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Customer Identification – A Critical Component of AML Compliance

What is Money Laundering?

Money Laundering is the process that hides the origin of illegally obtained money and runs it through banking or any other legit financial institution to make it appear as an income received from legitimate resources. This illicit money is then invested in funding criminal and terrorist activities.

Significance of AML compliance for businesses and financial institutions:

As per AML/CFT legislation in UAE, Financial Institutions, Designated Non-Financial Businesses and Professions (DNFBPs), and Virtual Assets Service Providers (VASPs) are required to establish a comprehensive AML/CFT compliance framework. This framework would support the entities in overcoming vulnerabilities related to money laundering, terrorism financing and proliferation financing.

What is Customer Identification?

Financial Institutions have specific procedures to identify and verify customer identities. Customer Identification is one of the basic steps that DNFBPs, and Financial Institutions and VASPs must follow to verify the identity of the prospective customers. It helps identify legitimate businesses, individuals, and institutions so that one may enter into a business relationship with them. In simple words, the customer identification program demonstrates a series of steps that establish the legitimacy of  the customer’s identity.

Role of customer identification in AML compliance

Customer identification is the most crucial stage while conducting AML compliance.  This is the stage where various checks are applied to verify the identity of the potential client and beneficial owner. On the basis of identification documents, a decision is made about whether to conduct business with this prospective client. After this stage, the clients are rated based on the ML/FT risk they pose to the business.

Components of the Customer Identification Program

UAE has adopted a progressive approach to AML compliance. The AML regulations and the guidelines issued by the Supervisory Authorities provide stringent customer identification procedures that DNFBPs, VASPs and Financial Institutions must follow to identify suspicious transactions. This customer identification procedure is also generally referred to as Customer Due Diligence.

Each country can determine how it implements the necessary CDD process by making a law or using other enforceable methods. It is noteworthy that the Financial Action Task Force (FATF) provided recommendations around Customer Identification Program – international guidelines to combat money laundering and terrorist financing. 

Steps in Customer Identification

The CDD measures implemented involve the following steps:

  1. Verify Customer Identity:  Identifying the customer and customer identity using independent reliable data.
  2. Identify UBOs: Determine the Ultimate Beneficial Owners, verify their identity, which provides a satisfactory answer to the DNFBPs, FIs and VASPs about true ownership. It gives a clear idea about the control exercised on the customer. Read The Complete Guide to UBO Verification.
  3. Purpose of Business: Obtaining information about the customer’s business activities and understanding the objective of the business relationship.
  4. Continuous monitoring: Continuous monitoring and due diligence is done on the business association and thorough examination of transactions is carried out during the business relationship. 

All the processes mentioned above apply to all the customers. 

As per the AML Laws, DNFBPs, VASPs and Financial Institutions should follow the above-discussed process to strengthen their AML framework. The Compliance Officer must ensure the adherence to the norms of the Customer Identification Program and keep the process in sync with the AML laws and regulations as prevalent in the UAE and the FATF Recommendations.

Technology & AML Compliance

With the help of technology and advanced AML software, organizations can create a close-knit AML framework. A good customer identification program must have written policies to follow. A clear protocol for customer identification weeds out any ambiguity and provides the regulated entities an apparent reference while implementing the customer identification policies. The policy should clearly mention the customer’s requirements while establishing the business relationship. DNFBPs, Financial Institutions and VASPs should be aware of the process listed in the AML rules and regulations to identify unusual patterns and suspicious transactions immediately. It is important to note that continuous monitoring is required to evaluate the risk profile and update the risk assessment process to identify any money laundering instances. AML software is highly beneficial in identifying cases of identity thefts and increasing data security. It helps retain the customers’ trust and protects the institutions’ goodwill in the market.

Strict Verification System

The AML software will introduce an effective customer verification system. It helps prevent identity thefts and verifies the criminals who are trying to hide behind the legal system.

AML training will provide the employees with the correct information and inform them regarding the proper processes to be followed while identifying suspicious activities.

AML software can prevent money laundering. Employees can create risk profiles based on information from multiple sources, such as public records, including information about immigration, current criminal history, and previous legal issues. It also provides information on asset tracking, which verifies if the customers are the real owners of the property they claim to be. On-site inspections can also be conducted if there is any suspicion regarding the details and documents furnished. 

An independent audit process is required to fulfill the requirements of the independent anti-money laundering regulatory bodies, which ask for a periodical audit. The CIP will ensure that the organization implements the AML guidelines correctly and adheres to the AML rules and regulations. An independent audit will keep the business on its toes, and it will diligently follow the AML rules and regulations.

UAE follows the recommendations closely by adhering to the CDD and record-keeping processes to identify suspicious accounts and transactions and report suspicious activities. 

Creating an effective AML compliance program is crucial for customer identification. The policy with a strict customer identification process identifies and deals with the challenges of the money laundering process and prevents financing of criminal and terrorist activities.

AML UAE: AML Compliance Consultants

If you need help with AML compliance, you can always trust AML service providers like AML UAE. A reliable consulting firm that offers complete AML solutions – it is a one-stop destination for AML compliance dedicated to the UAE market. AML UAE team has the right exposure and the requisite skills, updated knowledge, and training to provide AML and CFT compliance. Get Documentation of AML/ CFT policies, AML training, assistance in Annual AML/ CFT Risk Assessment Report and setting up an In-house AML compliance department, AML software selection and AML/ CFT health check-ups. 

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FAQs

The customer identification process is the process of identifying customers through verification of their identity documents and other reliable data to assess their risk to your business.  

Customer identity can be identified by checking their identity documents and seeing if their name is found in Sanction Lists or PEPs. 

Customer identification and verification is a process of obtaining information from customers, verifying it, and recording it to identify each customer that your company is onboarding. You must also check if that customer appears in any Sanction Lists, Politically Exposed Persons (PEPs) lists, or government terrorist lists.  

The vital elements of customer identification programs are: 

  • Customer identification and verification 
  • Identification of UBOs 
  • Understanding the objective of their business 
  • Periodic review and continuous monitoring 

The customer identification process is carried out in 4 steps:

  • Verify Customer Identity
  • Identifying UBOs
  • Purpose of Business
  • Continuous monitoring

The documents for customer identification depend on whether the customer is an individual or a corporate.

For individuals:

Documents for identity verification: Passport/Emirates ID/Any other government-issued ID bearing photo

Documents for address verification: Recent Utility Bill/Municipal Tax Record/Property Purchase or Rent agreement/Insurance Policy

For corporates:

Documents for identity verification: Certificate of Incorporation/Memorandum of Association/Articles of Association/Trade License

Documents for address verification: Recent Utility Bill/Municipal Tax Record/Property Purchase or Rent agreement/Insurance Policy

Customer identification is necessary to check any potential client’s background and ensure that the client is genuine and has no criminal or illicit intentions to carry out any financial crime.

Banks can set up a comprehensive framework for customer identification consistent with the regulations set up by the Central Bank of UAE.

There can be various instances where suspicion can arise. But some compliance measures like proper training for the frontline staff, keeping up with the updates of the regulators, using robust screening and monitoring software, etc., can help identify suspicious activities and safeguard entities from financial criminals.

About the Author

Pathik Shah

FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a Chartered Accountant with more than 25 years of experience in compliance management, Anti-Money Laundering, tax consultancy, risk management, accounting, system audits, IT consultancy, and digital marketing.

He has extensive knowledge of local and international Anti-Money Laundering rules and regulations. He helps companies with end-to-end AML compliance services, from understanding the AML business-specific risk to implementing the robust AML Compliance framework.

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