When Do Businesses Need to Do AML and KYC Checks?

Regular Anti Money Laundering (AML) and Know Your Customer (KYC) checks should be an integral part of the compliance management system of every regulated business.

To build a strong and robust fraud-prevention system, companies need to incorporate effective anti-money laundering measures into their business processes. To do this, every company needs to know the process of how and when it should do AML and KYC checks. Before carrying out these checks, it’s vital to understand what these processes entail.

What Is the Current Law Concerning AML and KYC?

The Know Your Customer (KYC) principle refers to the verification of personal and business data of new customers of a credit institution for the prevention of money laundering and terrorist financing, based on The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. These regulations came into force in June 2017, replacing The Money Laundering Regulations 2007 that were previously in effect.

Why Do Businesses Need to Do AML and KYC Checks?

AML and KYC checks, when done thoroughly, help financial services and other regulated firms guard against white-collar crime including money laundering, corruption and fraud. These are all issues that can affect any business and can have serious consequences, for both the business in question and wider society.

When Do Businesses Need to Do AML and KYC Checks and What Is Involved?

To ensure that KYC and AML checks are performed thoroughly, companies need to undertake due diligence of new clients. Due diligence is the process of taking steps to identify your customers and verify that they are who they claim to be, in order to ensure compliance and to guard against money laundering scandals.

As part of the due diligence process, a thorough KYC audit serves to accurately verify customers and to help flag any warning signs of unusual activity. During the process, personal information and business data, such as the name, date of birth, residential address and photo identification, of the customer should be recorded and evaluated, and transactions examined to detect possible issues.

In cases where an individual is acting on behalf of another party in a transaction, or you need to establish the ownership structure of an organisation, you will also need to identify the ‘beneficial owner’. This will be the person behind the customer or the person on whose behalf the transaction is carried out.

Any check that raises question marks about a customer’s bona fides in terms of identity must lead to further checks to ensure they are satisfied that all is in order.

  • When you establish a new business relationship with a customer

  • When you suspect money laundering or terrorist financing

  • When you have doubts about a customer’s identification information, even if you’ve verified that party’s information in the past

  • When you work with existing customers whose circumstances have changed

  • If you are not a high-value dealer — a firm or sole trader who accepts payment of €10,000 or more in exchange for goods — you must carry out due diligence when you carry out an ‘occasional transaction’ worth €15,000 or more

  • As a high-value dealer, when you:

    • make a payment to a supplier worth €10,000 or more

    • carry out an ‘occasional transaction’ worth €10,000 or more

When establishing a business relationship — whether a formal or informal arrangement — you need to gather specific information. This includes the purpose of the relationship and the nature of the relationship. You may also need to obtain details of the customer’s business, copies of financial statements and the source of the funds the customer will use during your relationship.

Enhanced Due Diligence

There are also cases where due diligence will need to be particularly thorough, called enhanced due diligence.

In these cases, additional checks will need to be carried out, including; obtaining further information to confirm a customer’s identity, checking documents supplied by financial institutions with added care and making sure that the first payment is made from an account in the customer’s name.

You will also need to carry out enhanced due diligence when a customer is not physically present, when you deal with individuals from a high-risk third country, where there’s a higher risk of money laundering or when you enter into a relationship with a ‘politically exposed person’, such as an MP, head of state, or a government minister and their family and associates.

Politically exposed persons, or PEPs, are at particular risk of corruption and bribery and are thus subject to additional checks in the guise of PEPs and Sanctions checks. Therefore, before engaging in a business relationship with these people, companies must be particularly vigilant and ensure that senior management approves the relationship, establish the origin of wealth and funds, and strictly monitor the business relationship.

What Happens if AML and KYC Checks Are Not Properly Carried Out?

Failing to carry out the required checks can result in penalties by the FCA, including fines or, in more serious cases, criminal prosecution. Companies who fail to comply with AML and KYC legislation also risk damage to their reputation.

Rebecca Angus, Marketing Manager, NorthRow

The Article Originally Appeared in The London Economic 
When Do Businesses Need to Do AML and KYC Checks? (22 August 2018) .

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