The EU’s AML Fourth Directive Places Responsibility for Due Diligence on You!

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When the law firm Mossack Fonseca found itself in the heart of the media storm known as the ‘Panama Papers’, the number one panic was to try to show robust record-keeping which was clearly missing. 
Two months into the storm they were ‘unable to identify the beneficial owners of more than 70% of 28,500 active companies in the British Virgin Islands (BVI) as well as 75% of companies in Panama’ (source: BBC).  

Never mind the $440,000 fine or the reputational damage that has resulted in the firm closing down, it is embarrassing to have to complete due diligence checks retroactively. In the words of a Mossack Fonseca employee: 

“We all know that we are under severe scrutiny by the authorities, and to present incomplete information to the FIA [the BVI’s financial intelligence agency] is bad,” a Mossack Fonseca employee wrote.

“But it is worse when we are directly involved with the management of the company and we ought to know and have the information and details on the UBO [ultimate beneficial owner], but that information is lacking. It is embarrassing.” (Source: The Guardian

The EU Fourth Directive and Avoiding Embarrassment

A key blindspot in much of what has become publicly known about Mossack Fonseca seems to have been its reliance on other firms’ green-lighting of clients for its own (lacking) due diligence procedures. As part of its last-minute scramble for information from its intermediaries about ultimate beneficiaries, the firm received responses along the lines of: 

‘THE CLIENT HAS DISAPPEARED! I CANT FIND HIM ANYMORE!!!!!!" from a Swiss wealth manager;

“We look like f**** amateurs,” wrote one customer after the firm asked it to obtain more information from its client. “A Mickey-Mouse operation.”

So let’s go back to what the EU AML Fourth Directive actually requires obliged entities to do (you can also read further on due diligence in a previous article of ours): 

Most Anti-Money Laundering (AML) legislation states that ultimate responsibility for conducting appropriate customer due diligence has to be with the obliged entity (i.e., you, if you’re the one handling a customer’s money in any way, whether investing or auditing, etc.).

Here is the relevant excerpt from the EU AML Fourth Directive, which will look similar in most jurisdictions:  

In order to avoid repeated customer identification procedures, leading to delays and inefficiency in business, it is appropriate, subject to suitable safeguards, to allow customers whose identification has been carried out elsewhere to be introduced to the obliged entities. Where an obliged entity relies on a third party, the ultimate responsibility for customer due diligence should remain with the obliged entity to which the customer is introduced. (Source: EU Fourth AML Directive)

This ensures that appropriate independent checks are in place to prevent any proceeds from crime entering the legitimate flow of money.

To this end, a private joke among our trainers is that the Know Your Customer (KYC) principle should really be ‘KaDYC’ = Know and Document Your Customer! Without properly filed paperwork that demonstrates you have done your due diligence and are in possession of evidence of who your client is, you risk serious embarrassment!

No Excuses

AML measures across the world are moving along the lines set out by the EU Fourth Directive, and the key theme is a risk-based approach to the matter. The Panama Papers show exactly how such a risk-based approach is so crucial to the success of your firm. 

As we have outlined in a previous article, sticking to the basic principles of KYC (or KaDYC as we call it) goes a long way towards ensuring integrity in your operations, which is important to you, your firm, your clients as well as your society! 



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