THE CHALLENGES OF CUSTOMER DUE DILIGENCE IN AFRICA Mu’Azu Umaru Director, Research and Planning GIABA Secretariat, Dakar, Senegal PRESENTED TO AT the AFREXIMBANK ANNUAL CUSTOMER DUE DILIGENECE & CORPORATE GOVERNANCE FORUM Dakar, Senegal, 28-29 OCTOBER 2014

CUSTOMER DUE DILLIGENCE 17/04/2017

INTRODUCTION Broadly, approaches to maintaining effective anti-money laundering/combating the financing of terrorism (AML/CFT) regime is two-fold: Preventive approach Detection/enforcement approach The preventive approach is designed to deter or prevent the criminals from perpetrating the crime of money laundering and the whole range of predicate offences

INTRODUCTION cont’d Initiatives pursuant to the realisation of the preventive approach include Customer Identification or Customer Due Diligence (CDD) CDD - International requirement Financial Action Task Force FATF 40 Recommendations (formerly 40+9) CDD – R10 with impact on several Recommendations, including Recs 1, 11, 12, 13, 14,16, 20 etc Basel Committee Customer due diligence for banks Considers KYC for client on-boarding etc

Nigerian Financial Intelligence Unit (NFIU) WHAT CDD ENTAILS 17/04/2017 Nigerian Financial Intelligence Unit (NFIU)

IMPERATIVES OF EFFECTIVE CDD Proper and effective CDD, amongst other things, helps to: Prevent the mis-use of financial institutions as well as reduce the incidences of fraud and other financial crimes Limit criminals from having access to the financial system Maintain the integrity, reputation, soundness and stability of local and global financial system Promote good business, governance, and risk management Minimizes regulatory sanctions & adverse consequences of such sanctions on financial institutions Generally, enhance implementation of robust AML/CFT programme by financial institutions

CENTRALITY OF CDD IN AML/CFT REGIME STR/CTR REPORTING (R20) ML/TF RISK ASSESSMENT (R1) RECORDS KEEPING (R11) CDD ML/TF INVESTIGATION (R30) FIU ANALYSIS (R29) AML/CFT INSPECTION (R26,28) CONFISCATION OF PROCEEDS OF CRIME (R3) ROBUST AML/CFT REGIME

IMPLEMENTATION OF CDD MEASURES The implementation of CDD measures presents unique challenges, especially in developing countries, and Africa in particular. African nations are low capacity countries with largely weak and underdeveloped formal banking/financial system

CUSTOMER DUE DILIGENCE (R5): GLOBAL PERFORMANCE OF COUNTRIES (MER) FSRB MUTUAL EVALUATION RATING FOR R5 (FATF 40+9 RECs) C LC PC NC NA ESAAMLG 5 10 MENAFATF 6 9 GIABA 2 14 CFATF 16 13 MONEYVAL 7 17 APG 3 18 19 GAFISUD 8 EAG 79 75 MENAFATF (Middle East & North Africa Financial Action Task Force) – Algeria, Bahrain, Egypt, Mauritania, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirate, Yemen ESAAMLG (Eastern and Southern Africa Anti-Money Laundering Group) – Botswana, Comoros, Kenya, Lesotho, Malawi, Mauritius, Mozambique, Namibia, South Africa, Swaziland, Seychelles, Tanzania, Uganda, Zambia, Zimbabwe GIABA (Inter Governmental Action Group Against Money Laundering in West Africa) – Benin, Burkina Faso, Cabo Verde, Cote d’Ivoire, Ghana, Guinea, Guinea Bissau, Liberia, Mali, Niger, Nigeria, Sao Tome & Principe, Senegal, Sierra Leone, Togo, The Gambia GAFISUD (Financial Action Task Force on Money Laundering in South America) – Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay MONEYVAL (Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures) – Albania, Andorra, Armenia, Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Malta, Poland, Serbia, Ukraine etc APG (Asia-Pacific Group on Money Laundering) – Australia, Bangladesh, Canada, Fiji, Indonesia, South Korea, Japan, Malaysia, Maldives, New Zealand, Pakistan, Philippines, Singapore, Sri Lanka, Thailand, United States of America etc GAFISUD – Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay EAG (Euroasian Anti-Money Laundering Group) – Belarus, China, India, Kazakhstan, Kyrgyzstan, Russian Federation, Tajikistan, Turkmenistan, Uzbekistan CFATF (Caribbean Financial Action Task Force) - Anguilla, Aruba, Belize , Bermuda, Jamaica, Haiti, Venezuela etc

CUSTOMER DUE DILIGENCE (R5): PERFORMANCE OF AFRICAN COUNTRIES (FATF 40+9 RECs)

GAPS RESULTING TO THESE POOR PERFORMANCES Legal gaps: No express provision in law requiring CDD when Carrying out occasional transactions above a designated threshold Carrying out occasional transactions that are wire transfers in the circumstances covered by SR VII There suspicion of ML and TF The FIs have doubts about the veracity of or adequacy of previously obtained customer identification data No express provision in the law requiring reporting entities to verify the identity of persons purporting to act on behalf of a customer where the customer is a legal person or legal arrangement

GAPS ……. Cont’d No clear obligation to identify and take reasonable measures to verify beneficial owner for all customers (including determining whether the customer is acting on his/her own behalf, understanding the ownership/control structure of the legal entity, and determine the natural persons who exercise ultimate control over the entity Regulatory gaps Weak AML/CFT regulatory/supervisory regime Weak oversight of reporting entities Poor application of administrative sanctions Inadequate capacity

GAPS ……. Cont’d Implementation/Operational gaps – Reporting entities Balancing profit with CDD/other regulatory requirements Profitability Vs cost of undertaking CDD and complying with other AML/CFT requirements De-risking – some financial institutions are now terminating or restricting business relationships with clients to avoid rather than manage risk in line with RBA owing to issues relating to profitability, regulatory requirements, reputational risks etc Limited implementation of CDD requirements by FIs and non application by other reporting/accountable entities No rules concerning CDD measures for existing customers CDD documentation exemption for customers conducting one-off transactions Use of threshold - for instances, specified forms of identification are required can lead to inadequate documentation being taken in circumstances where threshold is not met. Weak human capacity

INFRSTARUCTURE/WAY FORWARD Review legal and regulatory framework, especially in view of changes in the FATF standards Develop robust national database on identification system Reliable national databases, reliable crime reports, credit references, and other sources of information which could facilitate customer identification, proper risk assessment etc Use of alternative means for identification/ verification of customers: Traditional chiefs/rulers Religious leaders Voter’s registration cards Biometric identification system, which will help to reduce the need for an identifiable physical address etc Nigeria – recent introduction of the biometric identification system for bank customers 

INFRSTARUCTURE…. Cont’d Improve human capacity – to improve AML/CFT awareness and assess the degree of risks associated with their customers Well funded and independent compliance function Introduction of low-risk banking and financial products and services that require minimal identification Application of risk based approach in the implementation of CDD – Simplified & Enhanced CDD measures Establishment of centralized CDD repository Automate -Deployment of an effective AML solution software that will enhance CDD efficiency Capture and store relevant documentation- Reviews and document management Perform continuous risk assessment

CONCLUSION The risks of financial systems being misused for ML/TF purposes is real In spite of the challenges associated with the implementation of CDD measures, stakeholders in the continent, including regulatory authorities and financial institutions must take appropriate and practical steps to implement requisite AML/CFT measures, especially CDD to prevent the misuse of their businesses, promote financial system stability and a secure world.

Thank you for your attention GAIBA Secretariat Dakar, Senegal Tel: +221338591818 Email: secretariat@giaba.org Website: www.giaba.org