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8th May 2020 | Jaroslaw Lejko | Chief Compliance Officer

Multi-stage customer due diligence - Purpose and intended nature of the business relationship

Obtaining reliable and comprehensive information regarding a customer’s source of funds and source of wealth is much more challenging, especially in case of a potential customer when a financial institution does not yet know their likely transactional activity, their counterparts and details regarding their transactions. 

This is why many European banks perform a detailed source of funds and source of wealth investigation on a risk-based approach only during conducting ongoing monitoring in a case of suspicious transactions or as a part of enhanced Customer Due Diligence (CDD) process during the onboarding of a high-risk customer.

In practice, during the verification of source of funds and source of wealth, the customer is obliged to provide the financial institution with a set of sensitive information. What is more, some regulators place special attention on collecting such data before financial institutions establish a business relationship with a prospective customer. A similar approach is taken by the local regulator, e.g. Gibraltar Financial Services Commission (GFSC) in “Systems of control to prevent the financial system from being used for money laundering or terrorist financing activities” (Guidance Note). In the recommendation 60 of the Guidance Note it is stressed that a financial institution should obtain information on the customer’s source of income or wealth to the extent which shall be determined on a risk-based basis.

Theoretically, obtaining comprehensive, confirmed information regarding customer’s source of funds and wealth could prevent the financial institution from establishing business relationships with customers of unacceptable AML/CFT risk levels. In practice, there are two key limitations in this area:

  • business requirements in highly competitive environments to simplify the on-boarding processes, and
  • quality of information obtained from the customer and the ability to confirm such information from reliable and independent sources.

A proper verification of customer’s source of funds and source of wealth consists of several steps including:

  • obtaining from a customer detailed information regarding their financial status, past, current and prospective business activities as well as other data which has significant influence on its overall wealth and current income;
  • obtaining from a customer or from reliable independent sources evidence of data and information provided by a customer;
  • analysing consistency and verifiability of customer data.

The process described above could entail several interactions between a financial institution and a customer. All these actions required not only professional, time-consuming analytical effort from a financial institutions side, but also a high commitment from the customer side, which is usually accepted by the customer with reluctance and impatience. The principle is simple to the most extent possible – the more questions are asked, and the more documents are required, the higher is customer’s frustration. Very often the customer does not understand the purpose of being asking such detailed and sensitive questions which makes the one more reluctant to finally conclude the agreement.

The other issue is that in many cases financial institutions are faced with problems whether they have to rely on a customer’s statement given the fact that verification of such data is either impossible to perform or too expensive and time-consuming.

All these factors outlined above demonstrate that preforming a full source of funds and source of wealth investigation during the onboarding process is extremely challenging in all jurisdictions where there is such an obligation, regardless of the number of customers and their risk level. In order to meet this obligation, the financial institution can implement several technical and organisational solutions to tailor Customer Due Diligence measures, in particular the financial institution should:

  • define CDD measures as well as data and documentary requirements in both standard and enhanced CDD process;
  • clearly define risk factors which trigger enhanced CDD process;
  • design interactive onboarding application form tailored to the customer's specification to collect information in a convenient way in case of standard CDD process;
  • design a process of asking a customer additional detailed questions and obtaining additional customer documentation in case of enhanced CDD process;
  • automate the process of analysing customer data in a range which optimise a financial institution’s resources dedicated to CDD process, limits human errors but on the other hand allows for manual investigation and a final individual decision in the case of high-risk customer and more complex cases.

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