Know your customer 

Cobus Van Schalkwyk, Warwick Wealth Director of Client Care 

This article discusses the important Financial Intelligence Centre Act (FICA), looking at terms like know your customer, Prominent Influential Persons (PIPs) and Politically Exposed Persons (PEPS) and what we need to do as Financial Service Providers.

We have all heard the term money laundering. This is the process by which money obtained from illegal sources is given the appearance of having come from a legitimate source. In today’s globalised economy, criminals can generate huge sums of money through fraud and many other crimes.  

Governments and international bodies have thus, undertaken efforts to deter, prevent and apprehend money launderers. Financial institutions have likewise undertaken efforts to prevent and detect transactions involving ‘dirty money’, both as a result of government requirements and to avoid reputational harm.

The Financial Intelligence Centre Act or ‘FICA’ is key legislation to combat money laundering and the financing of terrorism. 

FICA contains control measures aimed at facilitating the detection and investigation of money laundering and terrorist financing and imposes specific responsibilities on financial institutions that relate to commencing a business relationship with a client as well as during the lifecycle of the business relationship. 

One of these requirements is to ‘Know Your Client’ or (KYC) by establishing and verifying the identity of all clients prior to establishing a business relationship or concluding a transaction.

What are the components of KYC:

1.   Customer Identification: Collect and verify customer information, like name, address, date of birth, and identification numbers. 

2.  Customer Due Diligence (CDD): Assess the risk profile of your customers by evaluating their background, the nature of the business relationship, and their transaction patterns.

 3.  Ongoing Monitoring: Regularly review and update customer information and monitor transactions for unusual or suspicious activity.

Politically Exposed Persons or (PEPs) and Prominent Influential Persons or (PIPs)

PEPs are individuals who hold, or have held, prominent public positions, such as heads of state, senior politicians, military officials, or judges. Due to their influence, PEPs pose a higher risk of involvement in corruption and money laundering activities.

PIPs are individuals with substantial influence over the decision-making processes within companies where these companies provide goods or services to an organ of state.

Steps to be followed by FSPs:

Identify and flag PEPs and PIPs during the KYC process and obtain senior management approval for establishing the business relationship. Conduct enhanced due diligence on PEPs and PIPs by gathering additional information and conducting more frequent reviews of transactions.

Evaluate the source of wealth and source of funds for PEPs and PIPs.

Monitor transactions continuously to detect any unusual or high-risk activities.

Lastly, one must remember that the Financial Intelligence Centre (FIC) provides a targeted financial sanctions list. It is important for FSPs to scrutinise their clients against this list and to ensure not to proceed with a transaction with any of these listed sanctioned individuals.

You can find possible matches on this list via the online search tool on the FIC website. 

What are the consequences of non-compliance?

The Financial Intelligence Centre and other supervisory bodies may impose a penalty, referred to as an administrative sanction, should they determine that an institution or person has not complied with the FIC Act.

The FIC may impose a financial penalty of up to R10 million for a natural person and R50 million for a legal person.​

In conclusion: By thoroughly understanding and implementing KYC, PEP and PIP requirements, and searching the Targeted Financial Sanctions List, FSPs can mitigate risks, ensure compliance with legal obligations, and contribute to the overall integrity of the financial system.

Regular training, the use of technology, and a proactive approach to risk management are essential in this ongoing process.

Thank you for viewing this video and I look forward to speaking to you again next month and bringing you some handy tips and insights on client care and compliance.