Due Diligence and Anti-Money Laundering (AML) Compliance: Verification Subjects

Introduction

Financial institutions have a critical role to play in preventing money laundering and other financial crimes. As part of this effort, they must conduct thorough due diligence on their clients and business partners to ensure compliance with AML regulations. In this article, we will explore the key points related to verification subjects for AML purposes.

Verification Subjects

The following individuals or entities may be considered verification subjects for AML purposes:

Partnerships

• Partners of a firm applying for business should be verified as if they were directors and shareholders of a company.
• Exception: Limited partnerships, where only the general partner needs to be verified. Limited partners are exempt from verification unless they are significant investors.

Companies (including Corporate Trustees)

• Unless a company is quoted on a recognized stock exchange or has substantial premises and payroll, steps should be taken to verify its underlying beneficial owners—those who ultimately own or control the company.
• Beneficial owners may include individuals with significant influence over the company’s decision-making processes.

Intermediaries

• If an intermediary is instructed by someone else to act, that person can be considered a verification subject unless the transaction is exempt.
• In some cases, even if documentation is in the intermediary’s name, they should also be treated as a verification subject.

Exempt Cases

The following cases are typically exempt from verification:

• Small one-off transactions: Unless linked to other transactions, small one-off transactions may not require verification.
• Exempt institutional applicants: Certain institutions, such as banks and credit unions, may be exempt from AML regulations in certain jurisdictions.
• Non-paying accounts: Accounts that do not generate any transactions or income may not require verification.

Monitoring for Undisclosed Principals

Institutions should monitor customers to ascertain whether there’s an undisclosed principal involved, especially if the customer appears to be merely an intermediary. This can help prevent money laundering and other financial crimes.

Reporting Suspicious Transactions

If a transaction is suspected of laundering, it should be treated as requiring verification (or refusal) and reported to the relevant authorities.

Conclusion

Verification subjects for AML purposes include partnerships, companies, intermediaries, and individuals with significant influence over a company’s decision-making processes. Exempt cases may include small one-off transactions, exempt institutional applicants, and non-paying accounts. Institutions should monitor customers to ascertain whether there’s an undisclosed principal involved and report suspicious transactions to the relevant authorities. The specific requirements can vary based on the jurisdiction and the type of business or institution involved.