AN EXAMINATION OF THE CONCEPT OF CUSTOMER DUE
DILIGENCE UNDER THE NIGERIAN MONEY LAUNDERING (Prohibition) ACT, 2011 (As
amended).
Ibrahim Abdu Abubakar1,
1 PhD Candidate, Dept. of Public Law, Ahmadu Bello University,
Zaria, Nigeria. P.O Box 618 Zaria, Kaduna State, Nigeria.
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ABSTRACT |
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Keywords: Examination;
Concept; Customer-Due Diligence; Nigeria; Money Laundering Act.. |
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The key steps financial and designated – non financial institutions
are required to perform to prevent illicit funds from entering their system
is Customer Due Diligence (CDD), to find out who their customer is, where his
funds have come from and the beneficiary of such funds. While it is important
that financial institutions develop their own effective CDD policies, leaving
them to do it on their own without regulatory oversight will not work,
because the avoidance of illicit funds, inevitably involves turning down
potential business, and not all financial institutions are willing to do
this. The current system of customer due diligence entrenched in Nigerians
Money Laundering (Prohibition) Act, 2011 (As amended), is full of loopholes.
The result is that financial and designated-non financial institutions are
complicit in helping to perpetrate money laundering and terrorist financing.
It is the aim of this paper to explore the provisions of Nigeria’s Money
Laundering (Prohibition) Act, 2011 with a view to identifying
vulnerabilities where Nigeria’s response to customer due diligence may need
to be strengthened. |
INTRODUCTION
By doing business with dubious customers financial
and designated non-financial institutions are facilitating corruption and state
lootings, which denies the nation the chance to lift them out of poverty and
leave them dependent on aid. This is happening despite a raft of anti-money
Laundering Laws that require them to do due diligence to identify their
customers and turn down illicitly acquired funds. But the current laws are
ambiguous about how far banks must go to identify the real person behind series
of front companies. Also, if a bank has filed a report on a suspicious customer
as required by the law, but the authority and the law permit the transaction to
go ahead[1] the
bank can take dirty money. So it may be possible for a bank to fulfil the
letter of its legal obligations, yet still do business with these dubious
customers. By accepting these customers, financial institutions are directly or
indirectly-assisting those who are using the assets of the state to enrich
themselves or brutalise their own people. The key steps financial institutions
are required to perform to prevent dirty funds entering the system is due
diligence to find out who their customer is and where his or her funds have
come from. But the current system is full of loopholes, whether in the
anti-money laundering laws or the way they are enforced.[2]
In accordance with international standards set by
the Basel Committee on Banking Supervision (Basel Committee), FATF[3]countries
must ensure that their financial institutions have appropriate customer
identification and due diligence procedures in place. The procedure applies to financial
institutions, individuals and corporate customers alike. These rules and procedures ensure that
financial institutions maintain adequate knowledge about their customers and
their customers’ financial activities.
Customer identification requirements are also known as “know Your
Customer” (KYC) rules,[4]a
term employed by the Basel Committee. KYC Procedures not only help financial
institutions detect, deter, and prevent money laundering and terrorist
financing, they also confer tangible benefits on the financial institutions,
its law abiding customers and the financial system as a whole.
CONCEPTUAL
CLARIFICATION OF KEY TERMS
Who is a
Customer?
The Basel Committee on Banking Supervision defines
a customer as:
A person or entity who maintains an account with a
financial institution or on whose behalf an account is maintained (i.e,
beneficial owners); Beneficiaries of transactions conducted by professional
intermediaries (eg, agents, accountants, lawyers); and A person or country
connected with a financial transaction who can pose a significant role to bank[5]
What is
Customer Due Diligence?
Customer Due Diligence means taking steps to
identify your customers and checking they are who they say they are. In
practice this means obtaining the following from a customer:
Their photograph on an official document which
confirms their identity, their residential address or date of birth.[6]
The best way to do this is to ask for a government
issued document like a passport along with utility bills, bank statements and
other official documents. In situations where it is relevant, you also need to
identify the (beneficial owner). This may be because someone else is acting on
behalf of another person in a particular transaction. Or it may be because you
need to establish the ownership structure of a company, partnership or trust.[7]
When do
you need to apply Customer due Diligence Measures?
You must establish customer due diligence measures:
When you establish a business relationship, when
you suspect money laundering or terrorist financing, when you have doubt about
a customer’s identification information that you obtained previously, And when the circumstances of existing
customers change.[8]
Customer
Due Diligence When you are establishing a business relationship
A business relationship is one that you enter into
with a customer where both of you expect that the relationship will be ongoing.
It can be a formal or informal arrangement. When you establish a new customer
relationship you need to obtain information on:
(a) The purpose of the relationship
(b) The intended nature of the relationship – for
example where funds will come from the purpose of transactions, and so on.[9]
The type of information that you need to obtain may
include:
Financial
Institutions
Financial institutions include banks, body
corporate, associations or group of persons, whether corporate or incorporate
which carries on the business of investment and securities, a discount house,
insurance institution, debt factorization and conversion firm, bureau de
change, finance company, money brokerage firm,
whose principal business include factoring, project financing, equipment
leasing, debt administration, fund management, private ledger service, investment
management, local purchase order financing, export finance, project
consultancy, financial consultancy, pension fund management, and such other
business as the Central Bank or other regulatory authorities may from time to
time designate.[11] Most, if
not all the crimes of money laundering are committed with the help of financial
institutions. The crime of money laundering is done in stages, namely
placement, layering and integration. Placement occurs when the launderer first
introduce the fund to the financial institution. The launderer seeks the
assistance of an insider who will assist him in the laundering process. Next,
is the layering stage, where the launderer create complex layers of
transactions, moving money from one account to another within the same bank or
from one bank to another.. the final stage is integration, where the launderer
take over an ailing business and revive it, making it difficult for law
enforcement to unravel.
Designated
Non Financial Institutions
“Designated Non Financial Institutions”
include dealers in jewelry, cars and luxury goods, chartered accountants, audit
firms, tax consultants, clearing and settlement companies, legal practitioners,
hotels, casinos, super markets, and such other businesses as the Federal Ministry
of industry may from time to time designate.[12]
These businesses and professions are used by launderers and those who finance
terrorism as shams or mask to avoid recognition by law enforcement agencies. To
check the crimes perpetrated by these businesses and professions, the Federal
Government established the Special Control Unit on Money Laundering (SCUML),
operating under the Ministry of Commerce, to regularly conduct inspections.
Politically Exposed Persons
While,
“Politically Exposed Persons (PEPs)” includes-
(a)
individuals who are or have
been entrusted with prominent public function by a foreign country, for example
Head of state or government, senior politicians, senior government, judicial or
military officials, senior executives of
State owned Corporations and important political party officials;
(b)
individuals who are or have been entrusted
domestically with prominent public functions, for example Heads of State or of
Government, senior politicians, senior government, judicial or military
officials, senior executives of State owned Corporations and important
political party officials; and
(c)
Persons who are or have
been entrusted with a prominent function by an international organization and
includes members of senior management such as directors, deputy directors and
members of the board or equivalent functions other than middle ranking or more
junior individuals.[13]
DEVELOPMENT OF THE CONCEPT OF CUSTOMER DUE
DILIGENCE
In 1988, when the Basel
Committee of Banking Supervision (BCBS) wrote the Basel statement of Principles[14] and
introduced the concept of Know Your Customer (KYC) as a fundamental principle
in banking supervision, the aim was far broader than “catching criminals.” The
principle sought first to facilitate credible risk management by financial
institutions and secondly to reduce the risk of uncontrolled flows worldwide.
The KYC principle was later upgraded to “Customer Due Diligence (CDD) for
banks.” Beyond combating money
laundering and terrorism financing, these obligations on customer acceptance and
their continuous monitoring are part of an attempt to harmonizing standards in
banking supervision as a reaction to the demise of national control by using
elements of global governance for financial centres.[15]
Concurrently, and not unrelated to the process, 13 major international banks
and NGO “Transparency International” decided to develop a private code of
conduct, the “Wolsberg Principles.”[16]
Their most significant effect was to spur regulators, who had already started
work on new rules of CDD within the BCBS into adopting a more rigorous
approach. The CDD paper of the BCBS influenced the Financial Action Task Force
(FATF) to issue the 40 Recommendations on money laundering and terrorism
financing.
INTERNATIONAL
STANDARD ON CUSTOMER DUE DILIGENCE
The Financial Action Task Force (FATF) created by
the G7 summit issued a set of 40 Recommendations designed to “provide an
enhanced, comprehensive and consistent framework of measures for combating
money laundering and terrorist financing.” These Recommendations among other
things, cover the criminalization of money laundering and terrorism financing,
the freezing and seizing of criminal proceeds and of terrorism funds, key
preventive measures against laundering and terrorism financing for financial
institutions and other institutions, financial intelligence units and
international co-operation.[17]
FATF Recommendation 10 requires that if, during the
establishment or course of the customer relationship or when conducting
occasional transaction, a financial institution suspects that transaction
relate to money laundering or terrorist financing, then the institution should:
Normally seek to identify and verify the identity
of the customer and the beneficial owner, whether permanent or occasional, and
irrespective of any exemption or any designated threshold that might otherwise
apply; and make a suspicious transaction report (STR) to the financial
intelligence unit (FIU) in accordance with Recommendation 20.[18]
When performing customer due diligence (CDD) under Recommendation 10, financial
institutions are also required to verify that any person purporting to act on
behalf of the customer is so authorised, and should identify and verify the
identity of the person. Also, when performing CDD measures in relation to customers
that are legal persons or legal arrangements,[19]
financial institutions should be required to identify and verify the customer
and understand the nature of its business, and its ownership and control
structure. The purpose of the requirement is twofold: firsts, to prevent the
unlawful use of legal persons and arrangements, by gaining a sufficient
understanding of the customer to be able to properly assess the potential money
laundering and terrorist financing risks associated with the business
relationship; and second, to take appropriate steps to mitigate the risks.
The type of information needed to perform due
diligence is:
Name, Legal form and proof of existence –
verification could be obtained through certificate of incorporation, a
certificate of good standing, a partnership agreement, a deed of trust, or
other documentation from a reliable independent source providing the name, form
and current existence of the customer.
The powers that regulate and bind the legal person or arrangement (eg senior
managing directors in a company, trustee(s) of a trust). The address of the
registered office, and, if different, a principal place of business.
Recommendation 10 also requires financial
institutions to identify beneficial owners of a customer’s account, which in
the case of legal persons includes “taking reasonable measures” to identify the
physical persons who own or control the legal person.
For life or other investments- related insurance
business, financial institutions in addition to CDD measures required for the
customer and the beneficial owners, conduct CDD measures in accordance with the
International Association of Insurance Supervision (IAIS) guidelines.
A key development in the 2012 Recommendations was
the adoption of an optional risk based approach for certain preventive
measures. The adoption of risk sensitivity “involves identifying and
categorizing money laundering risks and establishing reasonable controls based
on risks indentified.[20]
Where the risks are lower, financial institutions could be allowed to conduct
simplified CDD measures.
Another innovation brought by the 2012 FATF
Recommendation[21] is
the conduct of CDD on Politically Exposed Persons. Financial institutions
should take reasonable measures to determine whether the beneficiaries of a life
insurance policy are Politically Expose Persons. Whether there are higher risks
identified, in addition to performing normal CDD measures, financial
institutions are required to inform senior management before the pay out of the
policy proceeds, and conduct enhanced scrutiny on the whole business
relationship with the policy holder and consider making a suspicious
transaction report.
CUSTOMER
DUE DILIGENCE UNDER THE NIGERIAN MONEY LAUNDERING (Prohibition) ACT, 2011 (As
amended).
Identification of Customers for financial and
designated non- Financial Institutions
The Money
Laundering (prohibition) Act 2011 (As amended) makes it mandatory for
financial institutions and designated non-financial to verify the identity and
update all relevant information on the customer[22]
before opening an account for, issuing a passbook to, entering into financing
transaction with, renting a safe deposit box to or establishing any other
business relation with the customer,[23]
and during the course of the relationship with the costumer.[24]Financial
institutions must also scrutinize all ongoing transactions undertaken
throughout the duration of the relationship in order to ensure that the
customer’s transaction is consistent with the business and risk profile.[25]
The use of the word “shall” in the section
presupposes mandatory. However, what is
not clear from the provision is the use of the term “its customers” as this
raises the question at what stage will a person be referred to as a customer? For example, for a person to be considered as
a customer of a bank, it is essential and indispensable that the person should
have opened an account in the bank[26]
or the person is conducting transaction on behalf of another person who has an
account.[27]
It is submitted that the phrase: ‘its customers’
ought to have been qualified to include its customers or prospective customers
so as to cover both the existing and potential customers.The identity of a
customer is verified, in the case of an individual, by the customer presenting
a valid original copy of an official document bearing his or her name and
photograph. For example, utility bills,
such as water bill and power holding corporation bills etc[28]
within the previous three months.
The address of an individual customer is also
verified by the customer presenting to the financial institution the original
of receipts issued within the previous three months by public utilities or any
other documents as the relevant regulatory authorities may from time to time
approve.[29]What
is not clear is whether the receipts must necessarily bear the name of the
customer or of any other person’s name.
The likely effect of the utility bill bearing the name of the customer
is that it may foreclose tenants, dependents, squatters and such others, who
will find it difficult to have utility bills in their names. To achieve the objective of the law, it is
necessary to expand the scope to include utility receipt issued in favour of a
guardian, guarantor, or any such similar person among others.
Public utilities connote services provided for the
public, for example, an electricity, water or gas supply.[30] In Nigeria today, it is an onerous task to
demand receipt of public utilities from even those who own residential
accommodation let alone squatters.
Today, the fixed line telephone line is almost extinct and the common
telephone facilities are GSM[31] and
fixed wireless[32]
which are substantially pay-as-you-go with no issuable receipt to establish
evidence of particular residential address.
The electricity bills are now replaced with pre-paid metering system
where electricity consumer will only buy credit units and receipts are no long
necessary. Water bill receipts are
similarly not a common instrument among the citizenry, because substantial
reliance for water supply is through personalized boreholes and water vendors
who issue no receipt.
Nonetheless, the purpose of the above requirement
is if an institution has only the basic details of a customer, it will lack
information that could be used to profile the specific client and to correctly
identify a suspicious and unusual transaction that may be concluded by the
client.[33] Customer Due Diligence violation is yet to be
tested in Nigerian Courts. But in the
South African case of Kwamashu Bakery Ltd
v. Standard Bank of South Africa Ltd,[34]
the court held that banks are required in terms of common law to identify and
verify prospective clients before opening an account. See also
Powell V. ABSA Ltd.[35]
A body corporate is required to provide proof of
its identity by presenting its certificate of incorporation and other valid
official documents attesting its existence.[36]It
is submitted that though the certificate of incorporation is a proof of
identity for corporate body, evidence of filing annual returns with corporate
Affairs Commission suffices.
Also, the manager, employee or assignee delegated
by a body corporate to open account shall be required to produce not only
documents mentioned in sub section (2), but also proof of the power of attorney
granted to him in that behalf.[37]
A casual customer shall comply with the provisions
of subsection (2) for any manner of transaction involving a sum exceeding
$1,000 or its equivalent if the total amount is known at the commencement of
the transaction or as soon as it is known to exceed $1,000 or its equivalent.[38]
Financial institutions or designated non-financial
institutions shall seek from the customer information as to the true identity
of the principal if it appears that the customer is not acting on his own
account. Where the customer is a body
corporate, the financial institution shall:
take reasonable measures to understand the
ownership and control structure of the customer; and determine the natural
person who truly own or control the customer.[39]
Where the customer is a public officer or Politically Exposed Person (PEP), the
Financial Institution or Designated non-financial institution shall in addition
to the requirements of subsection (1) and (2)put in place appropriate risk
management systems; and Obtain senior management approval before establishing
and doing any business relationship with the public officer.[40]
Section 3 sub section (4) of the Act provided
for management of risks by financial and designated non financial institutions.
Enhanced measures are taken to manage and mitigate high risks[41].
While simplified measures are taken to manage and mitigate lower risks[42]. In
the case of cross-border correspondent banking and other similar relationships,
sufficient information is gathered about a respondent institution[43].
Also the respondent institutions anti money laundering and combating the
financing of terrorisms control shall be assessed[44].
Respective responsibility of each institution in this regard must be documented[45]. Also,
management approval must be obtained before establishing new correspondent
relationships[46].
Former sub section (8) which provided for putting in place appropriate risk
management systems and obtaining senior management approval before establishing
and during any business relationship with the public officer is now replaced
with a new sub section 7. The new sub section replaced “public officer” with
“politically exposed person.”
Due Diligence for Designated Non- financial
Institutions.
Due
Diligence for Casinos
In addition to the customer due diligence
requirement in section 3 of the Act, the law made it incumbent upon casinos to
verify the identity of their customers. Anybody carrying out financial
transactions with a casino is required to present a valid original document
bearing his name and address[47]. The due diligence required of a casino
includes recording of all transactions in chronological order, including the
nature and amount involved in each transaction;[48]
and each customer’s surname, forenames and address, in a register forwarded to
the Ministry of Industry for the purpose.[49]
Due
Diligence for Occasional Cash Transactions by Designated Non- financial
Institutions
Designated Non-financial Institutions include
dealers in jewellery, cars and luxury goods, chartered accounts audit firms,
tax consultants, clearing and settlement companies, legal practitioners,
hotels, supermarkets and such other business as the Federal Ministry of
Industry, Trade and Investment or appropriate regulatory authorities may from
time to time designate.[50] The
due diligence required from a designated non-financial institution for
occasional cash transactions is as follows: before the commencement of any new
business and in the case of existing business operated within 3 months from the
commencement, must submit a deceleration of its activities to the Ministry of
Commerce, Trade and Industry.[51] A
specialised unit from the Ministry of Commerce known as Special Control Unit on
Money Laundering (SCUML) coordinates the activities of designated non financial
institutions, business and professions (DNFIBPs).[52]
DNFIBPs whose business
involves cash transaction shall prior to any transaction involving a sum
exceeding US$1, 000 or its equivalent, identify the customer by requiring him
to fill a standard data form and present his international passport, driving
license, national identity card or such other document bearing his photograph
as may be prescribed by the Ministry of Commerce.[53]
Also, the DNFIBPs must
record all transactions in chronological order, indicating each customer’s
surname, forenames and address in a register numbered and forwarded to the
Ministry of Commerce and Industry.[54]
Upon receipt of the transactions, the Ministry of Commerce, then forwards the
information received to the Economic and Financial Crimes Commission within 7
days of receipt.[55] It
is also required that the register be kept and preserved for a period of 5
years after the last transaction recorded.[56]
The penalty for DNFIBPs that fails to comply with the requirement of customer
due diligence and the submission of returns of such transactions is a fine of N250,
000 for each day during which the offence continues and suspension, revocation
or withdrawal of license by the appropriate licensing authority as the circumstances
may demand.[57]
Complying with the above due diligence requirement protects financial and
designated non-financial institutions from legal risk, operational and
reputational risks.
THE ROLE
OF FINANCIAL SECTOR REGULATORS IN PROMOTING CUSTOMER DUE DILIGENCE.
The
Central Bank of Nigeria Act, 2007.[58]
The CBN
Act,[59]
established a body known as the Central Bank of Nigeria, (referred to as “the
Bank”) and charged it with the responsibility of administering the Banks and Other Financial Institutions Act
(BOFIA) of 1991(as amended), the bank discharges its principal functions of
ensuring high standards of banking practice and financial stability through its
surveillance activities, as well as the promotion of an efficient payment
system. In its role towards combating money laundering, the CBN issued the Know
Your Customer (KYC) directives as expounded by circular on Anti Money
Laundering/Counter Terrorism Financing (AML/CFT).[60] The circular reminds the financial
institutions of the requirement to implement the various provisions of the
Money Laundering Guidance notes and to observe the code of ethics and
professionalism issued by the Bankers’ Committee.[61] The KYC directive requires financial
institutions to develop policies, practices and procedures that will ensure a
rigorous customer due diligence in order to protect their institutions from
being used for financial crimes. The
prudential guideline 2010 reiterated the compulsion of compliance with the
Money Laundering Act and other directives related thereto by the CBN.[62]The
KYC principles require financial institutions to; inter alia observe the following customer identification and record
keeping rules in spirit of Money Laundering (prohibition) Act:
It is submitted that the KYC Guidelines and
the prudential guidelines have provided a comprehensive guide for banks and
other financial institutions, within the regulatory purview of the CBN, on the
uniform procedure to be adopted for obtaining adequate information for the
banks to minimize the risk of illicit activities, protect themselves against
fraud and reputational risks.[67]
Investments and Securities Act, 2007.[68]
The Act established a body to be known as The
Securities and Exchange Commission[69]
vested with the power to regulate and develop the Nigerian capital market, in
addition to setting the basis of allotment of securities by the Securities and Investments Act, 2007.[70] It
also has power to register and regulate Securities Exchange; Capital Trade
Points; Options and Derivative Exchanges; commodity Exchanges and any other
recognizes Exchange.
The Commission in
March 2003 issued Know Your Customer (KYC) guidelines which are also in line
with the FATF Recommendations. The fundamental objective of KYC framework is to
determine the true identity of all customers seeking to utilize the capital
market services. The scope of identification stretches to include the
beneficial owner of all accounts and custodial facilities. The framework seeks
to make capital market operators aware of activities that are unusual or
inconsistent with normal market activity.[71]To
satisfy these requirements, market operators need to have mechanism that will
facilitate the establishment of customer transaction profile. Internal systems
therefore need to be developed or put in place by every capital market operator
to determine such profiles and to identify trends or activities with
established profile.[72]
Within the regulatory
framework, the Commission pursuant to its powers[73]
issued the Anti-Money Laundering/Combating the Financing of Terrorism Manual
for Market Operators 2010.[74] The
manual intended to guide capital market operators in the implementation of the KYC
and Customer Due Diligence (CDD) requirements for the capital market.
Compliance with the Manual is mandatory and violation attracts prescribed
sanctions.[75]
In exercise of the powers conferred on the
Securities and Exchange Commission (SEC), by section 13(a), (aa) and (dd), and
section 313 of the Investments and
Securities Act, 2007, and all other powers enabling it in that behalf, SEC
made Regulations[76]
that provides protection against fraud, reputational and other financial market
risks. These Regulations are known as “Securities and Exchange Commission
(Capital Market Operators Anti-money Laundering and Combating the Financing of
Terrorism) Regulations, 2013. The Regulation also minimise the risks faced by
the capital markets from the proceeds of crime; guide capital market operators
in the implementation of Know Your Customer (KYC) and Customer Due Diligence
(CDD) requirements for the capital market[77];
and protect the integrity of the securities market against all forms of abuse,
fraudulent and unfair trade practices.[78]
National
Insurance Act, 2003[79]
The Insurance Act, 2003[80]
established a body to be known as the National Insurance Commission (NAICOM).
Similar to the SEC, the role of the Commission in combating money laundering
and terrorist financing may be viewed from two perspectives. Firstly, as
goalkeeper and secondly, as supervisor. As goalkeeper, the Commission
discharges the function of making appropriate rules and regulations that will
ensure ethical practice of insurance business and also determine who is a fit
and proper person to be licensed to engage in insurance business in Nigeria.[81]
In order to strengthen
the provisions of the Money Laundering (Prohibition) Act, 2011 especially as it
relates to necessary disclosures and statutory reporting, the Commission issued
the KYC guideline. The scope of the identification within the KYC principles
stretches to include the policy holders and beneficiaries of insurance policy.
The framework seeks to make underwriters aware of and report activity that is
unusual or inconsistent with the normal insurance transactions. To satisfy
these requirements, insurance operators need to have mechanism that will
facilitate the establishment of customer transaction profile. In ensuring
compliance, the Commission appoints high-ranking officers as Compliance
Officers who shall not be below the rank of Assistant General Manager.[82]
In addition to above, the National Insurance
Commission in exercise of the powers conferred on it by section 101 of the Insurance Act, 2003[83]
and all other powers enabling it in that behalf made Regulations[84]
with the approval of the Honourable Minister of Finance. These Regulations are
known as “National Insurance Commission (Anti-money Laundering and Countering
the Financing of Terrorism) Regulations, 2013. The objective of the Regulations
is to promote, enhance and ensure compliance with subsisting legislation on
Anti-money Laundering and Countering the Financing of Terrorism by the
Insurance Industry in Nigeria.[85]
CHALLENGES
OF IMPLEMENTATION
In
a number of developing countries, the way people are identified makes full
compliance with the law requirement a burdensome and costly process. Those
financially vulnerable people, who form a significant part of the potential
clientele of financial institutions, often lack proper identification
documents. A survey of some banks situated in some countries highlighted a
number of practical problems[86]:
Consequently, Banks may also face reputational
risks resulting into commercial challenge, since these CDD requirements are
conflicting with their mandate to serve unbanked and under-banked people.
Customer
due diligence also include the Know Your Customer Principles (KYC) and the Know
Your Customer Business (KYB). As
operators move to embrace the KYC and KYB principles more comprehensively, they
will be challenged to implement these principles in respect of their existing
customers. While a system for the
implementation of the principles in respect of new businesses can be put in
place without difficulty, the task of implementing the principles in respect of
existing business is far more challenging.
Apart from the sheer volume of the work involved, the question may arise
of the legal opinion available to the operator that discovers that an existing
customer does not satisfy the KYC/KYB test applied.
Based
on available data, the KYC enables banks to minimize risk of illicit
activities, protect themselves against fraud and reputational risks.[87] In order to ensure compliance, the regulators
conduct examination of financial institutions on anti-money
laundering/combating the financing of terrorism (AML/CFT). During the examination carried out in 2008,
some of the problems observed include difficulty in obtaining information on
Politically Exposed Persons (PEPS), lack of transparency by operators and lack
of continuous training for staff.[88] It is recommended that appropriate regulatory
guidelines should be evolved to deal specifically with the PEPs.
CONCLUSION
Financial and designated non financial
institutions must be properly regulated to force them to-do their customer due
diligence properly, so that if they cannot identify the ultimate beneficial
owner of the funds, they must not accept the customer as a client. Anti-money
laundering laws must be absolutely explicit, and consistent across different
jurisdictions, that financial and designated non financial institutions must
identify the natural person behind the funds, investigate the source and refuse
the customer if he presents a risk. Regulators must ensure that this is
enforced, and should treat the prevention of illicit money flows as a priority.
Secondly, the
requirement for presenting original receipts of public utilities to verify the
address of a customer is not clear under the Money laundering (Prohibition)
Act, 2011. What is not clear is whether the receipt must bear the name of the
customer or any other persons name. Insisting that the receipt must bear the
name of the customer forecloses tenants, dependents and squatters from becoming
customers of the financial or designated non financial institution. In Nigeria
today, it is difficult to demand receipt of public utility from even those who
own residential accommodation let alone a squatter, tenant or dependent. The
apt thing to do in the circumstances is to introduce a liberal interpretation
of customer identification and verification to give everybody the opportunity
of enjoying the services of financial and designated non financial
institutions. It has also been found that the issue of verification of a
customer’s identity by financial institutions raises the question at what stage
will a person be referred to as a customer? For example, to be a customer of a
bank, it is essential that a prospective customer opens an account in the bank,
or a person is conducting a transaction on behalf of another person who has an
account. It is recommended that the phrase “its customers” ought to have been
qualified to include its customers or such other persons in circumstances
wherein a contract may arise. Financial
institutions must scrutinize all ongoing transactions undertaken throughout the
duration of the relationship with its clients in order to ensure that the
customers’ transaction is consistent with the business and risk profile.
Thirdly, in conducting
CDD, financial institutions should determine the extent of such measures on a
risk sensitive basis depending on the type of customer, business relationship
or transaction.. In certain circumstances, where there are low risks the
financial institution could apply reduced or simplified measures. The measures
that are to be taken should also be consistent with guidelines issued by
competent authorities. For higher risk categories, financial institutions
should perform enhanced due diligence. In certain circumstances where there are
low risks simplified measures should be conducted.
REFERENCES
CBN Annual Report 2008
CBN Annual Report 2009
De Koker, J. (2001) “Money Laundering Control-The
South African Model” Journal of Money Laundering Control.
Insurance Regulation, 2003.
Investment and Securities Act, 2007.
Laws of the Federation 2004.
Operational Guideline, National Insurance
Commission, 2005.
Official Gazette of the Federal Republic of
Nigeria, 2013, vol. 100.
Undue Diligence-How Banks Do Business With Corrupt
Regimes. (2009), A Report By Global Witness.
Winer, J. (2002) “Globalization and Global Conflict-Time
for a White List?” 4 European Journal of Law Reform.
[1] Section 6 of the Nigerian Money Laundering
(Prohibition) Act, 2011, (As amended)
[2] Undue Diligence – How Banks Do Business with Corrupt
Regimes. A Report by Global Witness, (2009)
[3]FATF recommendation 5.
[4]Basel Customer Due Diligence for Banks.
[5] Basel Customer Due Diligence for Banks. See also FATF
Recommendation 10
[6] www.hmrc.gov.uk/mir/... Responsibilities Accessed on the 9th of
October at about 8.00hrs.
[7] Ibid
[8] See Section 3 of the Nigerian Money Laundering
(Prohibition) Act, 2011 (as amended)
[9] Ibid
[10] See Basel committee on Banking Supervision and FATF
Recommendation.
[11] Ibid
[12] Ibid.
[13] Ibid.
[14] Winer, J. (2002) “Globalization and Global
Conflict-Time for a White List?” 4 European Journal of Law Reform.
[15] Ibid.
[16] www.wolsberg.principles.com. Accessed on the 30th of September, 2014 at
about 100 hours.
[17] The FATF 40 Recommendations are broken into four
groups. These are Group A: Legal systems, and include the scope of the criminal
offence of money laundering (1 and 2) and provisional measures and confiscation
(3). Group B: Measures to be taken by financial institutions and (certain)
Non-financial Business and professions to prevent money laundering and terrorist
financing, and include prohibition on shell Banks (4) Customer Due Diligence
and recordkeeping. (5-12) reporting of suspicious transactions and compliance.
(13-16), other measures to deter money laundering and terrorist financing etc.
For the purpose of this paper we will concentrate on measures to be taken for
Customer Due Diligence.
[18] In determining the reasonableness of the identity
verification measures, regard should be led to the money laundering and
terrorist financing risks posed by the customer and business relationship.
[19] In these recommendations references to legal
arrangements such as trusts, being a customer of a financial institution or
DNFBBP or carrying out a transaction, refers to a situation where a natural or
legal person that is the trustee establishes the business relationship or
carries out the transaction on behalf of the beneficiaries or according to the
terms of the trust. The normal CDD requirements for customers that are natural
or legal persons would continue to apply.
[20] See FATF Guideline on the Risk Based Approach to
Combating Money Laundering and Terrorist Financing.
[21] FATF Recommendation 12
[22] Section 3(1)(a).
[23] Section 3(1)(a)(i).
[24] Section 3(1)(a)(ii).
[25] Section 3(1)(b).
[26] Great Western
Railways Company v. London and Country Banking Co. (1902) AC, 424;
Ademuliyi and Damuye v. A.C.B. (1964) N.M.L.R. 137.
[27] New Nigerian
Bank v. Odiase, (1993) 8 N.W,.L.R. 235, at pp.243-4.
[28]Section 3(3).
[29] Section 3(2)(b).
[30]Oxford Advanced Learners Dictionary, sixth Edition.
[31] For example MTN, Airtel, GLO, Etisalat, et cetera.
[32] For example multi links, starcomms etcetra.
[33]Dekoker, L. “Money Laundering Control: The South African Model,” Journal of Money Laundering Control (2001).
[34](1995)2 S.A. 377.
[35](1998), 2 SA 807.
[36]Section 3(3).
[37]Section 3(4).
[38]Section 3(5).
[39] See Section 3(7)(a) and (b).
[40]Section 3(8(a) and (b).
[41] Subsection (4) (a)
[42] Subsection 4 (b)
[43] Subsection (4) (C) (i)
[44] Subsection (4) (C) (ii)
[45] Subsection (4) (C) (iii)
[46] Subsection (4) (C) (iv)
[47] Section 4 (1)(a)
[48] Section 4 (1)(b)(i)
[49] Section 4 (1)(b)(ii)
[50] Section 25 of the Money Laundering (Prohibition) Act,
2011
[51] Section 5(1) (i) (ii)
[52] The SCUML is a specialized unit of the Ministry of
Commerce and Industry responsible for regulating, supervising and monitoring of
designated non-financial institutions, business and professions against money
laundering in compliance with FATF 40 Recommendations.
[53] Section 5 (1) (b)
[54] Section 5 (1) (c) of the Money Laundering
(Prohibition) Act, 2011
[55] Subsection (2) Ibid
[56] Subsection (3) Ibid
[57] Subsection (6) Ibid
[58] Cap. C4, LFN, 2004.
[59] Ibid.
[60]CBN Annual Report 2009, p.43.
[61]BSD/DIR/GEN/CR/O2/0275.
[63]This is to be done without impeding the freedom of
capital movements.
[64] See also section 3(8)(a) and (b) of the Money Laundering (Prohibition) Act 2011.
[65]Ibid.
[66]CBN Annual Report 2008.
[68] Cap. 124, LFN, 2004.
[69] Ibid.
[70] Section 1 of the Investments and Securities Act, 2007.
[71] www.sec.gov.ng/laws/2009, accessed on 28/03/13 at 2.00.
[72] Ibid.
[73] Section 13 (n) of the Investment and Securities Act,
2007.
[74] Effective from 28th July, 2010.
[75] Section 29 of the Manual
[76] No 63 of 2nd September: - Official Gazette
of the Federal Republic of Nigeria vol. 100
[77] Regulation 1 (b)
[78] Regulation 1 ©.
[79] Cap.N.53, LFN, 2004.
[80] Ibid.
[81] See section 1 & 2 of the Insurance Regulation
2003.
[82] Section 25, 2005 Operational Guidelines, National
Insurance Commission
[83] Cap. N53, LFN, 2004.
[84] No. 62 of 9th September, 2013: - Official
gazette of the Federal Republic of Nigeria Vol. 100
[85] Regulation 1
[86] As reported for example by the HFC Bank Ltd, Ghana; Caisse d,Eppargne de Madagascar; Bank
Simpanan Nasional, Malaysia; Philippine Postal Savings Bank; PostBank Uganda;
PostBank South Africa or Lesotho PosBank
[87]www.cbn.org. Accessed on
the 16/4/13.
[88] CBN Annual Report, 2008, pp.24-28.