Much ado about KYC
This article highlights the importance of the Know Your Customer/Anti-Money Laundering (KYC/AML) and why it ought to be part of any institutional risk management framework.
The KYC/AML regulations are now applicable to financial institutions and non-designated financial institutions e.g. law firms, car dealerships, estate agents, law firms, accountants,etc.and any firm that has client relationships at the heart of their business.
The key international AML monitoring system is known as the Financial Action Taskforce, commonly referred to as FATF. The FATF’s recent visit to Nigeria was a crucial one during which it assessed Nigeria’s capacity to comply with the global AML/KYC procedures. Many will recall that Nigeria’s journey started a few years ago, at the bottom in the black list of FATF. In response to the blacklisting major reforms were carried out the most important being the creation of the EFCC.This is what moved Nigeria out of the black list. However since then, Nigeria has had to work harder than ever before on AML reform to be worthy to move onto the clean list from the grey list. Corruption remains a serious issue in Nigeria and Money Laundering is implicated as a major active ingredient driving and sustaining corruption. In spite of this, it is hoped that the outcome of the FATF plenary scheduled to hold in November 2013 will deliver a favourable judgment that sees Nigeria enter the green list for the first time.
The FATF monitors countries adherence to the global AML standards.The process is known as the 40 + 9 key recommendations. Given the impact of money laundering on Nigeria’s economic development and ability to attract Foreign Direct investment,a short background will be useful here.Money laundering activitieshas a notorious record going back to the 1950’s. Organised crime wielded enormous influence on society and was veryrampant in jurisdictions such as the United States. Criminalgangs made millions by activities such as racketeering, prostitution rings, gambling, etc. and the trick was to ‘launder’ the illicit funds into ‘clean money’ thereby erasing the trail. Typically, the proceeds of illegal activity are re-invested into legitimate business such as real estate, luxury goods market, Fine arts, etc.
The current estimate of global money laundering by the United Nations office on drugs and crime is $2 trillion not 1.8 billion. Money laundering costs hundreds of millions of dollars per annum in undeclared revenue, tax evasion,etc. to global economies. It is for these reasons that the war on corruption in Nigeria must be intensified.
A universally acceptable definition of Money laundering is the process by which criminals seek to conceal the source of illegally obtained money or proceeds of crime by integrating backinto the financial system by transactions that give the appearance of being obtained legitimately. There are three main stages of money laundering
1. Placement – the process of placing the physical proceeds in a bank or other financial institution e.g., opening a bank account
2. Layering – the process whereby the criminal undertakes several transactions over a period of time in an attemptto ‘wash’ or clean up the proceeds by making it appear to be from legitimate activity and thusdisassociate it from the true source.
3. Integration –the final stage of money laundering where the criminal has achieved concealing the ill-gotten proceeds in the system and the money is circulated into the economy freely. The focus on money laundering by the international community is at its peak, because of the impact part referred to above.
It is clear that money laundering which is part of the larger corruption index silently damages the very fabric of national economies.This is because financial institutionsare the most obvious target for money launderers to launder their proceeds.
It is important that financial institution and designated financial institutionbe aware of theenormous risk of ml. Second need tounderstand the very important role they must play in the AML crusade. Financial institutions can unknowingly and easily become conduits for money laundering and one of the major ways to prevent this is by careful scrutiny of their customers. This procedure is known as KYC.
The Know your customer (KYC) regulations are now a mandatory requirement in most highly regulated industries. It is mandatory for all financial institutions and designatednon-financial institutions to establish the identity of every customer/client before commencing a business relationship. The reason is simple. If you do not know your client well enoughyou cannot determine the source of his funds mitigateagainst the associated money laundering risk.Further, it is in fact a breach of the Money Laundering (Prohibition) Act 2013 to fail to conduct checks and due diligence before commencing a business relationship.
A good AML framework requires proper risk management systems to be put in place.This enables on-goingassessment and monitoring of all clients to be regularly undertaken.Financial institutions required to maintain a client database which should checked against designated sanctions list fromOFAC, HMT, UN sanctions list, Nigeria sanctions list. Financial institutions are required to have a dedicated Money Laundering reporting /Compliance officers familiar with the body of AML/KYC regulations.
As a result of the growing body of regulations over the years, money laundering methods have become increasingly sophisticated and are devising new methods to avoid getting caught. Although the methods haveevolved however the objective/goal remains the same: to distance the true nature of the proceeds from the original source and often the ownership.
The Nigerian AML regulatory framework has recently been strengthened. The former SEC AML/CFT Compliance manual has now been gazetted and has become an enforceable set of regulations. This has strengthened the government’s ability to respond to AML issues. Capital Market operators are required by strict and strong enforceable regulations to comply with AML. This is a very positive development.
At a West African regional level AML issues are in the hands of GIABA. GIABA is the West African coalition of the FATF. IT has also played an important role in monitoring in regional AML compliance. Nigeria’santicipated emergence from the grey list into the ‘green’ list currently occupied by just one other African nation; South Africa, will enhance the reputational profile of Nigeria. Certainly Nigeria will begin to attract more foreign direct investment and will present new opportunities for the Nigerian business community. I think that the key challenge here is that the business community needs to join hands with the government and provide the required public awareness to ensure AML is widely understood, appreciated and complied with.
Beverley Agbakoba-Onyejianya is a Compliance Officer with Renaissance Capital. She is also currently serving as chairperson of the Compliance Officers Rules and Review Committee of the Nigerian Stock Exchange (NSE). The views expressed by the author are hers and do not represent the views of Renaissance Capital.
By: Beverley Agbakoba-Onyejianya