“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.