Smart Identification and Verification

Know Your Customer refers to the requirements of the Money Laundering Act, which requires obligated parties to clarify the identities and verify the risks associated with a business relationship. The process fits into the broader framework of a bank's money laundering prevention policies. KYC processes are implemented to ensure that natural persons in business relationships are indeed who they claim to be. Originally, these regulations applied only to institutions in the financial industry, but they are now applicable to the non financial industry as well.

The term due diligence refers to the identification ("Who is the customer really?") and verification ("Is the customer really who he claims to be?") of new and existing customers for obligated parties under the Money Laundering Act (Section 3 AMLA). This process can be extremely time-consuming, especially in corporate banking. In particular, international corporate complexes nested over many levels make it difficult for obligated companies to find out whose ownership and control a company actually has. The question of who is the beneficial owner of the company "at the end" is particularly important here.

The beneficial owner is the natural person who permanently owns or controls the contracting party or the natural person at whose initiative a transaction is finally effected or a business relationship is finally established. Legal representatives, managing partners or partners of the contracting party shall be deemed to be beneficial owners qua fiction if no natural person can be identified even after the obligor has conducted comprehensive checks to determine whether a natural person is the owner of or otherwise exercises control over a legal entity or company. Further information can be found in the Interpretations and Application Notes on the Money Laundering Act issued by the German Federal Financial Supervisory Authority (BaFin).

Section 2 of the Money Laundering Act lists a number of obligated companies. In addition to the traditional credit institutions and financial services institutions, however, insurance companies, capital management companies, lawyers, auditors and tax consultants as well as real estate agents and commodity dealers are also obligated under Section 2 of the AMLA.

As an obligated party under the Money Laundering Act, companies are by law considered so called reliable third parties in order to be called upon for the handling of processes in the area of obligations under the Money Laundering Act. Section 17 of the AMLA permits the utilisation of third parties in this context for the fulfilment of the general due diligence obligations pursuant to Section 10 of the AMLA.