The paper covers the high level regulation and framework for KYC and AML in European Union

1. AML/KYC regulations in EU
Author: Muthu Siva

2. Presentation Contents
• Overview of EU KYC/AML guidelines
• The fourth EU AML directive – introduction and key facts
• Anticipated dates/timelines & activities
• Snapshot – key requirements and their impact on the banking sector
• Case Study
• Financial service firms fined by regulatory bodies

3. OVERVIEW – EUROPEAN UNION KYC/AML NORMS
• Money laundering is listed as one of the main crime threats to the EU. Three
principle observations
1. Most serious and organised crime is driven by profit, which tend to be very large – not
to say huge - and that most of those profits are laundered in one way or another
2. Second, serious and organised crime creates great damage, both to innocent victims
and to the EU's economy as a whole. According to a report from the police in the United
Kingdom, serious and organised crime has social and economic costs of 20 billion pounds
a year in that Member State alone.
3. Finally, we have seen that organised crime groups are becoming increasingly complex,
sophisticated and international in the way they operate. An estimated 3600
international organised criminal groups active in the EU, involved in trafficking in drugs,
human beings, firearms and other illicit goods, fraud, cybercrime and other criminal
markets. They launder and re-invest criminal profits, often in illegal activities, to
strengthen their power and abilities to evade prosecution. Such groups pose a serious
and growing challenge to the police and other law enforcement authorities in the EU.

4. OVERVIEW – EUROPEAN UNION KYC/AML NORMS
• EU directive is clear and covers more industries and set high standards on customer
due diligence in terms of both individuals and businesses, including its
representatives
• In addition to having good customer knowledge, the law requires them to have
internal guidelines and policies for risk management, follow inspection bodies, train
staff and have procedures for customs documentation and archiving of information
Rules on Know Your Customer
• Getting to know your customer includes so much more than the initial identity
check to establish an identity
• Check customer’s source of funds and the purpose of the business relationship
• If the customer is a company; the customer’s business, finance and ownership
strictly controlled
• Representatives must be identified and you have to check that they really have the
right to represent the company
• At any suspicion, that everything not is right, the customer must be reported to the
authorities in the EU country where the reporting obligated person is operating

5. THE FOURTH EU AML DIRECTIVE – INTRODUCTION AND KEY FACTS
• On 5 February 2013, the European Commission published two proposals to
reinforce existing rules on anti-money laundering and funds transfer
• Proposals fully take into account the revised Recommendations of the Financial
Action Task Force (FATF) (February 2012), the world anti-money laundering standard
setting body, and go further in a number of fields to promote the highest standards
for anti-money laundering and counter-terrorism financing
• All EU countries should implement the Money Laundering laws and KYC rules, based
on EU’s proposed Fourth money laundering directive published by European
Commission

6. ANTICIPATED DATES, TIMELINES AND ACTIVITES
Anticipated Dates Activities Activities
15 March 2013 The European Commission hosted a conference on the 15 March 2013,
which
facilitated discussion amongst various groups of stakeholders in relation
to the main
changes in the international framework as well as the proposed
Directive.
Late 2013/Early
2014
The 4th EU AML Directive will be formally adopted by the European
Parliament and
the Council of Ministers under the ordinary legislative procedure and
become effective.
Political agreement amongst key EU institutions on the final proposal
expected at the
end of 2013.
Early 2014 Her Majesty’s Treasury (HMT) will re-draft the UK Money Laundering
Regulations
2007 to align to the 4th EU AML Directive.
Jun - Dec 2014 The revised UK Money Laundering Regulations will be subject to a
consultation
period, during which UK banks will input via the BBA Money Laundering
Advisory
Panel (MLAP).
2015/2016 The EU Member States will have 2 years from the date of adoption to
implement the
4th EU AML Directive into national legislation/regulation.

7. KEY REQUIREMENTS & IMPACT ON THE BANKING SECTOR
Key Changes Impact on Banking Sector
Treatment of Politically Exposed Persons
(PEPs): Introduce new requirements for
domestic PEPs/ PEPs working in international
organisations, with risk-sensitive measures to be
applied.
The proposed 4th EU AML Directive introduces new
requirements for domestic PEPs working in
international organisations (Directors, deputy
directors and members of the board or equivalent
function) and allows a risk-based approach in
relation to the level of EDD (Enhanced Due Diligence)
performed on domestic PEPs versus foreign PEPs.
A number of banks have already adopted a policy
position which includes domestic PEP considerations.
Customer Due Diligence: Member States to
ensure that Enhanced Due Diligence (EDD) must
be conducted in certain situations of high risk,
while allowing them to permit Simplified Due
Diligence (SDD) in lower risk situations. It is
proposed to change the current approach where
SDD is permitted where there is a ‘specified
product’ or a ‘specified customer’.
Each decision on ‘when’ and ‘how’ to apply SDD
must be justified on the basis of risk, with a list of
factors to be considered when making such a
decision. Under the proposals, transactions
involving public limited companies, public bodies,
particular types of insurance, pensions and some
other financial products and some defined
jurisdictions will qualify for SDD. Conversely,
transactions involving asset holding vehicles and
cash-intensive businesses, those where unusual or
apparently unnecessarily complex ownership
structures are in place and those associated with
"higher risk“ jurisdictions will
require the application of EDD.

8. KEY REQUIREMENTS & IMPACT ON THE BANKING SECTOR (..contd)
Key Changes Impact on Banking Sector
Equivalence of third country regimes: remove
the “white list” process i.e. the provisions relating
to positive ‘equivalence’, as the customer due
diligence regime is becoming more strongly risk
based and the use of exemptions on the ground of
purely geographical factors is less relevant
Firms will need to remove current references to
‘equivalence’ from their Global AML Policies and
replace it with a reference to the Risk-Based
Approach.
Thresholds for traders in goods: reduce the
scope and customer due diligence thresholds for
traders in high value goods from €15,000 to
€7,500 for cash transactions.
In the UK, this will impact on anyone selling goods
for cash in a single or
series of linked transactions in excess of the new
limit will need to register
with HMRC as a high value dealer. Wherever a
customer pays cash above the
limit the high value dealer will be required to carry
out a risk assessment, CDD
checks and report suspicious activities. The change
responds to a concern that
the current €15,000 threshold is too high.
Data protection: introduce provisions in the
Directive to clarify the interaction between anti
money laundering/combating terrorist financing
and data protection requirements.
Article 39 of the proposed 4th EU AML Directive
introduces a specific requirement for personal data
to be deleted after the mandatory 5 year period for
which CDD Records are kept after the cessation of a
relationship. Firms should be alert to this potential
new requirement in relation to their current and
future record keeping arrangements.

9. Key Changes Impact on Banking Sector
EU REGULATION on information
accompanying transfers of funds. This is
primarily concerned with the obligations arising
from the Financial Action Task Force (FATF)
Recommendation 16, previously Special
Recommendation 7 (SR 7), as implemented within
the laws and regulations of FATF member
countries (in the EU this was by means of
Regulation 1781 / 2006). The proposed Directive
introduces a requirement for ‘full beneficiary
details’ to be included in electronic payment
messages
The draft Regulation on wire transfers tightens
existing Regulation and aims to increase the
traceability of payments by requiring the mandatory
inclusion of information on payees e.g. (a) the name
of the payee; and (b) the payee's account number,
where such an account is used to process the
transaction, or a unique transaction identifier where
no such account is used for that purpose. It
will introduce requirements on payment service
providers to verify the identities of beneficiaries for
payments originating outside the EU for amounts
over €1,000, to put in place risk-based procedures to
determine when to execute, reject or suspend
transfers and to keep records for five years. It also
clarifies that credit or debit cards and mobile phones
and other electronic devices will be covered by the
requirements if they are used to transfer funds
KEY REQUIREMENTS & IMPACT ON THE BANKING SECTOR (..contd)

10. CASE STUDY: Politically Exposed Persons (PEPs), Customer
Due Diligence (CDD) & Beneficial Ownership
• The PEP customer of a private bank is a UK resident from a high-risk country and is
not currently employed. The file states her source of funds as ‘money made from
dividend payments, real estate and oil’.
• An intelligence report on file revealed that two close relatives had held high office
in her home country and that one had been the subject of serious allegations of
corruption.
• There was some evidence on file of compliance questioning the customer’s source
of wealth, the customer had explained that it was from “her own investment
business” and from earnings from an international organisation, but her English was
not good enough to allow her to provide greater detail.
• The Relationship Manager stated that “her family had been relatively wealthy [even
under a previous regime]” and that “I don’t know how much she originally invested.
I do not know where the funds for her original investment came from as I did not
know her at the that time - but they were her funds and not anyone else’s”. This
explanation satisfied compliance.

11. CASE STUDY: Politically Exposed Persons (PEPs), Customer
Due Diligence (CDD) & Beneficial Ownership (…contd)
• The file also contained an article from a credible source, found as part of a regular
review of the relationship. It quoted an individual convicted of corruption, who
stated in an affidavit that he had been instructed to set up a trust for the benefit of
the customer in order to launder the proceeds of corruption by one of her relatives.
There was no evidence that the bank had considered the implications of this
information.
New client take on – CDD checklist/risk assessment
 Do you Know Your Customer?
 Do you Know their Business?
 Have you undertaken Customer screening for PEPs and Sanctions?
 Do you know who the Ultimate Beneficial Owner is?
 Can you identify and verify the customer’s source of funds?
 Do you know what the purpose and nature of relationship is?
 Have you undertaken an adequate risk assessment?
 Enhanced Due Diligence (EDD)?

12. CASE STUDY: Politically Exposed Persons (PEPs), Customer
Due Diligence (CDD) & Beneficial Ownership (…contd)
New client take on – ‘top tips’
 Identify adverse information on your customers or the customers’ beneficial owners
and ensure a programme is established for ongoing monitoring and updating CDD.
 Have a robust approach to identifying PEPs in respondent banks and understanding
of the level of influence such PEPs may have.
 Ensure that relationship managers and others responsible for recommending high-
risk customers provide balanced reports that articulate not just the positive revenue
streams but also adverse media coverage.
 Avoid a ‘one-size fits all’ approach to CDD in higher-risk situations; carefully
deliberate the risks of PEPs in relation to corruption and then adequately identify
PEPs and implement appropriate EDD measures. Try to avoid too much reliance on
external PEP list providers to identify PEPs without a proper consideration of the
actual risk of corruption that individuals may pose and which thus qualifies them as
a PEP e.g. wider family who may be outside the rigid definition.

13. SUMMARY OF PROPOSED REQUIREMENTS: 4TH EU AML DIRECTIVE
Treatment of Politically Exposed Persons (PEPs):
introduces new requirements for domestic PEPs/ PEPs working in international
organisations, with risk-sensitive measures to be applied.
Information on the Beneficial Owner:
the revised Directive proposes new measures in order to provide enhanced clarity and
accessibility of beneficial ownership information. It requires legal persons to hold
information on their own beneficial ownership. This information should be made
available to both competent authorities and obliged entities. For legal arrangements,
trustees are required to declare their status when becoming a customer and
information on beneficial ownership is similarly required to be made available to
competent authorities and obliged entities.

14. AML FRAMEWORK

15. FINANCIAL SERVICE FIRMS FINED BY REGULATORY AUTHORITIES
 UK’s FCA Fines South Africa’s Standard Bank Subsidiary £7.6 Million Over AML
Failures
The multi-year efforts of the UK’s Financial Conduct Authority (FCA) has resulted in a
fine it announced today, imposing a civil penalty of £7,640,400 against Standard Bank PLC
(Standard Bank) the UK subsidiary of the South Africa headquartered Group under its brand name.
The fine is connected to failings relating to Standard Bank’s anti-money laundering
(AML) policies and procedures over corporate customers connected to politically exposed persons
(PEPs), according to the regulator’s press release, for periods between 15 December, 2007 and 20
July, 2011. The fine was determined based on the firms revenues during the relevant period, and
based on an eligible discount of 30% due to its cooperation with the FCA.
Read the whole story…
 HSBC pays record $1.9bn fine to settle US money-laundering accusations
HSBC was guilty of a "blatant failure" to implement anti-money laundering controls
and wilfully flouted US sanctions, American prosecutors said, as the bank was forced to pay a
record $1.9bn (£1.2bn) to settle allegations it allowed terrorists to move money around the
financial system.
Read the whole story…

16. FINANCIAL SERVICE FIRMS FINED BY REGULATORY AUTHORITIES
 Standard Chartered Bank said that it expects to pay $330 million to settle all
pending cases of alleged violations of U.S. sanctions.
Standard Chartered Bank said that it expects to pay $330 million to settle all pending
cases of alleged violations of U.S. sanctions. The Justice Department and banking regulators have
been investigating whether the London-based bank laundered money on behalf of Iranian banks
and companies.
Read the whole story…
 Wachovia to Pay $160 Million to End Money Laundering Probe.
Wells Fargo & Co.’s Wachovia Bank agreed to pay $160 million to resolve a criminal
investigation of how drug cartels used the bank to launder money through Mexican exchange
houses.
Read the whole story…