Financial Crime World

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Financial Institutions Must Implement Strict Measures to Combat Money Laundering and Terrorist Financing

The Financial Action Task Force (FATF) has issued new international standards, urging financial institutions worldwide to implement robust measures to prevent money laundering and terrorist financing. These standards require financial institutions to conduct Customer Due Diligence (CDD) on all customers, including occasional transactions above a designated threshold or wire transfers in certain circumstances.

Conducting Customer Due Diligence

Financial institutions must:

  • Identify the customer and verify their identity using reliable sources
  • Understand the purpose and nature of the business relationship
  • Identify the beneficial owner and take reasonable measures to verify their identity
  • Conduct ongoing due diligence on the business relationship and scrutinize transactions to ensure they are consistent with the institution’s knowledge of the customer

Risk-Based Approach

The FATF recommendations stress the importance of a risk-based approach (RBA) in implementing CDD measures. Financial institutions should:

  • Determine the extent of such measures based on their individual risk profiles
  • Take into account factors such as the type of business relationship and the level of complexity involved

Non-Compliance

In cases where financial institutions are unable to comply with the applicable requirements, they must:

  • Not open an account or establish a business relationship
  • Consider making a suspicious transactions report in relation to the customer

Record-Keeping

Financial institutions must maintain records on transactions and information obtained through CDD measures for at least five years after the business relationship is ended or an occasional transaction is completed. This enables swift compliance with information requests from competent authorities.

Additional Measures for Specific Customers and Activities

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The FATF recommendations also provide additional guidance on specific customers and activities that require enhanced due diligence, including:

  • Politically Exposed Persons (PEPs): Financial institutions must:
    • Have appropriate risk-management systems in place to determine whether a customer or beneficial owner is a PEP
    • Obtain senior management approval for establishing business relationships with such individuals
  • Correspondent Banking: Financial institutions must:
    • Gather sufficient information about respondent institutions and assess their AML/CT controls before entering into correspondent banking relationships

These measures are designed to help prevent money laundering and terrorist financing, while also ensuring that financial institutions can conduct normal business activities without undue disruption.