To identify whether you are facilitating money laundering and terrorist financing (ML/TF), it is imperative that you know with whom you are dealing.
Customer due diligence refers to knowing your clients and understanding their business. Properly implemented, customer due diligence measures enable you to better manage your client relationships. They also enable you to better identify possible attempts by clients to exploit an institution’s products and services for illicit purposes.
For this reason, customer due diligence should be a key component of your Risk Management and Compliance Programme (RMCP). Your RMCP should describe your customer due diligence measures and how these are intensified, based on your exposure to ML/TF risks. Factors to consider include product risk, customer risk, geographical risk and the risks inherent in product and service delivery.
The findings from your risk assessment should help you decide on the appropriate level and type of due diligence for each client. The greater the risk, the more intense your due diligence process should be. You may also determine to which prospective clients your customer due diligence measures apply.
Previously, the Money Laundering and Terrorist Financing Control (MLTFC) regulations required FSPs to establish and verify the identity of a client. By introducing the obligation to conduct customer due diligence, the principle of client identification and verification is now expanded significantly. The regulations and exemptions relating to client identification and verification have been amended to align with the Financial Intelligence Centre (FIC) Amendment Act.
This gives you greater discretion to determine the appropriate compliance steps to be taken in given instances. You also have the flexibility to choose the type of information you will use to establish and the means to verify clients’ identities, instead of following the rigid steps in the MLTFC regulations.
What the FIC Amendment Act requires
Section 21A of the FIC Amendment Act states that you must, “when establishing a business relationship or entering into a single transaction, establish and verify the identity of the client and, if applicable, the person representing the client as well as any other person on whose behalf the client is acting.” After applying your processes to establish and verify a client’s identity, you should know the client with sufficient certainty, given your risk assessment pertaining to that client engagement.
Currently, FICA controls include verifying customers’ identity and residence through intermediaries, keeping paper trails of all transactions, and reporting all suspicious and unusual transactions and cash transactions of R25 000 or more. While these obligations remain, the FIC Amendment Act introduces customer verification that involves identifying and verifying customer identity, defining ultimate rights in the case of legal entities, understanding the purpose and nature of the business relationship, and carrying out continued customer caution.
Section 21B of the Act requires that you establish the nature of a client’s business and the client’s ownership and control structure, if the client is a legal person or a natural person acting on behalf of a partnership, trust or similar arrangement between natural persons.
Section 21C requires that you conduct ongoing due diligence in respect of a business relationship. This includes monitoring transactions undertaken throughout the course of the relationship, including the source of funds, to ensure the transactions are consistent with your knowledge of the client and the client’s business and risk profile.
Section 21D provides for measures to take when in doubt about the truthfulness or adequacy of previously obtained customer due diligence information or where a suspicion of ML/TF arises at a later stage.
Any FSP is a possible target of money laundering, so be sure to conduct a proper due diligence when business is concluded with a client. By following the client take-on process and doing a customer due diligence you can avoid increasing your exposure to possible ML/TF risks.