Nowhere in the regulations are financial institutions instructed to use a proprietary database or conduct a proscribed level of research when onboarding a new customer or counterparty. Yet this is where the bulk of the money is spent: in database costs, workflow tools, and investigative labor. As this is where the money is, we have provided a number of detailed best practices with regard to the research component of KYC.
Patriot Act: Section 326 says all banks must have a written CIP that describes client entity verification and determine whether the name of the new customer appears on any government list of known or suspected terrorists or terrorist organizations. Banks should take all reasonable steps to ensure that they do not knowingly or unwittingly assist in hiding or moving the proceeds of corruption by senior foreign political figures, their families, and their associates. Because the risks presented by PEPs will vary by customer, product/service, country, and industry, identifying, monitoring, and designing controls for these accounts and transactions should be risk-based.14
FSA: “Firms need to ensure that prospective and existing customers are assessed for being potential PEPS, either under the definition set out in the Money Laundering Regulations (“MLR’s”) or by reference to a wider definition…In this regard it is important to remember that PEPs include those who are family members or “known associates” of PEPs.”15
FATF: “Financial institutions should be required, in relation to politically exposed persons (PEPs) (whether as customer or beneficial owner) in addition to performing normal CDD measures to: a) have appropriate risk-management systems to determine whether the customer or the beneficial owner is a politically exposed person; b) obtain senior management approval for establishing (or continuing, for existing customers) such business relationships; c) take reasonable measures to establish the source of wealth and source of funds; and d) conduct enhanced ongoing monitoring of the business relationship.”16