Best Practices for Record-Keeping and Due Diligence by Reporting Entities

The fight against money laundering, terrorist financing, and other financial crimes is a top priority for governments, regulators, and financial institutions worldwide. Reporting entities such as banks, financial institutions, intermediaries, etc., play a crucial role in preventing financial crimes. These entities are obligated to maintain records, perform due diligence, and identify beneficial owners. In this blog post, we will discuss best practices for record-keeping and due diligence by reporting entities.

Maintain Records

Reporting entities must maintain records of documents evidencing the identity of their clients and beneficial owners, account files, and business correspondence related to their clients. All the information maintained, furnished, or verified must be kept confidential, except where provided otherwise under any law. These records must be maintained for a period of five years from the date of transaction between the client and the reporting entity. Maintaining proper records is crucial in identifying and preventing financial crimes.

Identify Beneficial Owners

Reporting entities are required to identify the beneficial owner of their clients, as prescribed by law. A beneficial owner is an individual who ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being conducted. It also includes a person who exercises ultimate effective control over a juridical person. All documents evidencing the identity of the beneficial owner must be maintained in a record along with account files and business correspondence related to the clients.

Access to Information

The Director of the regulatory body can call for records from any reporting entity. Reporting entities must furnish such information as required by the Director within the time and manner specified by the Director. Every information sought by the Director shall be kept confidential, except where provided otherwise under any law. The recent Finance Act of 2019 allows the Director to request any records from reporting entities. Banks and other businesses must maintain records of the kind, size, and currency of transactions, along with the dates on which they were carried out.

Document Purpose of Transactions

Reporting entities must take additional steps to record the purpose behind conducting the specified transaction and the intended nature of the relationship between the transaction parties. If the client fails to fulfil the conditions laid down under sub-section, the reporting entity shall not allow the specified transaction to be carried out. If a transaction is considered suspicious or likely to involve proceeds of crime, the reporting entity must increase future monitoring of the business relationship with the client, including greater scrutiny of transactions, as prescribed by law.

Categorise Customers Based on Risk

Banks, financial institutions, and intermediaries must put documentation requirements for clients trying to open or operate an account or conduct a transaction. This documentation will also help in categorising the customers according to their perceived risk levels, and these categories will further decide the level of due diligence that each body must then conduct. It is essential to have a proper risk categorization system to identify high-risk customers and apply enhanced due diligence measures.

Follow Aadhaar Act

Every reporting entity is under a duty to perform a certain level of due diligence before indulging in any client transaction. They must verify the identity of the clients indulging and undertaking the transaction by following the procedure and conditions given under the Aadhaar Act, 2016. The verification requires the entities to examine the ownership and financial position, including sources of the client’s funds, record the purpose behind conducting the specified transaction, and the intended nature of the relationship between the transaction parties. If the client does not meet the conditions, the reporting entity must not proceed with the transaction.

Prevention of Money Laundering 2005

Reporting entities can also refer to the Prevention of Money Laundering 2005 rules for client due diligence. These rules are self-explanatory and can assist reporting entities in adhering to the best practices for record-keeping and due diligence. These rules prescribe various measures that must be taken by reporting entities to prevent money laundering, terrorist financing, and other financial crimes.

Some of the key measures prescribed under the Prevention of Money Laundering 2005 rules include the verification of identity, recording of the purpose and nature of transactions, and identification of high-risk customers. Reporting entities must also establish and maintain an effective system of internal controls, training programs, and risk management practices to ensure compliance with these rules.

Conclusion

The proper maintenance of records and due diligence by reporting entities is crucial in preventing financial crimes such as money laundering and terrorist financing. Reporting entities must follow the best practices for record-keeping and due diligence to comply with the relevant laws and regulations and effectively combat financial crimes. By maintaining accurate records, identifying beneficial owners, categorising customers based on risk, and following applicable laws and regulations, reporting entities can contribute to a safer and more secure financial system.

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