THE CHALLENGES OF CUSTOMER DUE DILIGENCE IN AFRICA

Mu’Azu UmaruDirector, Research and Planning

GIABA Secretariat, Dakar, Senegal

PRESENTED TO AT the AFREXIMBANK ANNUAL CUSTOMER DUE DILIGENECE & CORPORATE GOVERNANCE FORUM

Dakar, Senegal,

28-29 OCTOBER 2014

CUSTOMER DUE DILLIGENCE

19/04/23

INTRODUCTION• Broadly, approaches to maintaining effective

anti-money laundering/combating the financing of terrorism (AML/CFT) regime is two-fold:– Preventive approach– Detection/enforcement approach

• The preventive approach is designed to deter or prevent the criminals from perpetrating the crime of money laundering and the whole range of predicate offences

INTRODUCTION cont’d• Initiatives pursuant to the realisation of the

preventive approach include Customer Identification or Customer Due Diligence (CDD)

• CDD - International requirement– Financial Action Task Force

• FATF 40 Recommendations (formerly 40+9)• CDD – R10 with impact on several Recommendations,

including Recs 1, 11, 12, 13, 14,16, 20 etc

– Basel Committee • Customer due diligence for banks• Considers KYC for client on-boarding etc

WHAT CDD ENTAILS

Nigerian Financial Intelligence Unit (NFIU)19/04/23

IMPERATIVES OF EFFECTIVE CDD• Proper and effective CDD, amongst other things, helps

to:– Prevent the mis-use of financial institutions as

well as reduce the incidences of fraud and other financial crimes• Limit criminals from having access to the financial system

– Maintain the integrity, reputation, soundness and stability of local and global financial system

– Promote good business, governance, and risk management

– Minimizes regulatory sanctions & adverse consequences of such sanctions on financial institutions

– Generally, enhance implementation of robust AML/CFT programme by financial institutions

CENTRALITY OF CDD IN AML/CFT REGIMECENTRALITY OF CDD IN AML/CFT REGIME

CDD

ML/TF RISKASSESSMENT(R1)

CONFISCATION OF PROCEEDS OF CRIME(R3)

AML/CFT INSPECTION(R26,28)

FIU ANALYSIS(R29)

ML/TFINVESTIGATION(R30)

RECORDS KEEPING (R11)

STR/CTRREPORTING(R20)

ROBUST AML/CFT REGIME

IMPLEMENTATION OF CDD MEASURES

• The implementation of CDD measures presents unique challenges, especially in developing countries, and Africa in particular.– African nations are low capacity countries with

largely weak and underdeveloped formal banking/financial system

CUSTOMER DUE DILIGENCE (R5): GLOBAL PERFORMANCE OF COUNTRIES (MER)

FSRB MUTUAL EVALUATION RATING FOR R5 (FATF 40+9 RECs)

C LC PC NC NAESAAMLG 0 0 5 10 0MENAFATF 0 0 6 9 0GIABA 0 0 2 14 0CFATF 0 0 16 13 0MONEYVAL

0 7 17 6 0

APG 0 3 18 19 0GAFISUD 0 0 8 2 0EAG 0 0 7 2 0

10 79 75

CUSTOMER DUE DILIGENCE (R5): PERFORMANCE OF AFRICAN COUNTRIES (FATF 40+9 RECs)

GAPS RESULTING TO THESE POOR PERFORMANCES

Legal gaps:• No express provision in law requiring CDD when

– Carrying out occasional transactions above a designated threshold

– Carrying out occasional transactions that are wire transfers in the circumstances covered by SR VII

– There suspicion of ML and TF– The FIs have doubts about the veracity of or adequacy of

previously obtained customer identification data • No express provision in the law requiring

reporting entities to verify the identity of persons purporting to act on behalf of a customer where the customer is a legal person or legal arrangement

GAPS ……. Cont’d• No clear obligation to identify and take reasonable

measures to verify beneficial owner for all customers (including determining whether the customer is acting on his/her own behalf, understanding the ownership/control structure of the legal entity, and determine the natural persons who exercise ultimate control over the entity

Regulatory gaps• Weak AML/CFT regulatory/supervisory regime– Weak oversight of reporting entities– Poor application of administrative sanctions

• Inadequate capacity

GAPS ……. Cont’d• Implementation/Operational gaps – Reporting entities

– Balancing profit with CDD/other regulatory requirements• Profitability Vs cost of undertaking CDD and complying with

other AML/CFT requirements• De-risking – some financial institutions are now terminating

or restricting business relationships with clients to avoid rather than manage risk in line with RBA owing to issues relating to profitability, regulatory requirements, reputational risks etc

– Limited implementation of CDD requirements by FIs and non application by other reporting/accountable entities

– No rules concerning CDD measures for existing customers– CDD documentation exemption for customers conducting one-

off transactions– Use of threshold - for instances, specified forms of identification

are required can lead to inadequate documentation being taken in circumstances where threshold is not met.

– Weak human capacity

INFRSTARUCTURE/WAY FORWARD• Review legal and regulatory framework, especially in

view of changes in the FATF standards• Develop robust national database on identification

system– Reliable national databases, reliable crime reports, credit

references, and other sources of information which could facilitate customer identification, proper risk assessment etc

• Use of alternative means for identification/ verification of customers:– Traditional chiefs/rulers– Religious leaders– Voter’s registration cards – Biometric identification system, which will help to reduce the

need for an identifiable physical address etc• Nigeria – recent introduction of the biometric identification

system for bank customers

INFRSTARUCTURE…. Cont’d• Improve human capacity – to improve AML/CFT

awareness and assess the degree of risks associated with their customers

• Well funded and independent compliance function• Introduction of low-risk banking and financial products

and services that require minimal identification• Application of risk based approach in the

implementation of CDD – Simplified & Enhanced CDD measures

• Establishment of centralized CDD repository • Automate -Deployment of an effective AML solution

software that will enhance CDD efficiency• Capture and store relevant documentation- Reviews and

document management• Perform continuous risk assessment

CONCLUSION• The risks of financial systems being misused for

ML/TF purposes is real• In spite of the challenges associated with the

implementation of CDD measures, stakeholders in the continent, including regulatory authorities and financial institutions must take appropriate and practical steps to implement requisite AML/CFT measures, especially CDD to prevent the misuse of their businesses, promote financial system stability and a secure world.

Thank you for your attention

GAIBA SecretariatDakar, Senegal

Tel: +221338591818Email: secretariat@giaba.org

Website: www.giaba.org