Financial Institutions Must Verify Customer Identity to Combat Money Laundering

Introduction

In an effort to combat money laundering and terrorist financing, financial institutions are required by law to conduct customer due diligence (CDD) measures before establishing business relationships or conducting occasional transactions with customers.

Requirements for Financial Institutions

According to the Regulations Governing Anti-Money Laundering of Financial Institutions, financial institutions must obtain certain information from customers or trusts to identify and verify their identities. This includes:

• Name
• Legal form
• Proof of existence of the customer or trust
• Charter documents that regulate and bind the entity

For customers who are organizations, financial institutions must also obtain:

• Names of relevant persons having a senior management position in the organization
• Address of its registered office and principal place of business

Additionally, financial institutions must verify the identity of beneficiaries of life insurance policies, investment-related insurance policies, or annuity insurance policies by obtaining sufficient information to establish their identity at the time of payout.

CDD Measures for Effective Risk Management

The CDD measures are designed to help financial institutions effectively manage money laundering and terrorist financing risks. However, in certain circumstances, financial institutions may rely on third-party providers to perform these measures as long as they ensure that:

• The third party is regulated, supervised, or monitored
• The third party has appropriate measures in place for compliance with CDD and record-keeping requirements

Electronic payment institutions, in particular, are required to carry out identity verification processes for offshore users through outsourced service providers. Financial institutions must adopt management measures to ensure that these outsourced service providers are located in countries with adequate anti-money laundering and counter-terrorism financing regimes.

Consequences of Non-Compliance

Failing to complete the CDD process may result in a financial institution being unable to establish business relationships or conduct transactions with customers. In such cases, the institution may be required to file suspicious transaction reports on money laundering or terrorist financing.

Conclusion

The regulations emphasize the importance of customer due diligence measures in preventing money laundering and terrorist financing. Financial institutions must therefore ensure that they comply with these requirements to maintain a safe and secure financial system.