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Know Your Client and Anti-money laundering policies

  • May 16, 2024 3:55 PM EDT

    Know Your Client, also known as KYC, refers to numerous due diligence activities performed not only by financial institutions but also other regulated companies in order to retrieve any relevant information about their clients before and in the course of doing business with them. Every financial and business entity is responsible for adopting and implementing various KYC procedures and regulations.

    Know Your Client policies typically include procedures like:
    Collecting and analysing a person’s identity information and looking into the real beneficiary of the company and business accounts
    Name-matching with lists of political parties (searching for Politically Exposed persons or PEPs)
    Determining a client’s likelihood of committing money laundering, terrorist financing, identity theft or other offences
    Creating expectation profiles based on a client’s transactional behaviour, and monitoring any deviations from this profile
    Anti-money laundering, also known as AML, is a set of laws, regulations and other procedures designed to eliminate the practice of generating income from illegal activity. Typically, money launderers hide the real source of their income through a series of steps that make it look like money derived from illegal activities was earned legitimately. Anti-money laundering policies aim to help institutions spot and look into possible cases.

    Globalisation and the global information exchange system
    KYC and AML policies are designed to offer solutions for eliminating the numerous risks deriving from the fact that financial institutions do not know their clients. On the other hand, these same policies also have a tendency to conflict with a private individual’s general expectations of confidentiality and privacy.

    With the rapid advance of globalisation over the last few decades, security concerns have become a top priority, not only for national regulators, but for the international community more generally. In response to rising concerns over money laundering, an intergovernmental organisation called the Financial Action Task Force on Money Laundering (FATF) was established in 1989 during the G7 summit in Paris, and shortly afterwards it issued recommendations on money laundering and terrorism financing. All the recommendations are intended to be put into action at a national level through legislation and other legally binding measures. In addition to the Know Your Client and Anti-money laundering procedures described above, FATF recommendations require states to co-operate internationally and exchange relevant information in investigations.

    A new international standard, called AEOI or the automatic exchange of information, will come into force in participating countries to ensure that tax authorities exchange data relating to taxpayers’ bank accounts. The main goal of AEOI is to make tax evasion impossible. AEOI stipulates that banks must report information about bank and safekeeping accounts to the domestic tax authorities. This information is then exchanged with the tax authorities in AEOI partner countries.

    Possible solutions to protect confidentiality
    Some jurisdictions consider revealing the name of an account holder to be a criminal act. The privacy of a bank’s clients is protected by law and regarded as being similar in nature to the confidentiality between doctor and patient or lawyer and client. Although privacy is seen as a fundamental principle and greatly protected in these jurisdictions, law enforcement access can be granted to the relevant information in the context of a criminal investigation.

    However, if no criminal accusation has been made, offshore banks offer the maximum possible confidentiality and security. Offshore banking jurisdictions are designed to protect assets from domestic litigation and other civil matters, such as contested estates or divorce. An even higher level of confidentiality and anonymity is available through other asset-holding vehicles — for example, international business companies and offshore trusts.