Customer due diligence or background checks is closely associated with the flight against money laundering.
Financial institutions and certain other business activities are required by law under the Money Laundering (Prevention) Act to carry out identification and verification of identity procedures before entering into a business relationship with a potential customer or client.
Institutions such as banks must identify and know their customer (often referred to as KYC).
Besides personal details of the customer, the bank must have sufficient information on the customer’s activities, financial position, banking practices and the purpose for which the service are used.
In practice the institution must verify the customer’s identity from an official identity document and inquire as to what kind of service the customer needs.
Moreover the Money Laundering (Prevention) Act also requires the financial institution or other business activity to determine the source of the incoming money and what the funds are going to be used for in order to satisfy themselves that the moneys have not been derived from or to be used for criminal activity.
To determine the origin or source of incoming money the financial institution may ask the customer for not only a written statement (source of funds declaration) but also documents evidencing business operations, registration or any other proof (e.g. deed of sale, will, etc.) which may assist the institution in verifying the source of funds and the purpose for which the funds are to be used.
Without due diligence financial institutions can become subject to reputational operational and legal risks, which can result in significant financial cost in terms of criminal fines and or revocation of licences. Financial institutions should not want to be categorized as accomplices or facilitators of money laundering.
The purpose of the following question and answer segment is to provide guidance to members of the public with respect to customer due diligence or KYC particularly as it relates to the initial process of customer or client identification and verification.
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