In December 2017, the Central Bank published its third Anti-Money Laundering Bulletin. This bulletin covers the topic of the discontinuance of a business relationship where there is a failure to provide customer due diligence documentation or information (“CDD”) and applies to regulated firms generally, including investment funds and their administrators.
A firm that is unable to identify and verify a customer’s identity due to the failure of that customer to provide the necessary CDD is prohibited from providing any service or carrying out any transactions for that customer while the CDD remains outstanding. Separately and distinctly, a firm must take action to discontinue the business relationship with the customer in such circumstances.
The Central Bank has acknowledged that the requirement to discontinue a business relationship with a customer for failure to provide CDD can be problematic in practice, especially where monies are payable to the customer. The Central Bank expects that a firm will have remediation plans in place to obtain outstanding documentation where a firm is unable where insufficient CDD is held on file to ensure that the situation is not allowed to perpetuate.
The Central Bank has provided the following guidance for firms on how to deal with both new and existing customers. As a general principle, the Central Bank states that a firm must act at all times in the best interest of the customer or prospective customer and “exhaust all possible avenues” before taking any actions that might disadvantage a customer.
• a firm should seek to obtain CDD prior to the establishment of the business relationship, although CDD may be carried out during the establishment of the business relationship where the firm believes that there is no real risk of money laundering or terrorist financing. Where this is the case, a firm should specify the defined timeframe within which CDD must be completed in their AML policies and procedures;
• contractual arrangements for new customers should provide for the discontinuance of the business relationship where CDD is outstanding and customer consent to the discontinuance of the business relationship should be obtained in advance as part of the onboarding process; and
• processes should be implemented to allow a firm to return funds directly to the source from which they came, although a firm should exercise caution that this does not have the effect of legitimising such funds and, in particular, should consider whether there is any cause for suspicion where CDD is not forthcoming and ensure that suspicious transaction reports are made where required.
• all customer records should be reviewed to ascertain the extent of any deficiencies in CDD;
• a comprehensive plan should be implemented to address any circumstances where deficiencies are identified. Where the remediation process may take a longer period of time, a firm should consider prioritising customers that have been identified as presenting a higher risk of money laundering, including politically exposed persons, over lower risk customers such as other regulated firms;
• all options to source outstanding CDD should be explored, including other types of documentation that may be acceptable. A firm should employ all available methods to contact any noncontactable customers, including via the customer’s intermediary;
• where there is a transfer of a book of business (for example, from one fund administrator to another), the Central Bank expects the AML function within the firm acquiring or transferring the business to be involved in the due diligence process to assess any potential AML compliance deficiencies;
• where CDD is not forthcoming, a firm should ensure that there are documented policies and procedures in place that outline the action required to discontinue the business relationship, which may include measures whereby these accounts are clearly identified as ‘discontinued’, ring fenced from normal accounts, flagged accordingly and subject to additional more robust CDD measures should the customer seek to enter into any further transactions; and
• a firm should consider whether there is any cause for suspicion where CDD is not forthcoming and ensure that suspicious transaction reports are made where required.
The Central Bank states that this guidance is not exhaustive and notes that it is for each firm to demonstrate compliance with the applicable AML legislation. While the bulletin helpfully acknowledges that diff erent approaches may be taken to discontinue a relationship with a customer, the guidance remains quite high level and further detail would have been welcome. From a practical perspective, firms should ensure that their policies and procedures around the discontinuation of a business relationship are clear. For an investment fund, appropriate disclosures in this regard should also be included in the prospectus and subscription documents.