Editor note: article updated in June 2024 to reflect regulatory changes.
‘Keep calm and carry on’ is something we’ve all seen and heard as the slogan has made its way from being a motivational World War II poster in 1939, to appearing on souvenirs, t-shirts, and mugs or as a meme around the world today. We can also adopt its sentiment in the world of anti-money laundering as we find the level of our verification checks for certain customers requires a calm, persistent approach in the face of challenging enhanced investigations.
Many of us have heaved a big sigh and had to stiffen our resolve when our customer due diligence investigations show the level of risk involved with a client requires enhanced customer due diligence (EDD), but it doesn’t have to be a painful process.
Yes, it certainly takes a bit more time and effort than your standard CDD but don’t back away from EDD. It can be a critical step in your due diligence process and following the correct steps and procedures can help make your life a lot easier in the long run.
Here we unpick all things EDD, including the changes which came into force on 1 June 2024, so keep calm and read on.
Enhanced customer due diligence is for those high-risk customers that require a greater degree of scrutiny than what is typically carried out during customer due diligence (CDD). This may be because you are dealing with large transactions or a high-net worth customer, or your due diligence activities may have uncovered the need to establish a higher level of identity verification.
Reasons you must consider a client high risk are:
- Your customer has a trust or another vehicle for holding personal assets.
- Your customer is a non-resident client from a country that has insufficient anti-money laundering and countering financing of terrorism systems or measures in place.
- Your customer has a company with nominee shareholders or shares in bearer form.
- Your customer is a politically exposed person (PEP).
- Your customer is a company with 1 or more nominee directors
- Your customer has a business relationship with a limited partnership with a nominee general partner.
- Your customer wants to carry out complex, unusually large transactions or an unusual pattern of transactions that appear to have no lawful or economic purpose.
- A business relationship with a customer that involves new or developing technologies or products that allow anonymity.
- You consider that the level of risk involved is such that enhanced CDD should apply.
And remember, EDD is not just for new customers. When a customer has been subject to EDD there are increased monitoring requirements. As part of your ongoing customer due diligence programme you should identify any situation which means EDD needs to be conducted and review those clients who have had EDD conducted for any changes in risk profiles.
Record and document that you have reviewed higher risk customers to ensure their behaviour of the customer is consistent with your knowledge and understanding of their business.
The FATF states applicable situations as follows:
- A high-risk customer’s account activity and transaction behaviour shows that their level of ML/TF risk remains high.
- A low- or medium-risk customer’s account activity and transaction behaviour shows that their level of ML/TF risk has increased since your previous assessment.
- When you consider, based on your risk assessment and programme, that the level of risk involved is such that enhanced CDD should apply to a particular situation.
Both CDD and EDD require the collection of data to verify a customer’s identity and to determine the level of risk they may present. However enhanced customer due diligence has two key components over and above what is usually required with CDD:
- The use of increased or more sophisticated measures to obtain and verify your customer’s details, their representatives, other key persons, and details of their beneficial ownership structure.
- Ensuring you obtain and verify source of wealth and/or source of funds of your customer.
These two components may seem like a lot more work but this extra degree of scrutiny will help you determine the legitimacy of beneficial ownership structures, determine whether funds are legitimately acquired, or whether there could be reason to suspect source of wealth maybe from the proceeds of criminal activity.
And what if you do find reason to suspect money laundering activity? Well, ‘stay calm’ and submit a suspicious activity report (SAR) to the FIU using the online form at GoAML which is the prescribed reporting tool from the AML/CFT Act.
CDD has become par for the course, we’ve all spent time gathering information on our customers and checking identities and we’ve become used to the general process. Enhanced customer due diligence is not so different. It makes us dig a little deeper and go a few steps further but it is a critical activity for high-risk clients and to meet requirements of section 22 of the AML/CFT Act.
- Confirm risk – determine the level of risk your customer poses. We have already spoken about the key reasons you may consider a client high risk – these factors need to be given careful consideration. Remember to think about the location of your customer, the types and frequency of transactions, whether they are a politically exposed person or use a trust or other vehicles such as limited partnerships, companies with nominee directors or shareholders to keep personal assets.
- Examine the nature and purpose – obtain additional information about the nature and purpose of the proposed business relationship between you and the customer.
- Identify and verify Identities – identity information must be gathered about a customer, the beneficial owner(s), and a person acting on behalf of a customer and verify their information.
- Find out the source of wealth and/or funds – obtain information about your customer’s source of wealth or source of funds. You must record this information and take reasonable steps, according to the level of risk involved, to verify this information using other reliable and independent sources.
Changes to the AML/CFT Act which came into effect on 1 June 2024 expanded the scope of EDD. These changes mean additional information is required to be collected when carrying out EDD where you have grounds to report suspicious activity, or in certain cases relating to business relationships.
Additional measures include:
- Obtaining further information from the customer in relation to a transaction;
- Examining the purpose of a transaction (before June 2024 there was no requirement to “examine”);
- Conduct enhanced monitoring of a business relationship; and
- Obtain senior management approval for transactions, or to continue the business relationship.
The FATF provides examples of enhanced CDD measures as:
- Obtaining additional information on the customer (e.g. occupation, volume of assets etc.) and updating more regularly the identification data of customer and beneficial owner.
- Obtaining additional information on the intended nature of the business relationship.
- Obtaining information on the reasons for intended or performed transactions.
- Obtaining the approval of senior management to commence or continue the business relationship.
- Conducting enhanced monitoring of the business relationship, by increasing the number and timing of controls applied, and selecting patterns of transactions that need further examination.
- Requiring the first payment to be carried out through an account in the customer’s name with a bank subject to similar CDD standards.
It is also important to remember that the June 2024 amendments to carrying out EDD includes trusts, limited partnerships, companies with nominee directors or shareholders and the need to have varying levels of customer due diligence performed on parties depending on the risk level identified.
Requirements for trusts include:
- Conducting EDD on a trust or another vehicle for holding personal assets.
- Taking reasonable steps, according to the level of risk involved, to verify the identity of any beneficial owners of your customer.
- The need to obtain the name and date of birth of each beneficiary of the trust. There is no requirement to verify this information. However, if the customer is a discretionary trust, a charitable trust, or a trust with more than 10 beneficiaries, you must obtain a description of each class or type of beneficiary. If the trust is a charitable trust, you must also obtain the objects of that trust.
- Ensuring you identify the settlors, and the origin of the settlor’s wealth. This will help identify the source of wealth and/or source of funds of the trust.
- Identifying the source of any income that the trust is receiving.
The June 2024 EDD changes also mean you will need to review and update your compliance programmes accordingly.
You must clearly describe in your compliance programme when it is necessary to obtain and verify the source of funds or source of wealth, or both for a customer. This is an important step that should not be missed as it helps to demonstrate that you have adequate and effective procedures, policies, and controls in place to help meet your AML obligations.
Enhanced customer due diligence is an important step in ensuring we know our customer and understand the business relationship. As we deal with the more complex, and high value transactions becomes the norm, we need to get used to carrying out enhanced checks, including it in our compliance programmes, staff training and record keeping.
Doing EDD right will not only help keep New Zealand from becoming a vehicle for money laundering but also help protect the reputation of your business and risk management systems, so as the saying goes ‘keep calm and carry on.’ And if you need a little help getting there, speak to our expert team on 09 369 867 and we’ll be able to provide practical help with EDD and your AML compliance programme.
