Customer due diligence obligations and recent changes to the Financial Intelligence Centre Act (PCC 59)
Customer due diligence starts with an accountable institutionknowing the identity of its client. In terms of section 21 of the Financial Intelligence Centre Act, an accountable institution must, in the course of establishing a business relationshipor entering into a single transaction, establish and verify the identity of the client and if applicable, the person representing the client as well as any other person on whose behalf the client is acting. This process provides a solid foundation for the establishment of a business relationship between an insurer and its client.
What are the objectives?
As an accountable institution, Sanlam should be confident in knowing a client’s identity after thoroughly establishing and verifying it, based on the risk assessment related to that client’s engagement.
How is the client’s identity verified?
Establishing a client’s identity entails an accountable institution obtaining a range of information about the client. In most cases, this information is provided by the client in response to questions being asked by the accountable institution as part of its onboarding process or its client engagement. The accountable institution is required to corroborate the legal entity or person’s identity information by comparing this with the information contained in documents or electronic data issued or created by reliable and independent third-party sources.
How is a natural person’s identity verified?
Verification of a person’s identity is determined by several attributes, such as:
- The person’s full name;
- Date of birth and,
- Unique identifying number issued by a government source;
- Passport number
- Address details
These basic attributes are used in accountable institutions’ onboarding processes to establish a natural person’s identity.
How are legal entities verified?
Verification of an entity is determined by the following:
- The nature of the legal entities’ business
- The ownership and control structure
- Identifying and verifying their beneficial owners
The above information is used by accountable institutions within their onboarding processes to identify a legal entity.
Recent changes to the Financial Intelligence Centre Act (PCC 59)
The recent publication of Public Compliance Communication (PCC) 59 by the Financial Intelligence Centre (FIC) provides crucial guidance for accountable institutions in complying with beneficial ownership requirements under the FIC Act. This guidance came into effect on 8 August 2024 for immediate implementation and compliance by accountable institutions and its practical application now requires an even more in-depth assessment to determine who our clients are.
Key Requirements and Guidance
- Understanding Beneficial Ownership:
- Accountable institutions are required to establish the ownership and control structure of clients that are legal persons, trusts, or partnerships.
- It is essential to identify and verify the natural persons who are the beneficial owners, as this understanding mitigates risks associated with money laundering, terrorist financing, and proliferation financing.
- Information Gathering:
- Institutions must obtain comprehensive information regarding different types of ownership interests and must verify this information against reliable, independent third-party sources.
- Sole reliance on self-declared information from clients is deemed inadequate.
- 5% Ownership Threshold:
- The FIC has set a new standard where holding 5% or more of ownership interest in a legal person is generally sufficient to indicate a controlling ownership interest.
- Institutions may, based on a risk-based approach, choose to identify and verify persons with less than the 5% ownership interest if deemed necessary.
- Partnership Requirements:
- In the context of partnerships, accountable institutions must identify and verify each partner, regardless of their percentage of ownership.
- Scrutiny of Client Information:
- Institutions must scrutinize client information, including beneficial ownership data, to ensure that neither the client nor the beneficial owners are listed on the Targeted Financial Sanctions list.
- Steps When Verification Fails:
- If an institution cannot identify or verify a beneficial owner despite reasonable efforts, it must refrain from establishing a business relationship or conducting transactions.
- Existing business relationships must be terminated in accordance with the institution’s Risk Management and Compliance Program (RMCP).
- Institutions should consider filing a suspicious and unusual transaction report to the FIC in such cases.
Conclusion
The PCC emphasizes the importance of thorough due diligence in understanding beneficial ownership. By adhering to these guidelines, accountable institutions can better manage risks and ensure compliance with regulatory requirements. The focus on independent verification and the establishment of a clear understanding of beneficial ownership structures is crucial for enhancing the integrity of the financial system.
At Sanlam, we have embarked on a group AML team-led project to implement the requirements of PCC59 across all business units. These new guidelines impose greater obligations than before, fundamentally changing how we identify the ultimate beneficial owners of our clients. This shift will significantly impact our AML processes and necessitate careful consideration of various factors, including resource needs and compliance costs.