1. Customer Due Diligence Experiences from the Eurozone
Antonio Ghirlando
Legal & Compliance Manager
Customer Due Diligence & Corporate Governance Forum
October 2014

2. The Scenario Global Enhanced Due Diligence Regional National
Obliged Entities
Enhanced
Due Diligence
Risk-Based Approach
Customer
Due Diligence
Simplified
Due Diligence

3. Global Standards
APG
CFATF
MONEYVAL
EAG
ESAAMLG
GIABA
GAFISUD
MENAFATF

4. 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.

5. 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

6. 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.

7. Regional Measures

8. 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.

9. 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

10. Obliged Entities Customer Due Diligence
Risk Assessment & Risk Management
Record Keeping Procedures
Reporting Procedures & Obligations
Awareness, Training & Vetting of Employees
Internal Controls

11. CDD Measures Customer Due Diligence Identification & Verification
Ongoing Monitoring
Purpose & Intended Nature
Identification & Verification

12. 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.

13. 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.

14. 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.
Body corporate or body of persons
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.
Legal entity or legal arrangement
The beneficiary under the policy.
Long term insurance business

15. Applicant for business
Identification & Verification
Identify
Official full name Date & place of birth Permanent residential address Identity reference number
Nationality
Verify
Government-issued document with photographic evidence to verify identity
Document to verify address
Applicant for business
Beneficial owners

16. Principal
Identification and verification procedures depend on whether:
Obliged entities must ensure that the applicant is duly authorised in writing
to act on behalf of the principal.
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

17. CFT Obligation
Obliged entities should have a system in place which detects whether an applicant for business is subject to any financial sanctions:
UN Security Council Resolution 1267/1999
UN Security Council Resolution 1373/2001
Related EU Regulations
Obliged entities need to remain updated with all sanctions that might have an impact on their business operations:
Independent research
‘International Sanctions’ section on the MFSA website (= prudential regulator)
Commercial databases, etc.

18. Purpose & Intended Nature
Establish Business & Risk Profile
Business/ occupation/ employment
Source(s) of wealth
Expected source & origin of funds
Anticipated level of activity
Anticipated nature of activity

19. 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.

20. 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

21. Customer Due Diligence
Application of CDD
SDD
EDD
Customer Due Diligence

22. Enhanced Due Diligence
General Circumstances
Customer Risk
Product/ Service Risk
Interface Risk
Geographic Risk
Specific Circumstances
Non Face-to-Face
Correspondent Banking
Politically Exposed Persons
New/ Developing Technologies
Customer Due Diligence

23. Simplified Due Diligence
Applicants
Relevant financial business
Listed entities
BOs of pooled accounts
Public authorities/ bodies
Certain low-risk entities
Products
Certain insurance policies
Certain pensions or similar schemes
Electronic money
Certain low-risk products
Customer Due Diligence
Specific criteria/ limits apply in most instances

24. 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.

25. Towards the 4th AML Directive
Scope
Align EU legislation with the revised FATF Recommendations.
Address issues that have arisen within a European context.
Timeline
Official proposal published by the Commission – 5th February 2013.
1st compromise text issued by the Presidency – 30th August 2013.
2nd compromise text issued by the Presidency – 22nd November 2013.
3rd compromise text issued by the Presidency – 28th January 2014.
3rd compromise text (revised) issued by the Presidency – 21st February 2014.
European Parliament amendments – 11th March 2014.
4th compromise text issued by the Presidency – 8th May 2014.
4th compromise text (revised) issued by the Presidency – 22nd May 2014.
5th compromise text issued by the Presidency – 10th June 2014.

26. 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.

27. Beneficial Owner Company A Company B 10% Person 2 100% Company C 60%
Legal persons
Natural persons not required to be identified as a beneficial owner
Natural persons required to be identified as a beneficial owner

28. Beneficial Owner Company V Company W 18% Company Y 100% Person 4 100%
Company X 52%
Person 2 20%
Person 3 50%
Company Z 30%
Person 1 30%
Legal persons
Natural persons not required to be identified as a beneficial owner
Natural persons required to be identified as a beneficial owner

29. Beneficial Owner Company A Person 1 Shares 20% Voting 10%
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

30. Beneficial Ownership Information
5th Presidency Compromise Text (Articles 29 – 30)
What information should be retained?
Corporate entities – essential information, including beneficial ownership information.
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?
To obliged entities – on request when these would be conducting CDD.
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).

31. Beneficial Ownership Information
European Parliament Amendments (Articles 29 – 30)
What information should be retained?
Corporate entities – essential information, including beneficial ownership information.
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?
Through public registers, commercial or company registers.
Accessible by competent authorities, FIUs, obliged entities and the public at large (subject to identification).

32. 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.

33. Customer Due Diligence
Simplified Due Diligence
No longer considered to mean “no CDD”.
Entirely risk-based.
Enhanced Due Diligence
Still mandatory in specific circumstances.
Inclusion of further specific circumstances where the application of EDD is mandatory (for example, domestic PEPs and certain complex transactions).
Reliance on third parties
No longer strictly rules-based.
Introduction of group-wide reliance.

34. Risk-Based Approach
May determine the extent of customer due diligence (CDD) measures on a risk-sensitive basis depending on the type of customer, business relationship, product or transaction.
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.
Current
Proposed

35. Risk Assessments – Overview
Supra-National
EU Commission
National
National Authority
Obliged Entities
Subject Persons
EU Member States, ESAs, FIUs & others
Recommendations
Public & private entities
Direction & Guidance

36. Antonio Ghirlando