KYC Regulations - Mel Georgie Racela

CURRENT TRENDS ON KYC REGULATIONS

ATTY. MEL GEORGIE B. RACELA, CPA, LlB, LlM Deputy Director and Head

Anti-Money Laundering Specialist Group (AMLSG) Supervision and Examination Sector

I. Introduction to Risk Based approach II. Risk Based and Tiered Customer Identification System

III. International Wire Transfers IV. Techniques to ensuring KYC is properly

performed V. Enforcement Actions

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1. Placement – Objective is to transform banknotes into non-cash assets. Places physical cash with Banks and other financial institutions or makes cash purchases.

• smurfing or structuring • converted into financial instruments • commingled with legitimate funds • purchase of insurance contract, real estates,

precious stones, jewelries

2. Layering – Objective is to disguise the origin of criminal funds. To do this, the launderer creates complex layers of financial transactions.

• Electronic transfer of funds • disguise the transfer as a payment for goods or

services • transfer the funds to shell corporation

3. Integration – Objective is to integrate illicit funds with legitimate business. The money is once again made available to the criminal with the occupational and geographic origin obscured or concealed. The laundered funds are now integrated back into the legitimate economy through the purchase of properties, businesses and other investments.

• Purchase shares of stocks in the stock exchange • Purchase of house and lot • Engage in legitimate businesses

Laundered money is most vulnerable to detection when: cash initially enters the financial system funds are transferred within and out of the financial

system cash flows abroad

A risk-based approach avoids 'one-size fits all' policies and procedures. Banks should tailor their efforts according to the level of the money laundering risk posed by their customers, products and services. This involves putting anti-money laundering policies and procedures in place that cover risk identification, assessment, mitigation and monitoring.

The extent of AML/CTF measures and due diligence depends greatly on perceived risk. There are a number of areas where banks tend to be more vulnerable. 1. Vulnerable Services (i.e. international wire transfers,

private banking operators, electronic banking); 2. High Risk Customers (i.e. money changers/

remitters, luxury item retailers, non-governmental organizations); and

3. High Risk Geographic Areas (i.e. NCCT list)

Objective: To establish the true and full identity of customers by undertaking the following requirements:

1. Identification Document 2. Face to Face requirement 3. Gathering of minimum information 4. Risk Profile the customer

Customers and the authorized signatory/ies of a corporate or juridical entity who engage in a financial transaction with covered institutions for the first time shall be required to present the original and submit a clear copy of at least one (1) valid photo-bearing ID document issued by an official authority.

General Rule: No New accounts shall be opened and created without face-to-face contact and personal interview, except:

1. Account opened through a trustee, nominee, agent, or intermediary,

2. Outsourcing arrangement, and 3. Third Party Reliance

What are these minimum information? I. For Individuals:

1. Name; 2. Present address; 3. Date and place of birth; 4. Nature of work, name of employer or nature of self-employment/business; 5. Contact details; 6. Specimen signature; 7. Source of funds. 8. Permanent address; 9. Nationality; 10. Tax identification number, Social Security System number or Government Service Insurance Number, if any; and 11. Name, present address, date and place of birth, nature of work and source of funds of beneficial owner or beneficiary, whenever applicable.

What are these minimum information? II. For Juridical Entities:

1. Certificates of Registration issued by DTI for single proprietors, or by the SEC, for corporations and partnerships, and by the BSP, for money changers/foreign exchange dealers and remittance agents; 2. Articles of Incorporation or Association and By-Laws; 3. Principal business address; 4. Board or Partners’ Resolution duly certified by the Corporate/Partners’

Secretary authorizing the signatory to sign on behalf of the entity; 5. Latest General Information Sheet which lists the names of

directors/trustees/ partners, principal stockholders owning at least twenty percent (20%) of the outstanding capital stock and primary officers such as the President and Treasurer;

6. Contact numbers of the entity and authorized signatory/ies; 7. Source of funds and nature of business; 8. Name, present address, date and place of birth, nature of work and

source of funds of beneficial owner or beneficiary, if applicable.

Who may perform this? The BSP Supervised Entity, or 1. Outsourcee pursuant to an Outsourcing

arrangement (§X806.2.d) Outsourcing Entity has ultimate responsibility Board Approved Written Service Level Agreement Counterparty has reliable and acceptable KYC process and

training program Turn over of all identification documents within 90 days

2. Third Party through TP Reliance (§X806.2.e.1) Relying Entity has ultimate responsibility Sworn Certification that Third Party has conducted KYC and has

custody of all ID documents and Relying Entity has ability to obtain ID docs upon request without delay

RATIONALE: Focus on the risks that really matter in your institution- the one with the potential to cause harm- and placing measures that will enable it to monitor, control and minimize these risks.

RISK-BASED TIERED CUSTOMERS LOW RISK

REDUCED DUE DILIGENCE

EXISTING AND ON-BOARDING

NORMAL RISK

AVERAGE DUE DILIGENCE


HIGH RISK

ENHANCED DUE DILIGENCE


Factors to consider in assessing customers (see § X806.1.a.) during on-boarding:

Factors LOW NORMAL HIGH

1. Background/ Source of funds Payroll Business Unknown/ inconsistent

2. Country of Origin/Residence Philippines U.S. Afghanistan

3. Public position of the customer or of the directors/ trustees, stockholders, officers and authorized signatories

Retired PEPs PEPs of reputable GOCCs

PEPs with elevated risks, etc.

4. Materially linked accounts None With 1 link 2 or more links

Factors to consider in assessing customers (see § X806.1.a.) during on-boarding:

Factors LOW NORMAL HIGH

5. Watchlist of individuals and entities engaged in illegal or terrorist activities

None None Listed individuals and entities

6. Business activities Self-employed

Hotels, Restaurants, Real Estate

Casinos, dealers of precious stones, jeweler, NGOs

7. Types of services/ products/ transactions to be availed of

Savings/ Time deposits

Current Accounts

International wire transfers and private banking services,etc.

Factors to consider in assessing existing customers (in addition to above):

Factors LOW NORMAL HIGH 1. High volume (relative)

transactions Below normal Define what is

normal volume Above normal

2. High value transactions Below normal Define normal value

Above normal

1. Set Criteria/ Factors that will rate customer as low, normal and high risk

2. Perform an initial assessment 3. Adjust according to the risk appetite until

an acceptable ratio is arrived (20:60:20) 4. Establish the necessary due diligence

procedures i.e. reduced, average and enhanced due diligence.

Documentation is essential:

1) Copy of the ID, Account Information Form, and Personal Interview; and

2) There must be an indication and documentation on how a customer was risk profiled (low, normal or high) and what standard of CDD (reduced, average or enhanced) was applied.- The Risk Score/ Assessment Chart

Bangko Sentral ng Pilipinas Maynila, Pilipinas

High Risk Customers under the UARR:

1) X806.2.m- customer from a country that is recognized as having inadequate internationally accepted AML standards, or does not sufficiently apply regulatory supervision or the FATF recommendations, or presents greater risk for crime, corruption or terrorist financing.

2) X806.2.o- NUMBERED ACCOUNTHOLDERS;


High Risk Customers under the UARR: 3) X806.3.a Inaccurate information or document Based on the criteria adopted Transacting without any underlying legal or trade

obligation, purpose or economic justification Transacting an amount that is not commensurate

with the business or financial capacity or deviates from his profile

Structuring transactions in order to avoid being the subject of CT Reporting


High Risk Customers under the UARR: 3) X806.3.a Knowing that the customer was or is engaged or

engaging in any unlawful activity Where additional information cannot be obtained

when applying EDD Any information or document provided is false or

falsified Where validation process is unsatisfactory when

applying EDD Where any circumstance for filing an STR exists


High Risk Customers under the UARR:

4) X806.2.l. - Forex dealers/ MCs/ Ras 5) X806.2.n. – Shell Company/ Shell Bank/ Bearer

Share entities 6) Foreign PEPs 7) Domestic PEPs with elevated risks

Apart from profiling and monitoring the

transactions, CIs should do the following: 1. Obtain additional information other than the

minimum information and/documents required such as list of banks, companies and banking services to be availed if individuals and for juridical entities, certain information on and identification documents of primary officers and stockholders and directors;


transactions, CIs should do the following: 2. Conduct Validation Procedures. For individuals confirm date of birth from official document; verify permanent address through utility bills, credit card

statements; contacting customer by phone, email or letter; and Determining authenticity by requesting certification from issuing

authority or by any other means.


transactions, CIs should do the following: 2. Conduct Validation Procedures. For Juridical Entities Require submission of Audited Financial Statements Inquire from Supervising Authority the status of the entity Obtain Bank references On-site visitation of the Company; and Contact the entity by phone, email or letter


transactions, CIs should do the following: 3. Obtain senior management approval for

establishing business relationship.


(K) Beneficial Owner – refers to natural person(s)

who ultimately owns or controls a customer and/or person on whose behalf a transaction is being conducted. It also incorporates those persons who exercise ultimate effective control over a legal person or arrangement.

Owns- 100%; Controls- 50% plus 1; ultimate effective control- literal meaning

Improved Risk Management Policy


(K) Politically Exposed Person or PEP - an individual

who is or has been entrusted with prominent public positions in the Philippines or in a foreign state, including heads of state or of government, senior politicians, senior national or local government, judicial or military officials, senior executives of government or state owned or controlled corporations and important political party officials.

Requirement for CI: Endeavor to establish and record the true and full identity of PEPs as well as their immediate family members and the entities related to them and establish a policy on what standard of due diligence will apply to them (see § X806.2.g).


§X806.2.i. (e) The following originator information

shall remain with the transfer or related message amounting to P50,000 or more or its equivalent through out the payment chain:

1. Name of the originator; 2. Address or in its absence the national identity

number or date and place of birth of the originator; 3. Account number of the originator or in its absence,

a unique reference number


Subsection X806.2.i. Fund/Wire Transfer, item 5 thereof is amended to read as follows:

“§ X806.2.i. Fund/Wire Transfer. xxx: For cross border and domestic wire/fund transfers and related message

amounting to P50,000 or more or its equivalent in foreign currency, the information accompanying all qualifying wire transfers should contain the following:

1. the name of the originator; 2. the originator account number where such an account is used to

process the transaction; 3. the originator’s address, or national identity number, or customer

identification number, or date and place of birth; 4. the name of the beneficiary; and 5. the beneficiary account number where such an account is used to

process the transaction.


§X806.2.i. (f) provides that the CI shall: 1. Exert efforts to establish the true and full identity and

existence of the originator; and 2. Apply EDD on the beneficiary. 3. If any of the two fails, the beneficiary institution shall

REFUSE TO EFFECT the wire transfer or the PAY-OUT of funds; and

4. When circumstances warrant, file an STR with the AMLC. 5. What to do with the funds? CI’s Internal Policy

1. Establish a system of internal controls and monitoring to ensure ongoing compliance:

implement risk-based customer due diligence identify high-risk banking operations periodically update customer's risk profile identify all reportable transactions include dual controls and the segregation of duties

2. Perform testing of AML compliance The testing should be independent of the internal

audit function itself Objective is to establish the existence of customers

aka identifying fictitious accounts

3. Specifically designate an AML compliance officer(s), responsible for managing AML compliance Should have adequate authority to execute the

responsibilities of the position Should possess the necessary independence ◦ Adequate resources- sufficiently staffed ◦ Direct reporting line to the Board of Directors/ Board Level

Committee or Board Approved Committee

4. Ensure adequate training and supervision of personnel

personnel should be fully aware of their

responsibilities under AML policies and practices personnel who handle currency transactions,

complete reports, grant exemptions or monitor for suspicious activity should be well supervised

5. Institute systemic reporting to the board and senior management

Reports should cover: compliance initiatives identified compliance deficiencies suspicious activity reports corrective action/s taken

6. Invest in Systems upgrade and Technology

A robust system is founded on sound technology Trash-in Trash Out Officers and Staff should be equipped Constant checking


Section X811. Sanctions and Penalties. In line with the

objective of ensuring that covered institutions maintain high anti-money laundering standards in order to protect its safety and soundness as well as protecting the integrity of the national banking and financial system, violation of these Rules shall constitute a major violation subject to the following enforcement actions against the Board of Directors, Senior Management and line officers.


Thank you…

Economy & Finance

KYC Regulations - Mel Georgie Racela