Anti-Money Laundering & Financial Crimes Conference April 18th 20th, 2018

Transcription

1 Anti-Money Laundering & Financial Crimes Conference 2018 April 18th 20th, 2018

2 Know Your Customer's Customer (KYCC) The next level of due diligence obligations

3 Introduction 1. FATF Standards, CDD and KYC 2. About KYCC 3. Implementation of KYCC 4. Benefits of KYCC 5. KYCC Challenges 6. Summary and Conclusion

4 FATF Standards, CDD & KYC Recommendation 1 AML/CFT Policies (Risk Based) & Coordination - Assess ML/TF risks & apply a risk-based approach (RBA)(Country, FIs & DNFBPs) - Implement AMLCFT policies informed by identified risks.

5 FATF Standards, CDD & KYC (Cont d) Recommendations Preventative Measures Customer due diligence & record keeping (FIs) - Identify and verify customers (KYC) using reliable independent source documents, data & information - Identify & verify beneficial owners, including beneficial owners of legal persons & arrangements; - Keep & maintain records of relevant transactions for at least 5 years-to facilitate requests by competent authorities.

6 FATF Standards, CDD & KYC (Cont d) Recommendations Additional Measures for Specific Customers & Activities (EDD) - Politically Exposed Persons - Correspondent banks - Value/ Money - New technologies - Wire transfers - Understand the nature and purpose of transactions - Continuous monitoring programs

7 FATF Standards, CDD & KYC (Cont d) Recommendations Reliance, Control & Financial Groups - Reliance on third party CDD/ KYC REs may rely on a 3 rd Party s CDD but the ultimate responsibility lies with RE - Make internal AMLCFT controls applicable to all foreign branches & subsidiaries (implement group wide programs) - High Risk countries apply enhanced/ risk based due diligence and countermeasures directed by or independent of a call from FATF.

8 FATF Standards, CDD & KYC (Cont d) Recommendations CDD, KYC & Record keeping (DNFBPs) - CDD/ KYC is applicable to DNFBPs, including reporting suspicious transactions when performing specified duties for their clients; Transparency & beneficial ownership for legal persons & legal arrangements - Ensure adequate, accurate and timely information on beneficial ownership & control structure for legal persons; - Similar requirement for expressed trusts, including on the settlor, trustee and beneficiaries.

9 FATF Standards, CDD & KYC (Cont d) Summary customers & Activities for CDD/EDD (KYC) Customers Natural Person Legal Person Legal arrangement Beneficial owners PEPs, MVTS, Third parties/ intermediaries (Correspondent Banks & T&CSPs)

10 Understanding the ML/TF risks associated with beneficial ownership structures Complex ownership structures & beneficial ownership Makes it difficult to identify money laundering & terrorist financing; Amplified in cases of companies, partnership firms & unincorporated entities.

11 BENEFICIAL OWNERSHIP BY CONTROL Understanding the ML/TF risks associated with beneficial ownership structures cont d Beneficial ownership (B/O) & control structure B/O interest arises with at least a 25% share ownership in a company.

12 ABOUT KNOW YOUR CUSTOMER S CUSTOMER (KYCC) KYCC is not a specific FATF recommendation; An enhanced due diligence process geared at closing loopholes that KYC procedures may not be able to fill; Entails knowing with whom your customers are doing business;

13 ABOUT KYCC CONT D KYCC refers to having a deeper understanding of the customer, i.e. - A more granular level of detail of the customer; - To know the source of funds for their business; - Assess the risks associated with third parties funding, etc.

14 ABOUT KYCC CONT D It requires establishing the legitimacy of the business including not only its beneficial owners, but also its: Suppliers Partners/ affiliates/ associates Customer related entities Note! The focus should not be to reject business, but to determine the need for KYCC scrutiny, based on the company s policies and risk appetite.

15 Practical Scenario of KYCC potential ML/TF risk by a supplier

16 ABOUT KYCC CONT D (TBML) Applying KYCC to Trade Based Money Laundering (TBML) TBML involves larges sums of money/ value and is disguised amongst high volume cross border international trade this facilitates hiding of the illegal activities. The true and real value of export/ import is therefore difficult to detect.

17 ABOUT KYCC CONT D (TBML) Involves overpayments, fictitious invoices, undetectable price value items (e.g. artwork, precious stones/metals); Made possible through ineffective customs systems - due to secrecy limitations (domestic and cross-border)

18 TRADE BASED MONEY LAUNDERING SCENARIO (OVER INVOICING)

19 IMPLEMENTATION OF KYCC Take KYC rules and apply it to third parties; Verify third party s identity; Satisfy yourself that the third party s funds are legitimate; Assess ML risks associated with third party Gather up-to-date and accurate information on their business registration numbers, names, status, addresses, directors, dates of establishment;

20 IMPLEMENTATION OF KYCC CONT D Involves third party screening - identify against various lists to determine high risk individuals or entities: Check sanctions lists (OFAC, UN, HMT, EU, DFAT); Lists by LEA; - Check regulatory bodies (financial and securities commission); - The aim is to determine how funds were acquired and; - To understand the business, industries, countries, amount and value of transactions.

21 IMPLEMENTATION OF KYCC CONT D - More focus on Risk Based Approach - to enhance risk management; - Global standard setters and regulators taking a joint approach, appreciating that financial integrity and inclusion are both important facets of the financial system - Develop and promote more cost effective systems geared at encouraging KYCC based on risk appetite and policies. - International cooperation and collaboration

22 IMPLEMENTATION OF KYCC CONT D Many countries have already taken the step towards strengthening laws to identify and verify 3 rd parties; - Identify beneficial owners and the complex paths of hiding money & combat layering; for example: - US (FINCEN): New rules to take effect May Those rules require CDD of beneficial ownership when opening accounts. - Europe: The 4 th AML Directive took effect June includes new initiatives on Beneficial ownership. - Canada: New Proceeds of Crime Act took effect June includes the requirement for REs to take into account new technologies, delivery channels, location etc.

23 BENEFITS OF KYCC Increased effectiveness & protection from misuse by criminals; Direct access to institutional responses and enhanced cooperation through promotion of data pooling networks; Support for the risk-based approach to ensure AMLCFT compliance;

24 BENEFITS OF KYCC CONT D Transparency through global KYC/KYCC profiles; Accurate, up to date access to a wide range of information, in and outside data pooling networks; Use and/or access to centralised registries and global listing systems. Protection of the integrity of the entity and overall financial systems (reputational, operational and legal risks).

25 KYCC CHALLENGES Rules can threaten to restrict access to financial services especially in marginalised parts of the world; Could undermine efforts to create more equitable global financial system; Massive de-risking by correspondent banks due to enhanced regulatory attention;

26 KYCC CHALLENGES CONT D Shared liability due to possible third party deficiencies; Possibility of setting a global KYCC standard - should be flexible based on identified risks, size, economy and/or sector. Reputational, legal and businesses; operational risks to

27 SUMMARY AND CONCLUSION Key Points on KYCC o KYCC is knowing your customers customers (suppliers, partners, etc) o KYCC is not specified as one of the FATF s 40 recommendations o It should be based on the assessed ML/ TF risks. o May be applied as a best practice based on the REs policies & risk appetite o It is a critical element of an effective KYC/CDD/EDD compliance programme

28 SUMMARY AND CONCLUSION o New technology should be developed to make KYCC more effective o The new trend of launching KYC registries, centralized indexes should be intensified. o The importance & need for more authenticated and shared corporate client information should be promoted & embraced. o Financial Institutions, in particular, should pay more attention to the ML/TF risks associated with businesses involved in international trade to reduce TBML

29 Sources Money Laundering & Terrorist Financing-Preventative Measures The FATF Recommendations, International Standards on combating Money Laundering and the Financing of Terrorism and Proliferation, February 2012 ( FATF Methodology for Assessing Technical Compliance with the FAFT Recommendations and the Effectiveness of AMLCFT, February 2013( FATF Guidance Correspondent Banking Services, October 2016 ( Article: Know Your Customer s customer ( March 2017) Article: Third-Party Due Diligence: Policies, Screening & Risk Management ( March 2017) Article: Trade Based Money Laundering -Ways to Detect & Prevent TBML ( March 2017) Article: James Thomas; Threat of KYCC highlights need for joined-up approach to financial inclusion and financial integrity (ICA International Association: http;// 2015/September 14)

30 Thank you. Any Questions?