Customer Due Diligence
Experiences from the Eurozone
Antonio Ghirlando
Legal & Compliance Manager
Customer Due Diligence & Corporate Governance Forum
October 2014
The Scenario
Enhanced
Due Diligence
Global
Regional
Customer
Due Diligence
Risk-Based
Approach
National
Simplified
Due Diligence
Obliged
Entities
Global Standards
APG
MENAFATF
CFATF
GAFISUD
MONEYVAL
GIABA
EAG
ESAAMLG
Global Standards
1990
1996
2001
2003
2012
The revised FATF Recommendations issued on the 16th February 2012 include a
number of significant and important changes that have strengthened the standards
in a number of key areas.
Global Standards
“Although the financial services industry is increasingly moving towards a globally
standardised approach, there is still notable inconsistency with regard to implementation
of AML controls at regional and local levels. This is not too dissimilar from the
fragmented approach regulators continue to display in their global efforts to manage
financial crime.
Despite some positive steps and evident strides in coming to grips with the 21st century
challenges posed by money laundering threats, regulators and the financial services
industry continue to lag behind today’s globally connected money launderers.
Inconsistent regulations have left gaps in which money launderers thrive, and as such, it
will become essential that regulators implement a consistent regulatory approach, but
also foster a closer working relationship with industry professionals in order to leverage
each other’s resources, align mutual interests, and effectively tackle financial crime”.
KPMG Global Anti-Money Laundering Survey 2014
Regional Measures
 The 3rd Anti-Money Laundering Directive
has been adopted by all 28 EU Members
States, as well as a number of other
European countries.
 There are a total of 18 EU Member States
that have, to date, adopted the €uro.
Most others are obliged to do so.
 The use of the currency extends beyond
the Eurozone, either through monetary
agreements or through unilateral
adoption of the €uro.
Regional Measures
Regional Measures
The 3rd Anti-Money Laundering Directive (Directive 2005/60) is part of a broader set
of legislative measures aimed at the prevention of money laundering and terrorist
financing. These include:





Directive 2006/70;
Regulation 1781/2006;
Regulation 1889/2005;
EU Council Decision 2000/642; and
A number of EU legal instruments imposing sanctions and restrictive measures on
governments of third countries, or non-state entities and individuals.
National Measures
Prevention of Money Laundering Act
Criminal Code (Articles 328A to 328M)
Prevention of Money Laundering &
Funding of Terrorism Regulations
Implementing Procedures
Guidance Notes
Obliged Entities
Customer Due Diligence
Risk Assessment & Risk Management
Record Keeping Procedures
Reporting Procedures & Obligations
Awareness, Training & Vetting of Employees
Internal Controls
CDD Measures
Purpose &
Intended
Nature
Identification
& Verification
Ongoing
Monitoring
Customer Due Diligence
Applicant for Business
 A legal or natural person
 Whether acting as principal or agent
 Who seeks to form a business relationship, or carry out an occasional transaction
 With a person who is acting in the course of either relevant financial business or
relevant activity.
Beneficial Owner (BO)
General Definition:
 A natural person who ultimately owns or controls the customer.
 A natural person on whose behalf or for the benefit of whom a transaction is
being conducted.
Specific Instances:
 Body corporate or body of persons.
 Legal entity or legal arrangement which administers and distributes funds.
 Long term insurance business.
Beneficial Owner (BO)
Body
corporate or
body of
persons
• A natural person who owns or controls, whether directly or indirectly,
more than 25% of the shares or voting rights (including through bearer shares).
• A natural person who otherwise exercises control over the management.
Legal entity
or legal
arrangement
• A natural person who is the beneficiary of at least 25% of the property.
• In the case of non-determined beneficiaries, the class of persons.
• A natural person who controls at least 25% of the property.
Long term
insurance
business
• The beneficiary under the policy.
Identification & Verification
Identify
Official full name
Verify
Government-issued document
with photographic evidence to
Permanent residential address
verify identity
Identity reference number
Document to verify address
Nationality
Date & place of birth
Applicant for business
Beneficial owners
Principal
Identification and verification procedures depend on whether:
Applicant is acting
on behalf of a
natural person
Applicant is acting
on behalf of a
company or partnership
Applicant is acting
on behalf of a
foundation or association
Applicant is a
trustee
of a trust
Obliged entities must ensure that the applicant is duly authorised in writing
to act on behalf of the principal.
CFT Obligation
 Obliged entities should have a system in place which detects whether an
applicant for business is subject to any financial sanctions:
o UN Security Council Resolution 1267/1999
o UN Security Council Resolution 1373/2001
o Related EU Regulations
 Obliged entities need to remain updated with all sanctions that might have an
impact on their business operations:
o Independent research
o ‘International Sanctions’ section on the MFSA website (= prudential regulator)
o Commercial databases, etc.
Purpose & Intended Nature
Business/
occupation/
employment
Anticipated
nature of
activity
Anticipated
level of
activity
Establish
Business &
Risk Profile
Source(s) of
wealth
Expected
source &
origin of
funds
Ongoing Monitoring
Scrutiny of transactions:
 On the basis of the business and risk profile of the customer.
 In response to activities of a similar peer group.
 In response to specific types of transactions.
Complex or large transactions.
Transactions from a non-reputable jurisdiction.
Updating CDD documentation:
 Updating expired documentation.
 Collecting new documentation as necessary.
Source of Wealth & Funds
At the beginning of the
business relationship
As part of the ongoing
monitoring process
Source of Wealth
Source of Funds
The economic activity
generating the total net worth
of the customer
The activity, event, business,
occupation or employment
from which funds used in a
transaction originate
Application of CDD
SDD
EDD
Enhanced Due Diligence
General Circumstances
Specific Circumstances
Customer Risk
Non Face-to-Face
Product/ Service Risk
Correspondent Banking
Interface Risk
Politically Exposed Persons
Geographic Risk
New/ Developing Technologies
Simplified Due Diligence
Applicants
Products
Relevant financial business
Certain insurance policies
Listed entities
Certain pensions or similar
schemes
BOs of pooled accounts
Electronic money
Public authorities/ bodies
Certain low-risk entities
Certain low-risk products
Specific criteria/ limits apply in most instances
Implementation of 3rd AML Directive
There are significant differences in the way the 3rd Anti-Money Laundering Directive
has been implemented within the Eurozone and the EU as a whole. Differences
relating to CDD (including BOs) include:
 Calculation of the 25% threshold for corporates;
 Categories of persons considered to otherwise exercise control over corporate
entities;
 Calculation of the 25% threshold for legal entities;
 Control and ownership structure;
 Verification of identity;
 High-risk indicators and enhanced due diligence;
 Requirement to keep BO information up-to-date; and
 Use of BO information obtained for CDD purposes.
Towards the 4th AML Directive
 Scope
o Align EU legislation with the revised FATF Recommendations.
o Address issues that have arisen within a European context.
 Timeline
o Official proposal published by the Commission – 5th February 2013.
o 1st compromise text issued by the Presidency – 30th August 2013.
o 2nd compromise text issued by the Presidency – 22nd November 2013.
o 3rd compromise text issued by the Presidency – 28th January 2014.
o 3rd compromise text (revised) issued by the Presidency – 21st February 2014.
o European Parliament amendments – 11th March 2014.
o 4th compromise text issued by the Presidency – 8th May 2014.
o 4th compromise text (revised) issued by the Presidency – 22nd May 2014.
o 5th compromise text issued by the Presidency – 10th June 2014.
Beneficial Owner
 In the case of corporate entities the definition is clarified, and further guidance
on how to identify beneficial ownership is outlined in the text.
 In case of trusts and similar arrangements the settlor, trustee, protector,
beneficiaries or class of beneficiaries (or similar positions) or any other person
exercising control shall be regarded as a beneficial owner.
Beneficial Owner
Company A
Company B
10%
Person 2
100%
Person 3
20%
Company C
60%
Person 1
30%
Person 4
50%
Person 5
30%
Legal persons
Natural persons not required to be identified as a beneficial owner
Natural persons required to be identified as a beneficial owner
Beneficial Owner
Company V
Company W
18%
Company Y
100%
Company X
52%
Person 1
30%
Person 3
50%
Company Z
30%
Person 2
20%
Person 4
100%
Legal persons
Natural persons not required to be identified as a beneficial owner
Natural persons required to be identified as a beneficial owner
Beneficial Owner
Company A
Person 1
Shares 20%
Voting 10%
Person 2
Shares 30%
Voting 20%
Person 3
Shares 20%
Voting 30%
Legal persons
Natural persons not required to be identified as a beneficial owner
Natural persons required to be identified as a beneficial owner
Natural persons required to be identified as a beneficial owner
Person 4
Shares 30%
Voting 40%
Beneficial Ownership Information
5th Presidency Compromise Text (Articles 29 – 30)
 What information should be retained?
o Corporate entities – essential information, including beneficial ownership
information.
o Trusts or similar arrangements – identity of settlor, trustee, protector,
beneficiaries or class of beneficiaries (or similar positions) and any other
person exercising effective control.
 How should information be made available?
o To obliged entities – on request when these would be conducting CDD.
o To competent authorities and FIUs – information should be stored in a
specified location through central registries or by virtue of data retrieval
systems. (Obliged entities may be granted access as well).
Beneficial Ownership Information
European Parliament Amendments (Articles 29 – 30)
 What information should be retained?
o Corporate entities – essential information, including beneficial ownership
information.
o Trusts or similar arrangements – identity of settlor, trustee, protector,
beneficiaries or class of beneficiaries (or similar positions) and any other
person exercising effective control.
 How should information be made available?
o Through public registers, commercial or company registers.
o Accessible by competent authorities, FIUs, obliged entities and the public at
large (subject to identification).
Politically Exposed Persons (PEPs)
 Members of governing bodies of political parties will also be regarded as PEPs.
 EDD will not be limited to PEPs residing in other Member States or foreign
jurisdictions, but will also be applicable to domestic PEPs.
Customer Due Diligence
 Simplified Due Diligence
o No longer considered to mean “no CDD”.
o Entirely risk-based.
 Enhanced Due Diligence
o Still mandatory in specific circumstances.
o Inclusion of further specific circumstances where the application of EDD is
mandatory (for example, domestic PEPs and certain complex transactions).
 Reliance on third parties
o No longer strictly rules-based.
o Introduction of group-wide reliance.
Risk-Based Approach
May determine the extent
of customer due diligence
(CDD) measures on a risksensitive basis depending
on the type of customer,
business relationship,
product or transaction.
Current
Proposed
Shall have policies, controls
and procedures to mitigate
and manage effectively the
money laundering and
terrorist financing risks
identified at Union level,
Member State level, and at
the level of obliged
entities.
Risk Assessments – Overview
EU Member States,
ESAs, FIUs & others
----------
Supra-National
EU Commission
Recommendations
Public & private
entities
----------
National
National Authority
Direction & Guidance
Obliged Entities
Subject Persons
Antonio Ghirlando
antonio.ghirlando@fiumalta.org