Question: Under the Prevention of Money Laundering Act, 2064, state the circumstances in which a reporting entity is required to identify its customers. Also explain which customers fall within the scope of enhanced customer due diligence.
Meaning of Customer Identification
Customer identification refers to the process by which a reporting entity identifies and verifies the identity and relevant particulars of a customer before establishing a business relationship and while conducting financial transactions.
Customer identification is an important preventive measure for combating money laundering and terrorist financing, as well as for reducing fraud and other financial crimes. Reporting entities are required to establish the true identity and relevant information of their customers and verify such information through appropriate measures.
The Prevention of Money Laundering Act, 2064 prohibits reporting entities from opening or maintaining accounts, or conducting transactions, in anonymous or fictitious names. Accordingly, proper customer identification and verification constitute an important component of the anti-money laundering framework.
Circumstances Requiring Customer Identification
A reporting entity is required to properly identify and verify a customer's identity in the following circumstances:
- Before establishing a business relationship with a customer;
- When opening an account;
- When conducting an occasional transaction exceeding the prescribed threshold;
- When carrying out an electronic fund transfer or wire transfer;
- When there is a doubt regarding the accuracy, authenticity or adequacy of previously obtained customer identification information, requiring further verification;
- When there is suspicion of money laundering or terrorist financing, requiring further verification;
- When a high-risk customer or a politically exposed person (PEP) conducts a transaction, as required by the applicable provisions; or
- In other circumstances prescribed by the regulatory authority.
Customers Falling within the Scope of Enhanced Customer Due Diligence
Enhanced customer due diligence refers to the application of additional and more stringent customer identification, verification and monitoring measures to customers or transactions presenting a higher level of risk.
The following categories of customers fall within the scope of enhanced customer due diligence:
- Customers identified as high-risk customers through risk assessment;
- Customers engaged in complex, large or unusual transactions for which there appears to be no clear economic or lawful purpose;
- Customers from countries or jurisdictions identified internationally as having inadequate or partial compliance with international standards relating to anti-money laundering and combating the financing of terrorism;
- Politically Exposed Persons (PEPs) and their family members or persons closely associated with them;
- Customers engaged in business or activities identified as requiring special attention;
- Customers using new products, services or technologies identified as high-risk;
- Customers suspected of involvement in money laundering, terrorist financing or other criminal offences; or
- Other customers as prescribed by the regulatory authority.
Conclusion
Customer identification is a fundamental component of a sound Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) framework. It enables reporting entities to understand who their customers are, assess the risks associated with their transactions and identify suspicious activities at an early stage.
Therefore, reporting entities should implement customer identification and enhanced due diligence measures in accordance with the legal and regulatory requirements, particularly in relation to high-risk customers and transactions. Effective implementation of these measures helps maintain the transparency, integrity, reliability and security of the financial system and contributes to the prevention of money laundering, terrorist financing and other financial crimes.