Customer Due Diligence: Identifying Beneficial Owners and High-Risk Customers

The European Union has introduced stricter regulations on financial institutions’ customer due diligence measures to prevent money laundering and terrorist financing. As of [date], obliged entities must identify beneficial owners and assess the risk of money laundering or terrorist financing in their customer relationships.

Identifying Beneficial Owners

Beneficial owners are natural persons who have control over a company, foundation, or foreign legal arrangement. Obliged entities must identify these individuals and verify their identity. The regulations apply to customers who:

• Hold more than 25% of the ownership interests
• Control more than 25% of the votes
• Have the right to appoint or unseat more than half of the directors
• Exercise control through an agreement or articles of association

Additionally, the regulations cover beneficial owners who are:

• Politically exposed persons (PEPs)
• Close family members and associates of PEPs

In these cases, obliged entities must apply enhanced customer due diligence measures to ensure knowledge of the customer, any beneficial owners, and the purpose and intended nature of the customer relationship.

High-Risk Customers

Obliged entities must also identify high-risk customers who are likely to engage in money laundering or terrorist financing activities. These individuals include:

• Politically exposed persons (PEPs)
• Close family members and associates of PEPs

To mitigate this risk, obliged entities must apply enhanced customer due diligence measures, including:

• Senior management approval
• Thorough background checks
• Ongoing monitoring of the customer relationship

Correspondent Relationships

Obliged entities that enter into correspondent relationships with institutions from outside the European Economic Area (EEA) must gather sufficient information on the respondent institution’s:

• Business
• Reputation
• Supervision quality

They must also assess the respondent institution’s measures to combat money laundering and terrorist financing and ensure senior management approval before establishing the relationship.

Prohibition against Shell Banks

Obliged entities are prohibited from entering into correspondent relationships with shell banks, which are financial institutions that:

• Lack a physical presence
• Have no real business activities

This prohibition aims to prevent the use of these institutions for money laundering and terrorist financing activities.

Conclusion

The new regulations aim to strengthen the fight against money laundering and terrorist financing by ensuring that financial institutions have a more thorough understanding of their customers’ identities, businesses, and relationships. By identifying beneficial owners and assessing high-risk customers, obliged entities can better detect and prevent suspicious transactions and maintain the integrity of the financial system.