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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.

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SPOTLIGHT: 4th Money Laundering Directive (4MLD)

Last year, the Financial Crimes Enforcement Network (FinCEN) published Anti-Money Laundering (AML) regulations for corporate entities such as banks to comply.  Of these Final Rules, these entities must comply with AML compliance with ongoing customer due diligence (“CDD”) that includes creating a customer risk profile and updating customer information somewhat continually (based on risk).

As Anti-Money Laundering (AML) and Know Your Customer (KYC) best practices and regulations continue to evolve on a global scale, one of specific focus is known as the Fourth Money Laundering Directive (4ML).  The European Union’s directive seeks to remove any ambiguities in previous legislation and improve enforcement consistencies.  At its core, the directive involves using a risk-based approach, combined with online mlmonitoring, beneficial ownership, Customer Due Diligence (CDD), Politically Exposed Persons (PEPs), and Third-Party Equivalence.

The directive has specific guidance where entities will be required to show that they have taken appropriate steps and considered various factors (e.g. customer, product, geography and channel) risks mitigating the threat of AML & CFT (counter terrorizing financing).   Further information is given about ongoing monitoring of customers with up-to-date records related to their risk assessment and continual due-diligence.

Focusing specifically on customer due diligence, further guidance has been given recently that impose requirements on “covered financial institutions” – which include banks, broker-dealers, mutual funds, and futures commission merchants and introducing brokers in commodities – to identify the beneficial owners who own or control certain legal entity customers at the time a new account is opened.  Here are the highlights regarding customer due diligence:

  • Customer Due Diligence for New Accounts – Applies when an account is opened by a new or existing “legal entity customer” – including a corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account.  This also requires identity verification.
  • Ongoing Due Diligence Requirements for Existing Accounts – requirement to identify and verify the beneficial owner(s) of certain legal entities that open new accounts, the Customer Due Diligence Rules formalized the requirement that covered financial institutions incorporate ongoing customer due diligence obligations in their AML compliance programs.  One specific procedure related to Identity Management is Conducting ongoing monitoring to identify and report suspicious transactions and to maintain and update customer information (which includes information regarding the beneficial owners of legal entity customers).

Worldview and 4MLD – Customer Due Diligence – 2×2

With the developments in the market, the Worldview platform has features to help comply with customer due diligence guidelines.  Because the recent updates include verifying the identities of individuals when the person is not present – like an online purchase or confirming an individual’s identity to sell on an online marketplace, it is best to use multi, high quality data sources to do that.  This 2×2 process includes verifying an identity from two distinct and quality data sources – to help with ongoing risk assessments and monitoring of individuals – not just domestically, but globally.

The Worldview Platform provides 2×2 verification in two unique ways.  The first is our waterfall approach which is a step approach to utilizing data sources that allows for the best result to be returned based on match/no match criteria at each step of the waterfall.  The other is the shotgun approach which broadcasts calls to multiple data sources at once and returns a set of match results.  63

Both approaches allow Worldview customers to access KYC data from best of breed, in-country sources through one single API.  In real-time, and ongoing fashion, customers can constantly monitor the individual constituents of their risk profiling efforts with the expansion messages and codes that Worldview has always provided.

Worldview currently offers 2×2 verification for the following set of countries:  AU, NZ, FR, ES, UK, DE, IT, CH, PL, AT, NL, SE, FI, NO, DK, BR and MX.