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Enhanced Customer Due Diligence and Beneficial Ownership

In the past, the team at GDC has written blog articles on customer due diligence (CDD) as the backbone of any Know Your Customer (KYC) compliance program to fight fraud such as money laundering. However, over the past several years, we have seen a trend of regulatory agencies putting increased pressure on financial institutions to improve their customer due diligence programs. These programs help minimize compliance violations and prevent financial crimes such as money laundering. These programs are applied to both consumers and corporate banking clients. For those customers that are deemed “high risk”, enhanced (or sometimes denoted as expanded) customer due diligence (eCDD) processes are applied.
 
More detailed enhanced customer due diligence is especially important for business accounts, trusts, and high-net-worth (HNW) accounts, and has become a focus for regulators, governments, and agencies to slow the funds for criminals, terrorists, and tax cheats looking to hide funds and assets to avoid detection and arrests. These programs, like regularly verifying customer identities, are also used to help firms improve their fraud detection and prevention efforts such as identity theft or financial fraud. This is an ever-growing problem as companies do more and more transactions through multiple digital channels.
 
One such aspect of this more detailed enhanced customer due diligence is determining “beneficial ownership” of the business entity. Beneficial ownership information identifies the individuals that directly or indirectly own or control a legal entity of the firm. It is defined as an individual who directly or indirectly owns 25% of more of a legal entity customer (defined as “ownership”) or individuals that have the responsibility to manage or direct a legal entity customer, such as a senior manager or executive officer (defined as “control”). Beneficial ownership analysis and monitoring is designed to discover and prosecute criminals, kleptocrats, and other bad actors that look to hide illegal proceeds in the financial system anonymously. The newer beneficial ownership rules and increased scrutiny are designed to help financial institutions and law enforcement gain access to more detailed information.
 
High profile media cases such as The Panama Papers have helped keep the focus on eCDD and beneficial ownership as they helped to provide a behind-the-scene view of the legal practices, transaction flows and (lack of) documentation used by large corporations and high-profile individuals to avoid regulatory compliance.
 
With the increasing regulations, Knowing Your Customer is only one part of Customer Due Diligence; Knowing Your Business (KYB) is just as important. As the volume of digital transactions increases, antiquated, manual processes just won’t keep up. Over the next few months, we will continue to explore the topic of enhanced Customer Due Diligence and what customers can do to keep up.

money laundering

4th Anti-Money Laundering Directive Prescribes Electronic Identity Verification for Customer Due Diligence

The 4th Anti-Money Laundering Directive (4MLD) came into force as an upgrade/replacement of the 3MLD (3rd Anti-Money Laundering Directive) on June 26th, 2017 with a clear goal of expanding the risk based approach established with 3MLD.  Further 4MLD expanded the requirements and general principles in the European Union which government the necessary checks required to meet money laundering and compliance guidelines.   

The overall focus for 4MLD is listed in the table below: 

Key 4MLD Focus areas of increased requirements:
Increased focus on risk based approach Required not just for Financial org. anymore
Focus on Tax Crimes Expanded Customer due diligence
Third country equivalence Politically Exposed Persons
Cross-border wire transfers Beneficial ownership

The 4th Anti-Money Laundering Directive (4MLD) came into force as an upgrade/replacement of the 3MLD (3rd Anti-Money Laundering Directive) on June 26th, 2017 with a clear goal of expanding the risk based approach established with 3MLD.  Further 4MLD expanded the requirements and general principles in the European Union which government the necessary checks required to meet money laundering and compliance guidelines.   

The overall focus for 4MLD is listed in the table below: 

(17)  Accurate identification and verification of data of natural and legal persons is essential for fighting money laundering or terrorist financing. Latest technical developments in the digitalisation of transactions and payments enable a secure remote or electronic identification.

It is this section that lays the ground work for eIDV’s requirement to meet CCD and 4MLD requirements.  Stay tuned to our next blog post where we break down the 2+2 rule set which meet the regulatory requirements for customer due diligence and discuss how your compliance team has unreasonable expectations for electronic Identity Verification.