Sanderson Abel
Banking laws require banking institutions to conduct customer due diligence (CDD) during the process of opening banking accounts. This information enables banks, not only to serve clients better, by understanding exactly what it is they do, enabling them to anticipate their needs, but it also serves a regulatory and risk management purpose.
One of the key observations from the recent study conducted by the Bankers’ Association of Zimbabwe (BAZ) and the Zimbabwe Economic Policy Analysis and Research Unit (ZEPARU) was the need for potential bank clients to produce documentary evidence of where they stay or where they did their business.
From the banks’ perspective this information is important as it allows the banks to understand whether the SMEs players’ businesses have a fixed place of operation or they are just mobile.
The study established that the majority of the players (around 73 percent) were operating from identified designated places while others operated from undesignated places. For banks, it is very important for them to ascertain where individuals work from and also have the knowledge of where their clients stay.
This information is important for the banks as there are supposed to do due diligence on their clients before they can open accounts for them.
The study revealed that the majority of the clients do not have adequate documentation to prove that there are officially operating at the designated premises. Most clients could not produce their proof of residence either.
What is the objective of KYC?
It is important to understand that banks at law are supposed to follow the “Know Your Customer” (KYC) norms. The main objectives of these norms is to prevent criminal elements from using the bank channels for money laundering activities and or financing of terrorism-related activities. Apart from checking money laundering, KYC is also important tool for checking frauds that sometimes unscrupulous and criminal elements try to perpetrate both on banks and unsuspecting members of the public.
In order to prevent such activities, it has become necessary to know about the true identity of customer, nature of customer’s business, source of funds, etc. It assists the banks to know and understand the customers and their financial dealings better to monitor their transactions for identification and prevention of suspicious transactions.
Why KYC?
KYC policies are simply meant to establish the identity of the client. This means identifying the customer and verifying his/her identity by using reliable, independent source documents, data or information. For individuals, banks will obtain identification data to verify the identity of the customer, his address/location and also his recent photograph.
This will be done for the joint holders and mandate holders as well. For non-individuals, the bank will obtain identification data to: verify the legal status of the legal person/entity; verify identity of the authorised signatories and verify identity of the beneficial owners/controllers of the account. To ensure that sufficient information is obtained on the nature of employment/business that the customer does/expects to undertake and the purpose of the account.
Banks with inadequate KYC risk management programme may be subject to significant risks, especially legal and reputational ones.
Sound KYC policies and procedures not only contribute to a bank’s overall safety and soundness, they also protect the integrity of the banking system by reducing the likelihood of banks becoming vehicles for money laundering, terrorist financing and other unlawful activities.
The legal and reputation risks are global in nature and as such, it is essential that each bank develops a global risk management programme supported by policies that incorporate KYC standards.
It is important that the adoption of customer acceptance policy and its implementation should not become too restrictive and must not result in denial of banking services to general public, especially to those, who are financially or socially disadvantaged.
What documents can be used for identifying good clients?
Letter from a recognised public authority or public servant verifying the identity and residence of the customer to the satisfaction of the bank
Telephone bill
Bank account statement
Letter from any recognised public authority
Electricity bill
Letter from employer (subject to satisfaction of the bank)
Banks, however, do not only confine themselves to documents mentioned in the above indicative list only.
If the customer provides any other document, which establishes proof of identity and proof of current address to the satisfaction of the bank, the same may be accepted.
It also important that banks should inform their customers that in the event of change in address due to relocation/any other reason, they should intimate the new address to the bank within reasonable time period of such a change.
Bank clients should note that all the information supplied to the bank by its clients at the time of opening the account or any other time, is kept confidential and is not disclosed to any person, except when required under the provisions of the applicable laws and regulations of the country.
Sanderson Abel is an economist. He writes in his capacity as Senior Economist for the Bankers’ Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on abel@baz.org.zw <mailto:abel@baz.org.zw> or on numbers 04-744686 and 0772463008