KYC - Know Your Client: Introduction, legislation & compliance

"Effective anti-money laundering & combating the financing of terrorism regimes are essential to protect the integrity of markets & of the global financial framework as they help mitigate the factors that facilitate financial abuse.” Min Zhu, Deputy Managing Director of the IMF".

What Is Know Your Client? [KYC]

Matrix is often asked this question - essentially Know Your Client or Know Your Customer is an industry-standard, usually but not restricted to the Banking and Investment industries that ensures the thorough identification and confirmation of a potential customer’s identity and establishing that both the source and that said funds and investments are from legal sources.

While KYC policies differ from industry to industry they generally incorporate the following four key elements within their framework:

  • Customer acceptance policies
  • Customer identification procedures
  • Monitoring of transactions
  • Risk management

Specifically, where Banking is concerned the on-boarding of new customers is conditioned by AML/CFT regulations [Anti-Money Laundering/Combating the Financing of Terrorism] which when effectively implemented, mitigate the adverse effects of criminal economic activity and promote integrity and stability in financial markets.

Despite the AML Directive, the valid methods for identity verification vary across the EU. This hampers the Single Market and creates an uneven playing field between Banks located in different member states.

Banks operating in EU countries with more restrictive regulations tend to use non-real-time data for identity verification that relies on requiring new customers to make a first transfer of funds from a bank account that they hold at another financial institution.

Where Investment Companies are concerned, KYC is expanded to not only verifying the identity and source of funds but also includes detailed enquiries to establish a potential clients risk tolerance, investment knowledge and overall financial position, in turn, enabling them to offer the best advice by knowing exactly which investments best suit their potential client’s personal situations.

Matrix Intelligence undertakes both Pre-Transactional Due Diligence and Enhanced Due Diligence investigations, which routinely cover current KYC protocols for Financial Firms internationally and are well appraised of relevant legislation across all jurisdictions.

Is KYC a Legal Requirement?

Yes, it is a legal requirement in all major jurisdictions while different applications of the basic edict, as well as regulatory bodies, differ. For example, in the UK the underlying KYC rules are governed largely by The Money Laundering Regulations 2017. Many UK businesses further use the guidance provided by the European Joint Money Laundering Steering Group along with the Financial Conduct Authority's guide as aids to compliance.

As part of a wider package of reforms to strengthen the AML supervisory regime, the UK Government has also recently established the Office for Professional Body Anti-Money Laundering Supervision [OPBAS] a new regulator set up by the government to strengthen the UK’s anti-money laundering [AML] supervisory regime and ensure the professional body AML supervisors provide consistently high standards of AML supervision

Do I have to carry out KYC check on my clients?

It depends on the specific business area that you operate in. We have already examined Banking & Investment Managers but a surprisingly large number of other sectors are covered by current legislation. Essentially a business needs to be monitored by a supervisory authority if Money Laundering Regulations apply to the business type.

Money laundering is defined as exchanging money or assets that were obtained criminally for money or other assets that are ‘clean’. The clean money or assets do not have an obvious link with any criminal activity. Money laundering also includes money that’s used to fund terrorism, however, it’s obtained.

In addition to Banking and Investment Managers, the regulations apply to a number of different business sectors, including accountants, financial service businesses, estate agents and solicitors. Whatever your business model, if it involves handling large sums of money specifically cash, for example, a Real Estate Agent, High-Value Car Dealer, Yacht & Boat Broker, Commercial Landlord, Jeweller, Art Dealer and digital & IT payment service providers not supervised by the FCA.

Because compliance is critical to specific business models we would always recommend taking professional advice specific to your areas of operation as criminal penalties for non-compliance can include imprisonment.

For example, in the UK, failure to disclose suspicious transactions is an offence that could result in a maximum prison term of 5 years in addition to unlimited fines. The same is also true in Canada. Prison terms for money laundering offences in the United States are considerably more severe, ranging anywhere from 5 to 20 years, depending on the precise offence.

Matrix Intelligence can advise your business on your KYC obligations, set up relevant protocols and undertake full Due Diligence on potential clients.

Why is KYC Suddenly in the News?

KYC and its various derivatives is already a widely searched subject across the internet, however, the recent spike in search trends is due to damning revelations in the recently published FinCEN Files. FinCEN is a reference to the US Financial Crimes Enforcement Network – the very department in the US Treasury who combat financial crime. Concerns about transactions made in US dollars need to be sent to FinCEN, even if they took place outside the US.

More than 2,500 documents have revealed how some of the world's biggest banks have allowed criminals to move dirty money around the globe without hindrance. They also show how Russian oligarchs have used banks to avoid sanctions that were supposed to stop them from getting their money into the West.

I have also heard of the FATF, who are they?

The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. The inter-governmental body sets international standards that aim to prevent these illegal activities and the harm they cause to society. As a policy-making body, the FATF works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.

With more than 200 countries and jurisdictions committed to implementing them. The FATF has developed the FATF Recommendations or FATF Standards which ensure a co-ordinated global response to prevent organised crime, corruption and terrorism. They help authorities go after the money of criminals dealing in illegal drugs, human trafficking and other crimes. The FATF also works to stop funding for weapons of mass destruction.

The FATF reviews money laundering and terrorist financing techniques and continuously strengthens its standards to address new risks, such as the regulation of virtual assets, which have spread as among other Blockchain applications, Cryptocurrencies gain popularity.  The FATF monitors countries to ensure they implement the FATF Standards fully and effectively and holds countries to account that do not comply.

About Matrix Intelligence

Matrix Intelligence are recognised experts in Pre-Transactional & Enhanced Due Diligence including full KYC protocols. We undertake risk analysis and due diligence investigations prior to acquisitions and joint ventures as well as investments.

Ideally, we are engaged at an early stage before legal costs and other professional fees are incurred; as this will mitigate the impact if adverse legal, financial or operational issues come to light. We provide detailed and cost-effective reports, prepared by a diverse team of specialists, to enable our clients to make informed commercial decisions.


Why Due Diligence is critical to any successful acquisition?

Investors buy business assets fully accepting the maxim of "caveat emptor" or "buyer beware". Every investor, buyer, whether an M&A (Mergers & Acquisitions) corporation, fund manager, bank or HNW individual needs to reduce the risk of every deal and by commissioning a full Due Diligence report they are going some way toward limiting the exposure that the individual purchase presents.

Effectively Due Diligence puts a potential acquisitions commercial history under the microscope.

Defined by the Oxford English Dictionary - Due Diligence is a comprehensive appraisal of a business undertaken by a prospective buyer - literally by examining the minutiae of the acquisitions DNA – focussing on the company, assets, reported liabilities, intellectual property, operating and litigation history, and robust background checks of the key management and decision-makers e.g. their track records, competencies, potential conflicts of interest and any political or criminal links.

It is also worth noting that Due Diligence is definitely not a one size fits all process. There are many different facets which can be deployed singularly or collectively depending on the client’s requirements, but the ultimate task of any Due Diligence is to transform assumptions into hard, actionable, facts. With this information, fully collated and cross-referenced the Due Diligence Report will summarise the overall commercial suitability of the acquisition and forward potential to the buyer.

Conducting thorough Due Diligence is critical to any successful acquisition. Without complete and thorough intelligence on the target company, it is impossible to make best-informed decisions on any potential business purchase or investment.

Due Diligence can also be the reasonable steps taken by a person to avoid committing a tort, breaching KYC (Know Your Client) protocols or other potential criminal offence.

Pre-Transactional Due Diligence

Today, major transactions are increasingly multifaceted. Whether you’re buying another company,   selling off a division of your company or partnering with a new alliance, real deal value can often be blurry, at best. That is why it is essential and moreover, common practice for buyers more than sellers to retain a Professional Due Diligence Partner.

Seller-side Due Diligence really just entails the seller providing information on their company’s projections, its competitors and relevant, current economic factors ensuring that the information being relayed to the potential purchaser is honest, accurate and true. In some situations, for example IPOs (Initial Public Offering), Seller-side Due Diligence can also be deployed to research potential buyers.

If you are selling your business whether in part or whole, as long as the appropriate KYC protocols have been observed and unless there is a strong ethical objection – then generally most business owners don’t really care who the buyer is as long as they have the required funds to close the deal; and a simple "proof of funds" document from the investors bankers will normally satisfy that requirement.

Of course in the M&A industry, the rapid assessment of Assets/Liabilities is literally bread and butter to the world’s leading banks and financial institutions. They have their own compliance departments whose sole role in life is to continually conduct due diligence, manage their KYC protocols and ultimately, again, reduce the risk/exposure that the individual transaction or client presents.

Instructing a Due Diligence Report, however, is no guarantee as to the performance of the deal in hand and in fact a significant number of business acquisitions fail to meet the expectations of the buyer, simply because of the outcome of the intelligence gathered by the Corporate Intelligence Specialist.

Enhanced Due Diligence

Where substantial transaction monies or say a leading Brand is involved the tasking of Due Diligence elevates to Enhanced Due Diligence also known as Advanced Due Diligence and generally this work falls to Corporate Intelligence firms who are experienced in multi-disciplined tasking obviating the need for additional contract Lawyers, Accountants or Management Consultants.

Enhanced Due Diligence takes the process to a much higher level of scrutiny necessitating the deployment of all actionable assets including individual in-depth intelligence including:

  • Administrative
  • Financial
  • Asset
  • Human Resources
  • Environmental
  • Taxation Liability
  • Intellectual Property
  • Geopolitical Risk
  • Reputation
  • Legal
  • Service Agreements
  • Credit Policy
  • Liability Insurances

Other forms of Enhanced Due Diligence enquiries also include IT (Information Technology) networks, issues of stocks and/or bonds, R&D (Research and Development), and sales and marketing reporting.

Matrix Intelligence

Matrix Intelligence are a leading Corporate Intelligence firm who have substantial expertise across a wide variety of disciplines but specialising in Enhanced Due Diligence, Asset Tracing & Recovery, Complex Investigations and Litigation Support for lawyers, financial firms, corporate clients, third party funders and HNW individuals – worldwide.

Having expended substantial time and resources Matrix Intelligence has developed an exacting schedule of proprietary Enhanced Due Diligence protocols.

Whether you require Pre-Transactional or Seller-side Enhanced Due Diligence, Matrix Intelligence can deliver advanced forensic reporting and comprehensive support data that can make the difference between a successful and smooth business transaction and a costly failure.


The three phases of Asset Tracing: Identify, Secure & Recover

Asset Tracing or Asset Tracking, is the process whereby investigators, usually working on behalf of law firms, conduct specialist financial enquiries to determine an individual subject or company´s wealth, trying to identify, assets such as: cash, money in bank accounts, share ownership, investments in stocks and bonds, real estate, luxury vehicles and yachts, art and precious metals.

The two key factors in any Asset Trace are the ability to quickly assess the probability of recovery of the identified assets and the associated financial cost of doing so – as of course there is little point pursuing non-recoverable assets that are otherwise encumbered, or legally shackled, or undertaking an action if the expected value of recovery doesn’t cover the costs.

It cannot be stressed enough that an asset trace can be costly and time-consuming, especially if an individual goes to great lengths to hide their assets behind a veil of shell companies in offshore jurisdictions. It is also challenging for those working in the context of failed states or, widespread corruption and that’s before factoring in considerations such as navigating relevant data protection laws, treaties and jurisdiction-specific legislation.

The entire Asset Tracing process is made up of a highly complex series of protocols that require expert professional support. It requires skill, judgment, experience and legal intelligence in order to pursue and reclaim identifiable assets. 

Having said that, whether pursuing assets through criminal or non-conviction based (NCB) confiscation, or through proceedings in a foreign jurisdiction, or a private civil action, the objectives and fundamental process for recovery of assets are generally the same. The process is broken down and can be categorised into four key phases: Pre-Investigation, Investigation, Judicial and Recovery.

Identify 

Pre-Investigation starts as soon as the Asset Trace is instructed. This initial phase includes gathering and analysing as much intelligence as possible on the target, potential assets, their value, their location and the status of their registered ownership. Once the assets have been identified in the Pre-Investigation phase the process moves to the Investigative phase. 

Frequently at this stage in an Asset Trace, cash at bank, goods and chattels are identified as having been amassed as the result of criminal activity. Where this is the case the evidence will be passed to the relevant prosecutors, who after assessing the probability of a successful conviction will pursue the perpetrator through the criminal courts and seek a successful prosecution. In the same way as a civil recovery they must secure the assets pending the outcome of the case.

Secure

The Judicial phase includes the trial and then issuance of the judgment against the persons identified in the Investigation phase. 

In order to seize the assets in the jurisdiction(s) in which they have been found, the judicial authorities of the requesting jurisdiction must work closely with their counterparts, to ensure that an appropriate course of action is taken (e.g., enforcement of the confiscation order from the requesting country or obtaining a local confiscation order in the requested jurisdiction). 

Once the investigation has identified the assets and their provenance, the time comes to secure and restrain the assets to avoid possible dissipation, removal or as in some cases destruction.

In order to secure the identified Assets seizure, the instructing client, very often law firms, must seek judicial authorisation such as a Mareva injunction - A temporary injunction that freezes the assets of a party pending further order or final resolution by the Court.

The so-called Mareva injunction, developed by courts in England, prevents a defendant from transferring their assets outside the United Kingdom, or otherwise dealing with their assets (other than in the ordinary course of business and for the payment of proper expenses) during the pendency of an action. 

Although originally limited to assets within the United Kingdom, Mareva injunctions (Worldwide Mareva Injunctions) have been extended so as to cover many other jurisdictions including offshore tax "havens".

Offshore is typically defined as business activities that take place anywhere else in the world outside of an individual’s own home country, or away from home shores in another jurisdiction,  meaning a sovereign territory, country or region within a country, that has its own legal structure and governing body. However, the true definition is commonly misinterpreted. Many such jurisdictions are based on islands, which has brought about the terminology in a literal sense. 

Where the Assets are held in foreign jurisdictions, International cooperation is essential for their successful recovery. An established global network is needed to provide local knowledge and legal processes to implement provisional cautions, assist in Asset Recovery and to oversee their final return.

Recover

And finally, the Recovery phase where the Asset is actually returned to the rightful owner or Plaintiff. When a court has ordered the restraint, seizure, or confiscation of assets, steps must be taken to enforce the order. If assets are located in a foreign jurisdiction, a request must also be submitted. 

The order may then be enforced by authorities in the foreign jurisdiction through either (1) directly registering and enforcing the order of the requesting jurisdiction in a domestic court (direct enforcement) or (2) obtaining a domestic order based on the facts (or order) provided by  the requesting jurisdiction (indirect enforcement). Similarly, private civil judgments for damages or compensation will need to be enforced using the same procedures as for other civil judgments.

If you have been the victim of fraud, quantifying the loss, identifying the perpetrators and developing a strategy for recovery is essential. Advancements in technology have enabled criminals to transfer funds around the world and hide behind complex offshore corporate structures.

Matrix Intelligence

Matrix Intelligence understands the difference between intelligence and evidence required for use in a Court of Law. We have extensive knowledge of the legal system, enforcement regimes and cultural practices within the jurisdictions that we most commonly operate.

Having conducted extensive multi-jurisdictional and cross border complex investigations, we are  experts at assisting with commercial and high-end litigation.

We deliver reliable and actionable intelligence for lawyers, financial firms, corporate clients, third party funders and HNW individuals - worldwide. We operate internationally and have exceptional capabilities in Eastern Europe and all offshore banking jurisdictions. For more 

info@matrix-intelligence.com or online at www.matrix-intelligence.com


Sovereign Asset Trace

Sovereign Asset Trace

Matrix Intelligence were engaged to conduct an Asset Trace against the government of an Eastern European country for assets held outside the EU, but including the UK.

The brief was to focus on assets owned by the state that were used for commercial purposes, including state-owned enterprises that could be proven to have a very high degree of state control over the entity.

In addition to tangible commercial assets (ships, planes, real estate etc.), we also searched for receivables owed to the government, i.e. interest/principal payments on sovereign bonds,  bank accounts used for commercial purposes and judgments/awards owed to the state.

Through OSINT (Open Source Intelligence) and closed source enquiries, we were able to quickly identify full or partial state ownership of more than two hundred companies. We broke these down by asset class, percentage of ownership, jurisdiction and likelihood of enforceability.

Outcome

This enabled us to produce a short list of target entities which we believed merited further investigation. We shared our findings with the client to confirm that they agreed with our methodology before delving further into those assets.

Having done so, we were able to provide our client with actionable intelligence to pursue asset recovery; including the valuation and ownership certificate for a U.S. based property.

Having conducted extensive multi-jurisdictional and cross border complex investigations, Matrix Intelligence are experts at assisting law firms in Asset Tracing and Recovery.

Working with Matrix Intelligence

At Matrix we understand the difference between intelligence and evidence required for use in a Court of Law and have extensive knowledge of the legal system, enforcement regimes and cultural practices within those jurisdictions most commonly associated with hidden assets.