Future customer surveys CDD
Banks and other financial institutions have a gatekeeper function. This means that they have a duty to prevent money laundering, terrorist financing and other criminal activities, among other things. By screening and knowing their customers and therefore knowing exactly who they are doing business with, customers who are engaged in money laundering or terrorist financing, for example, can be kept out. How banks must fulfill this gatekeeper function is stipulated in the Money Laundering and Terrorist Financing Prevention Act (Wwft). The DNB (De Nederlandse Bank) and the AFM supervise banks and other financial institutions for compliance with the provisions of this law.
The Wwft stipulates the outcome of the customer due diligence that banks and financial institutions must conduct to screen their customers. It does not specify exactly how this screening should be carried out. The purpose of screening is to assign a risk profile to clients in order to then determine, based on this risk profile, how intensively a client should be monitored. A low risk profile means less intensive monitoring than a high risk profile.
Most banks and financial institutions screen their customers by asking them specific questions about why a customer chooses the particular bank, why the customer chooses the product being purchased, about the source of assets and expected account usage. In addition, questions include where the customer lives/is registered, who the UBO (ultimate beneficial owner) is, and whether the customer is a PEP (Politically Exposed Person). Based on the customer's answers and outcomes, the customer's final risk profile is determined.
Bunq is an online bank and customers can easily open an account there via the Internet. For simple checking accounts, this is also possible with other banks, but with Bunq, for example, it is also possible to quickly open a business account via the Internet. Part of the reason that this is possible is that Bunq uses data analysis and artificial intelligence to perform customer screening. Thus, customers are not contacted to ask them questions in person. Through data analysis and the use of artificial intelligence, a standard low-risk user profile is assigned to retail customers. Bunq assumes that most customers will behave according to this standard profile (and thus with a low risk rating). This way of screening saves a lot of time and manpower.
Bunq received instructions from DNB as a result of this method of screening because, according to the DNB, Bunq would not comply with the gatekeeper function it has as a bank and Bunq would therefore not comply with the provisions of the Wwft in the context of this gatekeeper function. DNB ruled that Bunq's screening method was deficient and that Bunq did not gather sufficient information about customers using this method of screening to assign a correct risk classification. DNB also believed that resulting monitoring of customers was deficient. Bunq disagreed with this assessment by DNB and took the matter to court. The Rotterdam District Court initially ruled in favor of DNB. Following this, Bunq filed an appeal with the Trade and Industry Appeals Tribunal (CBb). On October 18, 2022, the CBb ruled that Bunq complies with the provisions of the Wwft with respect to screening and monitoring customers (and, incidentally, that Bunq does violate the Wwft when investigating the source of customers' financial resources and carrying out enhanced investigations into PEPs; this was judged insufficient). This is an important ruling for the financial sector. Recently, high fines have been imposed by the DNB on several banks for allegedly failing to prevent money laundering (and thus violating the Wwft). No bank has previously stood up to these measures by the DNB.
In recent years, banks and other financial companies and institutions have had to invest heavily in manpower, among other things, to meet the requirements placed on them as gatekeepers and compliance with the Wwft. Research by McKinsey shows that banks in the Netherlands spend at least half a billion euros annually on customer surveys alone. The Dutch Banking Association therefore rightly questions whether the current model of doing customer surveys is future-proof. Banks suffer substantial annual losses on payment transactions due to the rising supervisory costs they incur from their function as gatekeepers. Between 2005 and 2021, this loss increased by 547 million euros; an increase of 2375%.
A more automated process could save a lot of money and time. And as has now become clear, this method of screening is permitted by law. At the same time, it is clear that a fully automated process is not sufficient. To really know a customer well and know exactly with whom you are doing business, it is also important to know the origin of the assets deposited with a bank. And this cannot be found out with data analysis or the use of artificial intelligence. This requires contact with the customer and asking incisive and "tricky" questions of a customer. Moreover, the customer's statements will often need to be supported with documentation for verification.
Following the CBb ruling, financial institutions and companies may decide to also make greater use of automated processes (data analysis and the use of artificial intelligence) when conducting customer surveys. But customer contact will thus remain an essential part of CDD as the CBb ruling also shows.
If you would like to learn more about CDD and/or conducting customer surveys or need help/advice on CDD please contact Suzanne de Wit at 06-39269713 or at suzanne@arcpeople.nl
Sources:
De Rechtspraak, "DNB instruction to Bunq partially scrapped: no evidence of all violations of anti-money laundering laws" The Hague Oct. 18, 2022
De Volkskrant, "Profile. Bunq boss Ali Niknam: the CEO for whom no opponent is too big" Oct. 19, 2022
