KYC/CDD procedures

PREVENTING MONEY LAUNDERING AND TERRORIST FINANCING

Terence Donovan, consultant, OSCE

May/June 2011, Baku

3.1

Know your customer

• Customer acceptance policy – any constitutional

restrictions in Azerbaijan?

• Create the initial customer profile

– define what is ‘usual’ or ‘expected’ for the customer

– what information is available or should be

requested?

• Additional procedures for corporate / non-personal

customers

Know your customer –

Identify and Verify

• What documentation should a bank obtain for the customer due diligence process?

• What procedures should the bank adopt to verify the identity of the customer?

• Does the bank need to review the CDD process at a later stage? If so, when and how might it do so?

International guidance –

Basel Committee

• Customer acceptance policy

• Customer identification

• On-going monitoring of accounts

• Risk management

– Group-wide policies

– Group-wide application of procedures

– Group-wide information sharing

International standard –

FATF Recommendations

• Prohibition of anonymous accounts and accounts in fictitious names (R5)

• General CDD requirements (R5) • Enhanced CDD for politically-exposed persons

(R6) and cross-border correspondent banking (R7)

• Special attention to high-risk customers (R8, 21 and 22)

• Special attention to complex and unusual transactions (R11)

• Wire transfers (SRVII) see later presentation

International standard –

FATF Recommendations

• Prohibition of anonymous accounts and accounts in fictitious names (R5)

• General CDD requirements (R5) • Enhanced CDD for politically-exposed persons

(R6) and cross-border correspondent banking (R7)

• Special attention to high-risk customers (R8, 21 and 22)

• Special attention to complex and unusual transactions (R11)

• Wire transfers (SRVII) see later presentation

Risk management for banks

• Banks are in the forefront of AML/CFT fight – CDD

is key safeguard

• Risk management is fundamental issue

• Identify, limit and control risk exposures

• Reduce likelihood of abuse by criminal parties

• Help protect institutional and market integrity

The CDD chain

KYC / CDD

|

Record-Keeping

|

Monitoring of accounts

|

Reporting of suspicious transactions

Elements of CDD

• Key components of CDD:

– Customer acceptance policies

– Customer identification (including verification)

– On-going monitoring of transactions & accounts

• Application of risk-based procedures

– Enhanced due diligence for higher risks

– May be option of reduced measures for lower risk

Customer acceptance policy

• Customer acceptance policies

– Graduated approach based on risk

– Standards for when accounts will not be opened

– Particular caution with private banking and other

”high risk” products and services

– Care not to deny banking services to legitimate

customers

Customer identification /

verification

– No verification: no business

– For direct customer and beneficial owner

– Ownership and control structure for corporate s

– Nature and purpose of intended relationship

• Verification using reliable, independent documents – Standards for acceptable documentation

– Security features (photo) & not easily counterfeited

– How many pieces of documentation are needed?

• Re-assessed when there are suspicions of ML/FT or doubts about veracity or adequacy of previous CDD

Beneficial owner

• “Beneficial owner refers to the natural person(s) who

ultimately owns or controls the customer and/or the

person on whose behalf a transaction is being

conducted. It also incorporates those persons who

exercise ultimate, effective control over a legal person

or arrangement”

Introduced business – relevant?

• Definition

– Business introduced by third party; and

– Where institution is seeking to rely on CDD undertaken by introducer

• Intra-group, third-party, and cross-sectoral introductions

• An important “concession” for market efficiency, but

– Must be clearly defined by countries

– Must be controlled effectively

Introduced business – relevant?

• Definition

– Business introduced by third party; and

– Where institution is seeking to rely on CDD undertaken by introducer

• Intra-group, third-party, and cross-sectoral introductions

• An important “concession” for market efficiency, but

– Must be clearly defined by countries

– Must be controlled effectively

Ongoing monitoring

• Obtain information on purpose and nature of business relationship

• Account and relationship monitoring – To ensure institutions know, and continue to know,

the customer’s profile and identity

– To check consistency between profile and actual transactions in order to identify unusual and suspicious transactions

• Pay special attention to all complex, unusual and large transactions, and all unusual patterns of transactions