CUS CUSTOME OMER R DUE DUE DILIGENCE DILIGENCE THE THE WHY - - PowerPoint PPT Presentation

CUS CUSTOME OMER R DUE DUE DILIGENCE DILIGENCE – THE THE WHY WHY , , THE THE WHO WHO AND AND THE THE WHA WHAT

What is Due Diligence? It means to exercise the necessary care to properly understand any situation that you may encounter – as such it is not limited to relationship with customers Since time immemorial it has been necessary to identify who you are dealing with:

• In times of war you need to know if the other person is on your side or the opposition and things like

language, uniforms, etc can be used to distinguish

• Political systems – are you allowed to vote and who do you support

In our personal lives we perform due diligence on everything from prospective employers to potential dates, where we want to go on holiday, or simply where to eat (think of restaurant reviews). Engaging in new business relationships is risky, because of the ultimate question that has to be addressed: „Is this person

• r company really who they say they are?‟

Customer due diligence is a specific type of due diligence – focused at customers or people taking up the services you provide –Customer due diligence (CDD) information comprises the facts about a customer that should enable an

• rganisation to assess the extent to which the customer exposes it to a range of risks.

Various pieces of legislation and regulation require various forms and levels of due diligence:

• Legal capacity (and criminal liability) – this only attaches at a certain age and this must be confirmed
• Travel – tourism and immigration requires ID of persons and location/jurisdiction
• Liquor & Tobacco – you are only allowed to sell alcohol and tobacco products to persons above a certain age –

hence you need to verify age, mostly through an official identity document

• Credit facilities – institutions are required to determine identity and address (from whom and where must it

collect the repayments), age (can you legally contract?), income (can you afford it)

AML/CFT customer due diligence is a very specific type of CDD that specifically addresses the issues of money laundering and terrorist financing risks. Organisations need to „know their customers‟ for a number of reasons:

• to help the firm, at the time the due diligence is carried out, to be reasonably certain that the customers are who they

say they are, and that it is appropriate

• to provide them with the products or services requested
• to guard against fraud, including impersonation and identity fraud
• to help the organisation to identify, during the course of a continuing relationship, what is unusual and to enable the

unusual to be examined;

• if unusual events do not have a commercial or otherwise straightforward rationale they may involve money

laundering, fraud, or handling criminal or terrorist property

• to enable the organisation to assist law enforcement, by providing available
• information on customers being investigated following the making of a suspicion report to the FIU.

• The Basel Committee on Banking Supervision was established in 1974 by the

central bank governors of the Group of Ten countries.

• It formulates broad supervisory standards and guidelines and recommends

statements of best practice, in the expectation that individual authorities will take steps to implement them through detailed

• The Basel Committee produced the first set of international principles for

combating money laundering in 1988, when the Committee issued its “Statement on the Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering.”

• The statement sets out the basic principles of customer identification, which

precludes assistance to criminals and encourages cooperation with law enforcement officers.

In the US context:

• Bank Secrecy Act (1970)
• Established requirements for recordkeeping and reporting by private individuals, banks

and other financial institutions

• Designed to help identify the source, volume, and movement of currency and other

monetary instruments transported or transmitted into or out of the United States or deposited in financial institutions

• Required banks to (1) report cash transactions over $10,000 using the Currency

Transaction Report; (2) properly identify persons conducting transactions; and (3) maintain a paper trail by keeping appropriate records of financial transactions

• Money Laundering Control Act (1986)
• Established money laundering as a federal crime
• Prohibited structuring transactions to evade CTR filings
• Introduced civil and criminal forfeiture for BSA violations
• Directed banks to establish and maintain procedures to ensure and monitor compliance

with the reporting and recordkeeping requirements of the BSA

• Anti-Drug Abuse Act of 1988
• Expanded the definition of financial institution to include businesses such as car dealers

and real estate closing personnel and required them to file reports on large currency transactions

• Required the verification of identity of purchasers of monetary instruments over $3,000

In the European Context: The EU was the first regional organization to adopt a comprehensive AML/CTF regulatory framework.

• European Union‟s Anti Money Laundering

Strategy First Anti-Money Laundering Directive (1991)

• The Directive was committed to protect financial

institutions with an aim to prevent the use of financial systems for the purpose of money laundering and to assure the correct functioning

• f financial and economic transactions.
• since then the Directive has been amended,

expanded and updated a number of times, currently the 5th EU MLD

• FATF 40 Recpommendations 1990 - https://www.fatf-

gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%201990.p df

• Customer Identification and Record-keeping Rules
• 12. Financial institutions should not keep anonymous accounts or accounts in obviously fictitious

names: they should be required …. to identify, on the basis of an official or other reliable identifying document, and record the identity of their clients, either occasional or usual, when establishing business relations or conducting transactions.

• 13. Financial institutions should take reasonable measures to obtain information about the true

identity of the persons on whose behalf an account is opened or a transaction conducted ……., in particular, in the case of domiciliary companies.

• 14. Financial institutions should maintain, for at least five years, all necessary records on

transactions, both domestic or international, to enable them to comply swiftly with information requests from the competent authorities.

• Financial institutions should keep records on customer identification (e.g. copies or records of
• fficial identification documents like passports, identity cards, driving licenses or similar

documents), account files and business correspondence for at least five years after the account is closed.

• In 2012, the Recommendations were revised again. The most important changes in this revision were:
• Creating a Recommendation on assessing risks and applying a risk based approach
• Creating a Recommendation for targeted financial sanctions related to proliferation of weapons of mass

destruction

• Focusing more attention on domestic PEPs and those entrusted with a prominent function by an international
• rganization

Important focus areas of the 40 Recommendations that have significantly affected AML/CFT due diligence from the previous era:

• Risk-Based Approach: Countries should start by identifying, assessing and understanding the money

laundering and terrorist financing risks they face. Then they should take appropriate measures to mitigate the identified risks. The risk-based approach allows countries to target their limited resources in a targeted manner to their own particular circumstances, thereby increasing the efficiency of the preventative measures. Financial institutions should also use the risk-based approach to identify and mitigate the risks they face.

• Knowledge and Criminal Liability: The Recommendations include the concept that knowledge required for

the offense of money laundering may be inferred from objective factual circumstances. This is similar to what is known, in some countries, as “willful blindness,” or deliberate avoidance of knowledge of the facts. In addition, the Recommendations urge that criminal liability and, where that is not possible, civil or administrative liability, should apply to legal persons as well.

Financial institutions must, using the risk-based approach:

• Identify the customer and verify that customer‟s identity using reliable, independent source

documents, data or information. Establishing accounts in anonymous or obviously fictitious names should be prohibited.

• Identify the beneficial owner and take reasonable measures to verify the identity of the

beneficial owner such that the financial institution is satisfied that it knows who the beneficial

• wner is. For legal persons and arrangements, this should include understanding the ownership

and control structure of the customer.

• Understand and, as appropriate, obtain information on the purpose and intended nature of

the business relationship.

• Conduct ongoing due diligence on the business relationship and scrutinize transactions

undertaken in the course of that relationship to ensure that the transactions are consistent with the institution‟s knowledge of the customer, the customer‟s business and risk profile, including, where necessary, the source of funds.

• FATF has brought significant changes in the customary ways that banks and businesses around the

world conduct their affairs. It also has provoked changes in laws and in governmental operations.

• According to FATF, crimes such as illegal arms sales, narcotics trafficking, smuggling and other

activities of organized crime can generate huge amounts of proceeds. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits, creating the incentive to “legitimize” the ill-gotten gains through money laundering.

• A key element of FATF‟s efforts is its detailed list of appropriate standards for countries to
• implement. The FATF‟s Recommendations have become the world‟s blueprint for effective national

and international AML and CTF related controls.

• The IMF and the World Bank have recognized the FATF Recommendations as the international

standard for combating money laundering and terrorist financing. In 2002, the IMF, the World Bank and FATF agreed to a common methodology to assess compliance with the FATF Recommendations

• GEORGETOWN JOURNAL OF INTERNATIONAL LAW “THE EVOLUTION OF THE EU LAW AGAINST CRIMINAL FINANCE: THE

“HARDENING” OF FATF STANDARDS WITHIN THE EU” Profesors LEONARDO BORLINI* AND FRANCESCO MONTANARO https://www.law.georgetown.edu/international-law-journal/wp-content/uploads/sites/21/2018/05/48-4-The-Evolution-of-the-EU- Law-Against-Criminal-Finance.pdf

• C. The “Hard” Impact of Global “Soft” Instruments
• The FATF Recommendations, first issued in February 1990, then revised in 1996, 2003, and 2012 represent the universal

standards shaping AML/CTF legislation around the globe, including the EU.

• The Recommendations take the form of a non-binding instrument. However, as the FATF has come to serve as the

international standard-setter in the AML/CTF field, its non-binding Recommendations have taken on a nearly binding character due to the large membership of the FATF and the sanctions mechanism that accompanies the Recommendations.

• Moreover, these quasi-binding standards often have been turned into binding provisions of international “hard”

instruments and of the aforementioned U.N. Security Council Resolutions. Hence, in the AML/CTF field, there is a deep and dynamic interaction between soft and hard law, both depending on and strengthening the other in a recurring relationship.

• FATF's three primary functions with regard to money laundering are:
• Monitoring members‟ progress in implementing anti-money laundering measures,
• Reviewing and reporting on laundering trends, techniques, and countermeasures, and
• Promoting the adoption and implementation of FATF anti-money laundering standards globally.