In an era where financial crime and money laundering pose significant threats, it has become imperative for financial institutions to implement robust customer due diligence (CDD) measures. Extended Annexure KYC is a crucial component of CDD for non-individual entities, enabling institutions to gather in-depth information about their clients.
According to a report by the Financial Action Task Force (FATF), around $2 trillion is laundered globally each year. Extended Annexure KYC plays a vital role in combating this by preventing criminals from using non-individual entities to hide their illicit activities.
Extended Annexure KYC typically includes the following elements:
Financial institutions can follow a structured approach to enhanced due diligence using Extended Annexure KYC:
Pros:
Cons:
A financial institution discovered that the beneficial owner of a client entity had been omitting his name from all required documentation. Further investigation revealed that the beneficiary was involved in money laundering and had used the entity to hide his criminal activities.
Lesson Learned: It is essential to verify the identity and background of all beneficial owners, even if they do not hold a majority stake.
Another institution encountered a client entity with a director who appeared to be a puppet for the real owners. The director had no experience in the industry and had only recently been appointed. Investigation revealed that the real owners were using the director to conceal their involvement.
Lesson Learned: Pay attention to the appointment of directors and their backgrounds. Consider the purpose of the entity and the reasons for the appointment.
A financial institution was onboarding a client entity that claimed to be a legitimate investment company. However, investigation revealed that the entity was a shell company registered in an offshore jurisdiction known for being a tax haven. The entity was actually being used to launder funds.
Lesson Learned: Be vigilant about entities incorporated in offshore jurisdictions. Thoroughly investigate their business activities and the legitimacy of their source of funds.
Element | Description |
---|---|
Identity Verification | Collect and verify information about the entity's legal representative(s) and beneficial owners. |
Ownership and Control Structure | Understand the ownership and control relationships within the entity, including beneficial owners. |
Source of Funds and Wealth | Determine the legitimate source of the entity's funds and assets. |
Purpose and Intended Nature of the Business Relationship | Establish the purpose of the entity and identify any suspicious or high-risk activities. |
Pros | Cons |
---|---|
Enhanced risk assessment and mitigation | Increased compliance costs |
Reduced exposure to financial crime | Potential delays in onboarding new clients |
Improved regulatory compliance | Limited availability of information on certain entities |
Step | Action |
---|---|
1 | Collect and review relevant documentation |
2 | Assess ownership and control |
3 | Analyze source of funds and wealth |
4 | Monitor and review |
Financial institutions must prioritize the implementation of Extended Annexure KYC for non-individual entities. By doing so, they can significantly enhance their due diligence processes, reduce their exposure to financial crime, and ultimately protect the integrity of the financial system.
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