CUSTOMER DUE DILIGENCE CDD AND RISK-BASED APPROACH FOR GATEKEEPERS

1. CUSTOMER DUE DILIGENCE (CDD) AND RISK-BASED APPROACH FOR GATEKEEPERS PRESENTED BY IGBODEKWE, EMMANUEL C.F. SPECIAL CONTROL UNIT AGAINST MONEY LAUNDERING (SCUML) ON THE OCCASION OF A 2-DAY AML/CFT COMPLIANCE RETREAT FOR GAKEKEEPERS IN NIGERIA AT LAGOS AIRPORT HOTEL 16TH MARCH, 2010

2. TABLE OF CONTENTS INTRODUCTION SOURCES OF CDD WHO HAS THE LEGAL DUTIES DUTIES OF THE GATEKEEPERS UNDER AML/CFT REGIME CDD AS ONE OF THE INTERNATIONAL BEST PRACTICE/STANDARDS MAIN ELEMENTS OF CDD PROGRAMME THE NEED FOR CDD CDD AND RISK-BASED APPROACH WHAT DOES IT ENTAIL? SUSPICION AND SECURITY OF TRANSACTIONS NATURE OF CDD TO BE EXERCISED WITHIN SPECIFIC SECTORS CONSEQUENCES ASSOCIATED WITH FAILURE TO CONDUCT CDD CONCLUSION

3. INTRODUCTION CUSTOMER DUE DILIGENCE (CDD) implies Appropriate carefulness � The degree of care that a prudent gatekeeper/DNFI would exercise, which is a legally required standard when transacting with the client. Standard proof of proper disclosure of all relevant information that applies to transactions by: Client Gatekeeper

4. SOURCES OF CDD The relevant laws, rules and regulations are: (a) FATF Recommendation 40 + 9 (International Best Practice Standards) Specifically Rec. 4, 5, 15 and 16 (i) Removal of banking secrecy and customer confidentiality laws (ii) Customer Due Diligence and Record Keeping Measures development of programme against money laundering and terrorist financing - internal policy and procedure, appropriate compliance management arrangement, and on-going employee training programme the need for lawyers, notaries and independent legal professionals to render suspicious transaction

5. SOURCES OF CDD cont�d (b) Sections 3 and 5 of the Money Laundering (Prohibition) Act (MLPA) 2004 Section 5b of the Money Laundering (Prohibition) Act 2004 provides: �A Financial Institution or Designated Non-Financial Institution prior to any transaction involving the sum exceeding US$5,000 or its equivalent shall verify its customers� identity by requiring him to fill a standard data form and present his International passport, drivers license, national ID or such other document bearing his photograph as may be prescribed by the regulator.�

6. SOURCES OF CDD cont�d Section 6 of the MLPA 2004 � Rendition of Suspicious Transaction Reports (STRs) Section 10 of the MLPA 2004 � Statutory Mandatory Disclosure of threshold Currency Transaction Reports (CTRs) Section 11 of MLPA 2004 - Evidence of Conspiracy Section 12 of the MLPA 2004 Removal of Banking Secrecy and Customer Confidentiality for the purposes of AML/CFT Regime Section 24 � defines the gatekeepers and other DNFIs Rules of Professional Conducts Rules 14, 15 and 19 of the Legal Profession Sections 170 � 173 of the Evidence Act; and Section 15(5) of the Constitution of the Federal Republic of Nigeria

7. WHO HAS THE LEGAL DUTIES The Gatekeepers, Namely: Chartered Accountants and Audit Firms, Tax Consultants, Legal Practitioners, Notaries and Estate Surveyors and Valuers (Estate Agents) Other Designated Non-Financial Institutions (DNFIs) are defined In Section 24 of the MLPA 2004 to include dealers in: Jewelry, Cars and Luxury Goods, Clearing and Settlement Companies, Supermarkets, Hotels and Casinos or Dealers in precious metals and stones Trust and Service company Pool betting and lottery Non-governmental Organisations The FMC has the powers to include new ones.

8. DUTIES OF THE GATEKEEPER UNDER THE AML/CFT REGIME Under the MLPA 2004, the DNFIs have the following statutory obligations to perform: Registration with FMC / SCUML Identification/Verification of Customers (KYC/CDD) Record-Keeping Establishment of robust Internal Control System (Policies & procedures) Rendition of statutory Reports (CTRs & STRs) Appointment of Compliance Officers at senior level Training and awareness creation among employees Limitation to make or accept cash Maintenance of Register for transactions of US $5,000 or equivalent Mandatory Disclosure if they are engaged in some activities designated by the FMC. These duties are regarded as international best practice standards

9. CDD AS ONE OF THE BEST INTERNATIONAL STANDARD PRACTICE IN AML/CFT KYC � presupposes information gathering CDD � presupposes continuous checks and monitoring of the information gathered and subsequent transactions and account thereto.

10. MAIN ELEMENTS OF CDD PROGRAMME Full identification of customer and business entities, source of funds and wealth Development of transaction and activity profiles of each customer�s anticipated activity Definition and acceptance of the customer in the context of specific products and services Assessment and grading of risks that the customer or the account present Account and transaction monitoring based on the risks presented Investigation and examination of unusual customer or account activity Documentation of findings Appropriate internal and external reporting Auditing of the KYC system Staff training about the importance of KYC Records keeping

11. The Need for CDD CDD Procedures are basis for effective monitoring Sufficient information about a customer or prospective customer, and making effective use of that information underpins all other AML procedures It is an effective weapon against the laundering of criminal proceeds It provides protection against fraud Enables suspicious activities to be detected It protects and enhances name and reputation Need to be compliant with MLPA and other applicable laws and regulations Required to decrease the likelihood of associating or falling victim of illegal activities and ML, Helps to detect suspicious activity in a timely manner. Needed to reduce the risk of government seizure/forfeiture of property. It aid regulators in gathering intelligence information; and Investigators in collating intelligence data

12. CDD and Risk-Based Approach saves time saves cost of operation; and lends focus resources

13. WHAT DOES IT ENTAIL? Risk-based Approach for CDD Good practice to assign risk categories to clients (for example) Level 1 (representing lower risk) Level 2 (representing medium risk) Level 3 (representing special risk accounts) The risk level will determine the KYC information required and the subsequent intensity of management and monitoring of the account (Enhanced Due Diligence) The risk level will also determine the account monitoring (risk-based account/transaction monitoring) An assessment of the risk associated with the client and his/her potential vulnerability to being used for money laundering purposes. An assessment of the risk associated with the type of customer and the nature of their business or source of wealth.

14. WHAT DOES IT ENTAIL? Cont�d An assessment of the anticipated volume of activity (i.e. thresholds) A review of the relevant KYC information for all customers against PEP. Warning list databases. Local assessment criteria to reflect any money laundering risks specific to the operating environment in the country concerned. Physical monitoring (identification of suspicious transaction at the time it happens) Determine the capability of your IT system Consider investing in IT Internal audit control mechanism and training Proper record keeping and statutory reporting - Gatekeepers are advised to maintain an oversight regular monitoring of less vulnerable customers and transactions.

15. SUSPICION AND SECURITY OF TRANSACTION Do not take no for an answer and vice versa. Be very curious rather. Since suspicion, security of transaction and risk management is germane exercise the following cross-checks for assurance when dealing with your customers How well do I know this customer? Does the transaction make sense considering the customer's profile? Do I fully understand the transaction the customer wishes to complete? Am I comfortable with this transaction? Is this the usual method for conducting this type of business transaction? If in doubt, there may be a possibility that your customer is using your institution to launder money

16. NATURE OF CDD TO BE EXERCISED WITHIN SECTORAL SPECIFICS Though Section 6 provides for what would amount to suspicious transaction, they may be inexhaustible For Example: Legal Practitioners, Notaries when promoting or registering or forming a company - Identify the beneficial owner, understand the ownership control structure/interests, determine the source of funds, identify and verify the natural persons - Where the customer or the owner of the controlling interest is a public company that is subject to regulatory disclosure requirements, it is necessary to seek to identify and verify the identity of any Director of that company clients account

17. NATURE OF CDD TO BE EXERCISED WITHIN SPECIFIC SECTORS cont�d Estate Agent when dealing with land (sale of Property) - conduct relevant searches to determine encumbrances, etc. Accountants, Tax consultants and External Audits - request for complete record and all relevant accounting books - look out for underlying criminality - possibilities for tax evasion, etc in cases of investment options and portfolio management

18. CONSEQUENCES ASSOCIATED WITH FAILURE TO CONDUCT CDD Reputation risk is the potential that adverse publicity regarding businesses practices and associations, whether accurate or not, will cause a loss of public confidence in the integrity of the institution. Borrowers, depositors, and investors might stop doing business with the institution because of a money laundering scandal involving the institution. Operational risk is the potential for loss resulting from inadequate or failed internal processes, people, systems and external events DNFIs that rely on the proceeds of crime have additional challenges in adequately managing their assets, liabilities and operations. Conspiracy and negligence may be imputed.

19. CONSEQUENCES ASSOCIATED WITH FAILURE TO CONDUCT CDD cont�d Legal risk is the potential for lawsuits, adverse judgments, unenforceable contracts, sanctions, fines and penalties generating losses, increased expenses for an institution, or even closure of such an institution, withdrawal or revocation of professional licenses or have name struck off the roll. Concentration risk is the potential for loss resulting from too much credit or loan exposure to one borrower. Lack of knowledge about a particular customer or who is behind the customer, or what the customer�s relationship is to other borrowers, can place a bank at risk in this regard. This is particularly a concern where there are related counter-parties, connected borrowers, and a common source of income or assets for repayment.

20. CONCLUSION Pertinent CDD Questions and Answers Why is Due Diligence Conducted? To assess potential risks ( Reputation, ML/CFT/Legal, operational, concentration�.) To risk profile customers To determine what level of due diligence needs be performed (Enhanced, Simplified,�) Who Conducts Due Diligence? The person entering the business relation (due diligence on business, on all parties involved) The compliance /AML officer If required a Lawyer ( Legal aspects) Management depending on risk level and business type, e.g. PEPS When is Due Diligence Conducted? Before entering into business relationship Before an occasional transaction is carried out When there is suspicion of Money Laundering or Terrorist financing

21. CONCLUSION cont�d How is Due Diligence carried out? Obtain information from all independent sources (Name, address, identification�) How Much Due Diligence Needs to Be Conducted? Depends on the risk profiling How Much Time is allocated for Due Diligence Completion? As much as is needed until fully satisfied and ultimate conviction that our utmost has been performed How does this fit into the FATF 40+9 recommendations? CDD will prevent: MONEY LAUNDERING (using the 40 Recommendations) TERRORISM (Using the 9 Recommendations) Can I Be Sued for Failing to Conduct Adequate Due Diligence? You can be liable for failing to perform your due diligence as a professional of the financial sector. You have an obligation of means not of result ( you have to be able to prove to 1/3 party that you have done your most to perform your due diligence.� What to do when CDD fails? Close the account Refuse to establish the relationship Make a suspicious transactions report

22. CONCLUSION cont�d FINALLY Take the following steps to achieve wider CDD KYC = Know Your Customer (Identification, Address, Location, etc as in mandate forms-customer profile) KYCB = Know Your Customers' Business (Transaction Profile, Type & Nature of business, Sources of Funds, Risk Profile, etc as in KYC Assessment Form) KYT = Know Your Customers� Transaction (Transaction Monitoring) KYE = Know Your Employee (Staff on-boarding practices should include background checks and a continuous monitoring system for fidelity) CM = Continuous Monitoring (changes in customer behaviour through transaction monitoring and other activities) CDD = Customer Due Diligence

23. Thank you for your Attention