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Beneficial Ownership and Customer Due Diligence: A New Era for Financial Institutions

In a move to combat money laundering and terrorist financing, the government has introduced new regulations requiring financial institutions to identify and verify the beneficial owners of their customers. These changes aim to ensure that financial institutions are aware of who ultimately owns or controls their customers, thereby reducing the risk of illicit activities.

Who is a Beneficial Owner?

A beneficial owner is defined as a natural person who exercises control over a legal entity or association through ownership, voting rights, appointment powers, or other means. This includes individuals who hold more than 25% of the ownership interests in a company, control more than 25% of the total number of votes, have the right to appoint or unseat more than half of the directors, or exercise significant influence over the entity.

New Requirements for Financial Institutions

Financial institutions are now required to identify and verify the beneficial owners of their customers. This includes:

• Obtaining and verifying information on the identity and control structure of the customer
• Assessing the risks associated with the customer relationship
• Conducting ongoing monitoring and reporting to ensure compliance with these new regulations

Enhanced Due Diligence for High-Risk Customers

For customers deemed to be high-risk, financial institutions are required to apply enhanced due diligence measures, including:

• Obtaining additional information on the customer’s source of wealth
• Conducting enhanced scrutiny of the customer’s transactions
• Assessing the purpose and intended nature of the customer relationship

Politically Exposed Persons: Additional Measures

Financial institutions must also take additional steps when dealing with customers who are politically exposed persons or have close family ties to such individuals, including:

• Ensuring senior management approval is obtained before establishing a customer relationship
• Conducting enhanced scrutiny of the entire customer relationship

Correspondent Relationships: New Requirements

Financial institutions entering into correspondent relationships with institutions from outside the EEA must:

• Gather additional information on the respondent institution
• Assess its measures to combat money laundering and terrorist financing
• Obtain senior management approval before establishing a new correspondent relationship

Prohibition Against Shell Banks

Finally, financial institutions are prohibited from entering into correspondent relationships with shell banks. This move aims to prevent the misuse of financial systems by illegal actors.

Conclusion

These new regulations mark a significant shift in the way financial institutions operate. By requiring them to identify and verify beneficial owners and conduct enhanced due diligence measures, the government hopes to reduce the risk of money laundering and terrorist financing. As the financial industry adapts to these changes, it is essential that institutions prioritize compliance with these new regulations to ensure the integrity of the global financial system.