A key part of the UK anti-money laundering (AML) regime is customer due diligence (CDD) which comprises checks that firms should apply to new customers whether or not they are high risk. Another important part of the AML regime is enhanced due diligence (EDD) where firms are required to identify clients who may pose a high risk of money laundering, and to conduct further research on them to better assess the risks they pose.
Unfortunately the FCA has previously found that some firms have failed to apply meaningful CCD and EDD measures. In this blog we discuss some of the key points that firms should bear in mind when conducting these measures.
Don’t just gather documents
The Money Laundering Regulations 2007 (MLR 2007) provide that a firm must typically conduct CDD for all business relationships and such measures include identifying and verifying a customer’s identity and obtaining information on the purpose and intended nature of the business relationship.
An important point is that CDD is not just a requirement to gather documents.
Firms must give active consideration of the documents they receive and seek further explanation from the new customer regarding any inconsistencies or omissions. Where a firm fails to make further enquiries regarding incomplete or missing information the FCA may take that as a sign that the firm treats CDD as an administrative box ticking exercise rather than a meaningful assessment of the risks posed by customers.
EDD must be commensurate
The purpose of EDD is to ensure that a firm has a better understanding of the risks associated with particular customers which will allow it to decide whether to establish or continue a business relationship and, where necessary, mitigate any risk of money laundering.
A firm has to be able to demonstrate that the extent of the EDD measures it applies are commensurate with the money laundering and terrorist financing risks posed by the customer.
Source of wealth
It is crucial that a firm takes active EDD measures as the information it gathers also forms the basis for its understanding of the customer’s affairs so that it may properly undertake enhanced on-going monitoring of transactions.
A particular aspect of EDD that some firms have difficulty with is source of wealth and source of funds. EDD includes taking adequate measures to establish a customer’s source of wealth and source of funds. Like CDD firms need to be proactive in EDD. They should not accept the customer’s responses at face value and obtain documentary evidence as necessary. Vague answers to questions should in particular not be accepted and further clarification should be sought.
On going monitoring
The MLR 2007 also provides that a firm must conduct on-going monitoring of all business relationships. Where the customer is considered to be higher risk, that monitoring must be enhanced.
Enhanced on-going monitoring is important in the sense that it allows the firm to understand any changes to the money laundering risks posed by a customer. It includes performing regular reviews of what is known about the customer and taking steps to ensure that information obtained about the customer remains current. It also requires heightened scrutiny of transactions undertaken in the course of the business relationship to ensure that activity is consistent with what is known about the customer.
Having inadequate knowledge of the customer’s profile will mean that the firm will have an ineffective on-going monitoring programme which will result in the firm being unable to properly re-assess the risk profile of the customer as it develops over time. Also, the firm will run the risk that it may not be able to identify a transaction that potentially involves money laundering.