Anti-Money Laundering (AML) regulations are designed to prevent the illegal generation of income and the concealment of assets derived from criminal activities. One of the key aspects of AML compliance is conducting customer due diligence (CDD) to verify the identity of customers and assess their risk profile. In certain situations, enhanced customer due diligence (ECDD) is legally required to mitigate the risks associated with high-risk customers or transactions. In this blog, we will explore when ECDD is legally required and the steps that designated persons should take to comply with these requirements.
When is Enhanced Customer Due Diligence Legally Required?
According to the legislation, ECDD is legally required in the following situations:
1. Politically Exposed Persons (PEPs): Section 37 of the legislation deals with PEPs, who are individuals holding prominent public positions or having close ties to such individuals. PEPs are considered high-risk customers due to their potential exposure to corruption, bribery, and other financial crimes.
2. Correspondent Bank Relationships: Section 38 addresses correspondent banking relationships, which involve providing services to another financial institution. These relationships can pose a higher risk of money laundering and terrorist financing due to the potential lack of transparency and control over the underlying customers and transactions.
3. High-Risk Third Countries: Section 38A, introduced by the Amendment Act 2021, focuses on customers established or residing in high-risk third countries. These countries are identified as having strategic deficiencies in their AML/CFT regimes, posing a higher risk of money laundering and terrorist financing.
Designated Persons' Discretion
Section 39 allows designated persons, such as accountants, auditors, and tax consultants, to apply additionalECDD measures at their discretion based on their assessment of the risks associated with a particular customer or transaction.
Steps to Conduct Enhanced Customer Due Diligence
When ECDD is legally required, designated persons should, in addition to the Normal Customer Due Diligence Procedures, take the following steps:
1. Obtain approval from senior management before establishing a business relationship with the customer and then annually, obtain approval from senior management to continue the business relationship with the customer.
2. Determine the source of wealth and funds of the customer and obtain appropriate evidence to verify same.
3. Continuously monitor the business relationship and business transactions to identify any changes in the customer's risk profile, suspicious activities/transactions.
4. Ensure the type of monitoring carried out is relevant to the business activity ie; if money laundering was occurring, the type of monitoring being carried out would enable you to identify it.
5. Continue to apply ECDD measures for as long as it is reasonably required, taking into account the continuing risk posed by the customer.
Enhanced customer due diligence plays a crucial role in mitigating the risks associated with high-risk customers and transactions in the context of anti-money laundering.
Designated persons must be aware of the situations in which ECDD is legally required and take appropriate steps to comply with these requirements. By doing so, they can contribute to the global effort to combat money laundering and terrorist financing, protecting the integrity of the financial system and society at large.
In House Training
Elaine Jackson of our Practice Support Team provides Full (3hrs) and Refresher (1.5hrs) AML In-House Training to Firms to assist them in meeting their annual training obligations. To arrange your training, reach out to Elaine at; [email protected]
The contents of this article are meant as a guide only and are not a substitute for professional advice. The authors accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.