KYC v Client ID – the importance of the bigger picture
A huge amount of money is thought to be laundered in the UK annually.
The Government’s National Risk Assessment (NRA) for Money Laundering published in October 2017 estimated that there are 5,900 organised crime groups operating with the UK, consisting of somewhere in the region of 39,400 individuals.
I find myself curious about that. We are, as a regulated sector, acutely aware of the potential for our services to be used by money launderers, and we have implemented, at vast expense, client identification procedures. I wonder why, then, is there a worsening of the situation?
There could be many reasons; the estimates are more accurate than before, the criminals are getting much better at it, new technology is giving the criminals more opportunity. I, however, have been considering whether the AML measures we have already put in place, that are required by the law, are effective.
Are anti-money laundering regulations working?
Not to state the obvious, but the Money Laundering Regulations 2017 require us to establish policies, controls and procedures to prevent money laundering. Client Due Diligence is part of that, but I emphasise “part”. Client Due Diligence is more than establishing the identity of a client.
Establishing that your client is who they say they are is important, for many reasons, not just AML. Identifying a client can deter identity fraudsters as well as criminals. The police may, if investigating a client, ask you for your Client ID information in order to know where to find the client, and sometimes, what they look like.
However, Client ID is only part of the picture. The regulations also require that a regulated person “understands the purpose and nature of the business relationship” and conducts “ongoing monitoring”. This is about understanding much more about your client than their date of birth and address, it’s about Knowing Your Customer/Know Your Client (KYC).
Additional steps to truly know your customer
In addition to the verification of the identity of the client, other enquiries might include:
- Politically Exposed Person (PEP) and Sanctions screening – this will establish whether you need to consider enhanced due diligence on the client. Many of the PEP lists include known associates of PEPs, so even if your client is not one of the role holders which would make them a PEP, it could show up any relationships which would make them a PEP.
- A negative news search – this may bring back some false positives, but these should be relatively easy to eliminate.
- Understanding the source of funds which will be used in the transaction – this could be making enquiries of the client, reviewing publicly available information about the client’s finances (such as accounts lodged at Companies House), or asking to see bank statements from the client.
- Understanding the client’s source of wealth – and whether the transaction fits in with their profile. This could be easy to determine for a private individual but may be more difficult for a company.
- Conducting ongoing monitoring – which may include reviewing your risk assessment throughout the matter to consider whether any changes in the instructions merit more due diligence or repeating some of your other checks such as on beneficial ownership identity.
It is clear that vast efforts are already put into identifying clients, but by conducting thorough due diligence you will be better able to identify possible money laundering and either report it or withdraw from acting, which may deny the criminals access to what they want; access to services to launder their illicit funds.
about Amy Bell
Amy worked for many years as a solicitor before moving into compliance and eventually launching her own firm. A leading figure helping law firms adapt to the changing legal landscape, Amy is also the author of The Law Society’s Elearning and Toolkit on the Bribery Act, and former Chair of their Anti-Money Laundering Task Force.
Amy specialises in AML regulations mainly professional services and runs ABC Consultancy.
Connect with Amy on LinkedIn.
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Due diligence solutions are not just for anti-money laundering
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