Financial Crime World

Brazil’s Know Your Customer Regulations: What Financial Institutions Need to Know

In a bid to strengthen its anti-money laundering (AML) regime, Brazil has recently introduced a risk-based approach for financial institutions, as recommended by the Financial Action Task Force on Money Laundering. This new framework aims to improve the effectiveness of AML controls and reduce the burden on financial institutions.

Know Your Customer Regulations

Under Brazilian law, all financial institutions are required to conduct thorough customer due diligence (CDD) and know your customer (KYC) procedures. The Central Bank has issued Circular No 3,978/2020, which outlines the minimum KYC data that must be collected from customers during the onboarding process. This includes:

  • Personal information
  • Analysis of the customer’s risk profile

Risk-Based Approach

The new framework introduces a risk-based approach to AML supervision, where financial institutions are required to conduct internal risk evaluations and classify their customers based on the level of risk they pose. This means that financial institutions must have mechanisms in place to:

  • Identify each customer
  • Qualify each customer
  • Classify each customer
  • Update this information as the relationship evolves

Key Changes

Circular No 3,978/2020 introduces several key changes to Brazil’s AML regime, including:

  • Expanded KYC requirements
  • Risk-based approach to supervision
  • Requirement for internal risk evaluations
  • Enhanced monitoring and reporting of operations
  • Coercive measures for non-compliance

Challenges Ahead

While the new framework aims to improve the effectiveness of AML controls, it also presents several challenges for financial institutions. One of the main challenges is:

  • Allocating responsibility under the risk-based approach regime
  • Ensuring that internal procedures are in line with regulatory expectations

Conclusion

The introduction of a risk-based approach to AML supervision marks an important step forward in Brazil’s efforts to combat money laundering and terrorist financing. However, financial institutions must be aware of the challenges ahead and take steps to ensure compliance with the new regulations. By doing so, they can minimize their risk exposure and avoid potential future liabilities.