CDB 16, identification, delegation: solutions for full compliance

Initiated in 1977, the Agreement on the Swiss banks’ code of conduct with regard to the exercise of due diligence (CDB) has been revised many times since its inception. The current version, which was established in 2016 and will be replaced on 1 January 2020 by CDB 20, sets out the rules on the due diligence of banks with respect to the fight against money laundering and terrorism financing. The main one is the obligation for financial institutions to identify the contracting parties and beneficial owners. This task can be particularly complex, for banks and customers alike, and yet is critical since a mistake in the identification may lead to fines of up to several hundred thousand of Swiss francs. In this context, delegating the identification makes it possible to considerably improve efficiency and time. Explanations.

CDB 16: MORE THAN A CODE OF CONDUCT

Past cases from the Supervisory Board (responsible for examining alleged breaches of banks' due diligence obligations) reveal the sometimes light treatment given to the identification of contracting parties and beneficial owners by certain financial institutions. However, the CDB is more than a code of conduct. Indeed, Article 35 AMLO-FINMA stipulates that provisions found in CBD 16 regarding the identification of the contracting partner and the beneficial owner are mandatory for banks. The express reference of the AMLO-FINMA to CDB 16 gives it (at least partially) the character of an ordinance.

The rules established by CDB 16 must therefore be strictly followed by Swiss financial institutions in order to avoid potentially high fines.

**THE LEGAL BASIS FOR THE IDENTIFICATION OBLIGATION UNDER CDB 16 **

• When to proceed with identification ?

According to Article 45 of CDB 16, “all the necessary documents for the identification of the contracting partner, the establishment of the controlling person and the beneficial owner must be available in an appropriate form before an account can be used”. However, if particular information and/or documents are not available, the account may be used in exceptional circumstances. Nonetheless, the bank must fulfil its duty of care within 90 days at the latest. Otherwise the account must be blocked for withdrawals until all the documents are available to the bank. Reactivity is therefore essential so as not to harm relationship with the clients!

• Verify clients’ documents

When entering into a business relationship, the question often arises as to whether the identification documents produced by the client fulfil the due diligence obligations. This is particularly the case with regard to the authenticity of the identification documents. Past judgments have established that a bank is also required to terminate the business relationship when the statements made by the client are misleading. To be compliant, the bank is therefore required to verify the information provided by the customer. Failure to verify misleading statements has led to conventional fines.

• Repetition of due diligence obligations when a doubt arises

It should also be noted that this duty of diligence lasts over time: the bank must repeat the verification of the identity of the contracting partner and the identification of the control holder or the beneficial owner, when a doubt arises.

This doubt may concern:

• The accuracy of the information given on the identity of the contractor,
• Whether the beneficial owner is still the same,
• Whether the control holder is still the same.

If the doubt cannot be removed and the bank finds that it has been misled or that indications have been knowingly misrepresented, the bank must terminate its current business relationship with the other party as soon as possible. It will therefore be recommended for the bank to pay particular attention to this verification before arriving at the radical solution of terminating the business relationship.

• Recording of the means used

One of the cornerstones of CDB 16 is the obligation for banks to record data and documents and the means used to verify the identity of control holders, contracting parties and beneficial owners. A lack of recording or too light means have led, here again, to conventional fines. It should also be recalled that the documents must be certified as compliant (in the case of remote business relations) and be valid, or at least recent. For example, identification documents for corporations and partnerships must not be more than 12 months old. Finally, it should be recalled that the documents used to verify the identity of the person establishing the business relationship must be available at the time the business relationship is opened, as mentioned above.

A SOLUTION: DELEGATION

Article 43 of CDB 16 provides for the possibility for banks to “mandate the verification of the identity of a controlling person as well as that of a beneficial owner”. This allows the bank to become more efficient, to facilitate its commercial relationship and to meet the obligations imposed by CDB 16 in a timely manner. However, it is important to note that the delegation of the identification of control holders, contracting parties and beneficial owners does not exempt the bank from verifying the information provided by the mandatory. The bank remains responsible for the identification carried out. Great care must therefore be taken in the choice of this mandatory, who must have the necessary skills, experience in research and identification of control holders and beneficial owners, as well as a network enabling them to carry out their research throughout the world. In addition, the mandatory must ensure systematic transmission of the documents identifying the contracting parties and beneficial owners in order to enable the bank to comply with the CDB's requirements. Specialized for several years in the international search for unclaimed account holders, Key Findings meets these requirements in every respect. Are you looking for a trusted partner to relieve you of the identification obligation of CDB 16 and increase your efficiency? Contact us.