Procedures of due diligence are an essential part of compliance programs. As stated in the French Anti-corruption Agency recommendations (FAA): "If they fail to conduct due diligence with regard to the integrity of the third parties – including customers – that they deal with, organizations may find themselves more or less directly implicated in corruption." The due diligence recommended by the FAA is distinct from the customer due diligence required of entities defined by the French Monetary and Financial Code relating to the fight against money laundering and terrorist financing (Articles L.561-1 et seq. of the Monetary and Financial Code which transpose the EU 2015/849 Directive).
The two processes are commonly aimed at assessing risks associated with a customer (Know Your Customer or KYC). But since the KYC procedure is much more sophisticated and demanding when based on anti-money-laundering and financing of terrorism legislation, it could serve as a model, especially regarding European companies dealing with customers in high-risk countries identified as such by the EU Commission.
Before assessing the risks associated with their customers in order to detect or prevent possible criminal activities in relation to money laundering or financing of terrorism, financial institutions must establish the identity of the customers, new ones as well as current ones. The Customer Identification Program (CIP) to be put in place includes the collection, analysis, storage and sharing of data either freely accessible on the internet or accessible through specific databases (Reuters, Dow Jones, Dun and Bradstreet, etc.). It also implies verification and record-keeping of customer identification information and screening of customers against lists of known criminals (e.g., who are on lists of international or national sanctions) or of high-risk individuals, given their functions or former functions (e.g., politicians, prominent public officials and senior figures in international organizations).
The French Prudential Supervisory and Resolution Authority (ACPR) guidelines published on Dec. 12, 2018, on the identification, verification and knowledge of customers1 address this issue. The guidelines were elaborated on at the request of financial institutions to provide them with all necessary details to fulfill their obligations in that respect. The purpose is to reinforce the risk-based approach to adopt, to explain the distinction between identification and verification of the customer's identity, and also to refer to – and promote – innovations that may help reinforce the verification process.
Identification begins with the receipt of the customers' declarations and of the documents sent by them. Due diligence measures are to be carried out when the veracity or adequacy of customer identification data is doubtful. Identity verification concerns the review of all written documents – whether in paper or electronic form – having a supposedly probative value. With regard to natural persons, financial institutions must verify the validity and reliability of the ID documents (national identity card, passport, residence permit) to prevent or detect fraud. Electronic identification schemes may be used. But they are not always sufficient. It is worth noting that the guidelines mention the possibility of financial institutions using an independent trustworthy third party able to propose secure technological solutions such as biometric solutions.
Interestingly, the ACPR guidelines echo the opinion of financial authorities in the EU and in the U.S., which made recent declarations to promote the use by financial institutions of new technologies in the customer due diligence process.
First, on Jan. 23, 2018, the European Supervisory Authorities (ESAs) (the European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority) made public an opinion2 to promote "new solutions to address specific compliance challenges, such as customer due diligence" linked to the AML/CFT regime and suggest to retaining a common approach with a view to fostering the consistent application of standards across the EU. These authorities envisage several types of control, such as "a built-in computer application that automatically identifies and verifies a person from a digital image or a video source (e.g. biometric facial recognition)" or "a built-in security feature that can detect images that are or have been tampered with (e.g. facial morphing) whereby such images appear pixelated or blurred."
In the same vein, U.S. agencies, including the Federal Reserve, issued a joint declaration dated Nov. 28, 2018,3 which welcomes the fact that "some banks are becoming increasingly sophisticated in their approaches to identifying suspicious activity, for example, by building or enhancing innovative internal financial intelligence units devoted to identifying complex and strategic illicit finance vulnerabilities and threats [and that] some banks are also experimenting with artificial intelligence and digital identity technologies." This declaration underlines that the implementation of innovative approaches in banks' AML/CFT compliance programs will not result in additional regulatory expectations.
However, the use of innovative technologies such as biometrics may be hindered by other applicable laws and regulations, such as those related to data protection and privacy, in particular the GDPR. For instance, biometric data processing is in principle forbidden unless it is done under strict conditions. Ambiguities remaina with regard to the legal basis of such processing under the GDPR. It is thus urgent that the EU data protection authority and EU financial authorities work together to clarify the legal regime of biometrics as probably one of the most promising customer due diligence tools.
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Footnotes
1 ACPR (Prudential Supervisory and Resolution Authority) Guidelines on identification, verification and knowledge of customer, Dec. 12, 2018
3 https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20181203a1.pdf
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