The following article discusses session three in the IR Global Virtual Series on 'Know Your Customer – Ensuring legitimacy in business transactions'

China – NC Some professionals in their practice rely
on the KYC that is done by the referring source professional. I had a situation
recently where a service provider was taking advice from a client of theirs.
They were asking me to provide service on a referral that they received from a
large international bank based in Hong Kong. I didn't trust the bank’s
onboarding or their KYC, because they have been fined many times.

A lot of people automatically will trust banks, but I will
automatically distrust a bank. When I asked the intermediary, who had received
the client referral from the bank about the KYC, he told me not to worry about
it. I was polite and reminded myself to be civil; but I knew then that this was
not going forward. We turned the project down and we turned down the
opportunity to work with a huge accounting firm. They told me they had many
cases like this, but I said I only needed one to get my firm in deep trouble.

So, the KYC process to protect everybody in the service
chain has to be about risk appetite. if the referring source doesn't have the
same risk appetite as you, it doesn't work. Each one of us, as a top-tier
service provider, has a zero-risk tolerance. The partners and the colleagues in
the firm are not going to forgive you if you bring in a new client, but didn't

Your reputation is worth far more than any fee that you
could generate on some small matter. As a result, KYC applies in all cases, for
all onboarding, in all transactions. Nobody can afford to get it wrong and
everybody has to be clean.

Financial transactions coming out of China, first have to
deal with the foreign currency conversion issue. Then the issue is whether the
funds are lawfully earnt and are post-tax dollars. We've set up a system for
the source of funds report where we are involved a Certified Public Accountant
(CPA) that we've worked with for 20 years.

We know that the guy cannot be bought and we do an official
translation in order to ensure full disclosure by the client. There are nine
sources of funds and they have to show where it came from, before the
accountant signs off, plus there's a physical report that is delivered. Every
transaction coming in to China should have this. I believe that we are very
much the exception to the rule right now, but I believe within a few short
years everybody will be required to do it.

I know major Chinese law firms that are not doing KYC and
they do not know how to do source of funds reports. This is shocking to me,
because it is where the international practices and the local practices have
diverged, but the truth is that China will be required to comply, because it is
such an international jurisdiction.

California – JS I'm going to focus here on the risk
involved with hiring of key staff and management versus pre-transaction
diligence, because that's where a preponderance of regulations come in that are
jurisdiction dependent, including privacy and security concerns. With regard to
hiring in different jurisdictions, the regulations are very different from
pre-transaction diligence. Once it's post acquisition different regulations
kick in.

We had an example recently where we prepared a
pre-transaction report on a management team and everything was fine until our
client came back to us and said they now had a suspicion of wrongdoing with one
of the management team.

At this point the issue switched to an employment or
employment and retention and internal investigation report because any action
taken would be post-transaction. Our client was in the UK, where one cannot do
anything without a signed authorisation. We went back and forth on this and the
client wanted us to go ahead without the authorization, but the risk for us –
and the client – was far too high to proceed.

The desire or the willingness to notify the person that an
investigation is going to be done and obtain their authorisation is a hard sell
sometimes, and we've definitely had to walk away from assignments because of

Reportable information varies widely, even within the US.
California is one of the most restrictive on reportable information, while
notices of the subject’s rights are also required. While it is the employer’s
duty to provide guidance on those rights, not everyone is well versed in
various jurisdictional regulations, so we provide model forms and notices as
well as guidance.

The other issue that we also like to advise our clients on
is the potential for litigation. There are scores and scores of potential
lawsuits that can run into tens of millions of dollars. Crossing every T and
dotting every I is important, because post-transaction due diligence is really
a different animal from pre-transaction diligence and we like to make sure our
clients are well versed both.

Dutch Caribbean – LS Curaçao promotes more
transparency, compliance and substance over traditional offshore vehicles based
primarily on favourable tax structures. Much of the financial infrastructure in
Curaçao has been setup to cater to structures that seek not only a favourable
tax climate, but mostly to provide insight and transparency into property and
money flows of the respective companies and private clients. The specific needs
of clients are carefully and thoroughly assessed and evaluated to provide
customised and compliant solutions through the most fitting structures that are
tailored around the principles of a risk-based approach.

This approach is anchored on current laws and regulations on
the prevention of money laundering and terrorist financing that aim to provide
a better, less timely and a more cost-effective alternative to the normative

Service providers can therefore allocate resources more
effectively on high-risk clients and meet compliance requirements with greater
efficiency. This, in turn, creates greater latitude and flexibility for
professional service providers to dedicate the desired and adequate attention
to the risk assessment of specific client profiles, country, product or
transaction types. This risk assessment is used to describe how the risks are
either eliminated or mitigated pursuant to the money-laundering legislation.

InfoCapital works in close alliance with CINEX, the official
Investment & Export Promotion Agency of Curacao to promote the investment
opportunities available on the island and to facilitate the investment process
for interested investors. Furthermore, InfoCapital has been designated as an
‘Accredited Person,’ authorised as a trustworthy investment consultancy company
to accept investments from foreign investors applying for the Curaçao
investment immigration programme.

Malta – DM KYC should always be done at the
onboarding stage. Depending on the risk being faced, one would need to
determine whether we are going to apply a standard due diligence or enhanced
due diligence.

Once that is in place and you know your client and what you
are looking at, then obviously the next stage is the ongoing monitoring stage.

During ongoing monitoring, you will come across different
scenarios, which might prompt you to carry out further testing in terms of
knowledge of your client. If there are material changes to the client business,
I would say that one would need to perform additional due diligence.

If for example, you have incoming or outgoing funds, which
do not match the clients’ business profile, you must decide whether to delve
deeper into such transactions. The same would be true if a particular
transaction does not make sense, or a different structure is suddenly put in
place to hide the ultimate beneficial owner. In such cases the commercial the
rationale behind the circumstances ought to be challenged.

Over time, for example, the status of a director or of a
beneficial owner, might even change to that of a politically-exposed person
(PEP). Should such a scenario happen, then obviously enhanced due diligence
measures ought to be adopted. Understandably, there are many scenarios which
prompt the adherence to strict KYC processes.

I have previously referred to the risk-based approach and
here lies the importance of the business risk profile and one’s risk appetite. Thus,
strict KYC procedures should only be carried when there is a high risk or
should they always be adhered to?

Dutch Caribbean – LS The risk-based approach depends
on the background of the client, the jurisdiction they operate in and the
nature of their business activities.

Each of these factors are assigned to certain risk profiles
and there's always a minimum level of due diligence that is done. Based on the
risk of the client, enhanced due diligence might apply and that carries true
across all areas, from dealing with notaries, corporate service providers,
banks or regulated exchanges.

Cyprus – TK As per the AML Directive, all regulated
entities must implement a risk based approach stating clearly the risks
involved and the necessary processes that should be followed at each time.

In the case of high-risk transactions, such controls become
stricter and the involvement of experts is deemed necessary. Examples of
high-risk entities (being either physical or legal) is the involvement of
politically-exposed persons or entities from sanctioned jurisdictions. Hence,
stricter controls must be followed so that the acceptance of such cases is
always in line with AML/KYC regulations.

With regard to Cyprus, the increased interest from foreign
investors and the new generation of technological development, particularly in
the financial sector, led the local authorities to revise all due diligence and
KYC regulations. The use of digital currencies in the banking and business sectors
is considered high-risk, making the respective sectors highly regulated.

The involvement of intermediary companies in supply chain
management, is another example of a high-risk transaction, due to the
complexities involved. Such cases have significantly increased during the last
decade, leading to a corresponding rise in the registration and use of local
shell companies.

To restrict the use of shell companies and enhance
transparency, the Central Bank of Cyprus has recently issued a revised circular
on the definition, use and substance of shell entities. This includes the
identity of the beneficial owner, the source of funds and the transactional
behaviour of such enterprises.

Cyprus is currently in the process of developing a public
register with information on ultimate beneficial owners, accessible to legal
entities solely for the purpose of due diligence and customer identification.
The public register will be maintained by the Cyprus Registrar of Companies and
Official Receiver.


Jessica Staheli (JS) Scherzer International – U.S –

Luis Santine Jr. (LS) InfoCapital Advisory & Management
– Dutch Caribbean

Nicholas V. Chen (NC) Pamir Law Group – China

Theodoros Kringou (TK) Infocredit Group Ltd – Cyprus

Dunstan Magro (DM) WDM International – Malta

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