,000 or more if you are a high value dealer (or equivalent in other currencies)
This applies whether it is a single transaction or related transactions.
Connected transactions are individual transactions of less than €15,000 (or €10,000 for high value dealers) that have been intentionally broken down into separate, smaller transactions to avoid customer verification. Businesses should have systems in place to identify potentially connected transactions.
In order to establish the possibility of money laundering or terrorist financing, it is necessary to decide whether it was intentionally segregated. Some issues to consider when:
- the same client made a number of payments in a short period of time
- it is possible that a number of clients were carrying out transactions on behalf of the same person
- a number of clients sent money transfers to one person
You also need to carry out customer due diligence measures on occasional transactions that are worth less than €15,000 in certain circumstances. For example, you should do this when the nature of the transaction means there is a higher risk of money laundering.
When to conduct enhanced due diligence
In some situations, it is necessary to conduct ‘enhanced due diligence’ for AML/CTF purposes. These situations are:
- when the customer is not physically present during the identification checks
- when you enter into a business relationship with a ‘PEP’ – typically a non-UK member of parliament or head of state or government, or a government minister and their family members and known close associates
- when you enter into a transaction with a person from a high-risk third country as identified by the EU
- any other situation where there is a higher risk of money laundering
In the event that clients are not physically present, it is necessary to:
- obtaining additional information to identify the customer
- applying additional measures to verify documents provided by a credit or financial institution
- ensuring that the first payment is made from an account that was opened with a credit institution in the client’s name
- find out where the funds come from and what the purpose of the deal is
Enhanced checks when you deal with PEP:
- ensure that only senior management gives approval for new business relationships
- taking adequate measures to establish the source of a person’s wealth and funds associated with business relationships
- conducting more stringent ongoing monitoring of business relationships
Counteraction to the financing, production, storage, and transportation of weapons of mass destruction and certain amendments to AML legislation.
Earlier this year, the Anti-Money Laundering and Counter-Terrorism Financing (Amendment) Regulations (No.2) (MLR 2022), which make a number of amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Payer Information) Regulations 2017 (MLR 2017).
The MLR 2017 was amended by the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (MLR 2019), which brought the UK regime into line with the Fifth Anti-Money Laundering Directive (EU) 2018/843.
This is a brief overview of the key changes envisaged by the MLR 2022, which, together with other recent legislative changes such as the new Economic Crime (Transparency and Enforcement) Act 2022 and the Economic Crime and Corporate Transparency Bill, demonstrate the political will of Her Majesty’s Government to make the UK an unattractive environment for economic crime.
EXPANDING RISKS COVERAGE TO INCLUDE PROLIFERATION FINANCING OF WEAPONS OF MASS DESTRUCTION
MLR 2022 adds proliferation financing of weapons of mass destruction to the list of financial crime risks covered by MLR 2017, alongside money laundering and terrorist financing.
It places new obligations on the Treasury and relevant entities to include proliferation financing in existing money laundering and terrorist financing risk assessment processes, identifying and assessing any additional, specific risks that arise.
The requirements to establish and maintain policies, controls and procedures to effectively mitigate and manage risks have also been expanded to require relevant persons to ensure their compliance with proliferation financing risks.
CHANGES TO CERTAIN CATEGORIES OF RELEVANT PERSONS
MLR 2022 amends the list of eligible persons subject to MLR 2017:
Require crypto-asset exchange service providers and custodial wallet providers to apply customer due diligence measures to a transfer of crypto-assets equal to or exceeding the equivalent in crypto-assets of €1,000 (together with any other transfer of crypto-assets that appears to be related to it).
Expanding the definition of “trust or company service providers” (TCSPs) to clearly include TCSPs that provide services related to the formation of all forms of business organisations, not just companies and legal entities.4 As a result, TCSPs will now be subject to the MLR 2017 when they form limited liability companies registered in England and Wales or Northern Ireland for clients.
Clarification of the definition of “art market participants” added by MLR 2019 to exclude artists who sell their own works of art for more than €10,000, including cases where the artist sells his works as an individual, as well as when he sells them through a company or partnership in which he is a shareholder or partner.
Excluding account information service providers (AISPs) from the scope on the basis that, in the government’s view, as purely information tools that allow customers to view their data and link that information to other services, AISPs pose a low risk of money laundering, terrorist financing, and proliferation financing.6
“TRAVEL RULE” FOR ELECTRONIC/BANKING TRANSFERS INVOLVING CRYPTOASSETS
The MLR 2022 extends the scope of the existing regime for the exchange of information on bank transfers (contained in the EU Funds Transfer Regulation) to include transfers involving crypto-assets. The regime is designed to enable financial institutions to detect potential cases of money laundering or terrorist financing by ensuring that the identities of the parties to a transaction are known and that appropriate records are kept. The requirements will apply to both domestic and cross-border wire transfers. The changes came into effect on September 1, 2023.
About the Author
Oleksandr Shchybun is a certified AML specialist (CAMS, USA) and a certified financial crime investigator (Utica University, USA). He is specialising in money remittance and card issuing businesses. O. Shchybun has spent more than 15 years working as a compliance officer at a number of financial institutions including conglomerates such as American Express, MoneyGram, and financial startups, e.g. Remittance360 Ltd. He is based in London, United Kingdom.
