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Tax Engineering

What does Due Diligence mean?


Question

What does the Due Diligence customer identification process mean? What does "Your documents are being reviewed by the compliance department" mean?

Answer

Due diligence is an investigation carried out by the Compliance Department of a bank, financial entity, credit institution or payment entity with the objective of assessing the viability of a natural or legal person and preventing the money laundering of illicit origin. The FATF (Financial Action Task Force) demanded the due diligence of the clients of banks, lawyers, auditors, tax advisors, jewelers, gaming activities, real estate and notaries to avoid transactions related to the laundering of money of illicit origin. Governments have been responsible for transferring the responsibility of Due diligence to professionals related to the movement of assets since these operations are interesting for governments to combat illicit money circulating in a country's economy. The Due diligence process is related to KYC. What is the KYC? KYC stands for "Know Your Client" and represent a list of identification requirements that governments impose compulsorily on banks, lawyers, auditors, tax advisers, jewelers, casinos or online, real estate and notaries to know what kind of clients they work with and what is his commercial activity.

The Due diligence is a malicious institution that transfers the responsibility of obligatorily detecting the operations of money laundering to the professionals without having anything to do with the activities carried out by the client. The high administrative cost of Due diligence for companies and the lack of diligence of these to get to know clients make financial entities bear full responsibility and suffer high fines. The professionals in charge of performing the Due diligence compliance to clients receive the pseudonym of financial gatekeepers or gatekeepers. They detect the deceptive operations performed by a natural or legal person with an apparent legality. However, the government will punish the porter or gatekeeper if he is not able to identify the illicit activities in the money laundering process. A notary or lawyer may be involved in a money laundering operation for 2 reasons:  

  1. The notary or lawyer participates as a voluntary consultant in the process of money laundering: the professional knows perfectly the illegal activity carried out by his client and consents to take the purchase of, for example, a property to hide the funds with an apparent legality.  
  2. The notary or lawyer being a key figure involuntarily is involved in the money laundering process: the professional does not know the real activity of his client and makes the purchase of the house without knowing the origin of the money. If the notary and lawyer perform a correct due diligence, they can avoid a judicial process by legitimizing assets of illicit origin of their client.  

The purpose of due diligence is for professionals to pay attention to operations that governments can not control due to lack of resources and can apply the corresponding taxes in the transfer of assets. 

What documents do you have to present for Due Diligence? When opening a bank account or registering a company without a physical presence in the country, in order to get to know its future client the financial institution usually requests a notarized and/or apostilled copy of a passport, ID or utility bills. The objective of Due Diligence is to avoid money laundering, possible scams to the credit institution and as a result to know better the intentions of the client.  

When the process of opening a bank account is done with physical presence of the client at the bank, the due diligence carried out by the banking officer in charge of compliance includes the verification of the passport or identity card. The compliance officer will also ask for information related to the business activity the client performs to see if there are any criminal indications. A typical compliance question for the Due diligence is to know the annual turnover the client will have annually in his bank account. If at the first meeting the client states that he is going to have movements of 50,000 euros in total per year and will only operate in his country of residence, he will not be able to receive a bank transfer of 50,000 euros coming from a country that was not indicated in the moment of opening the account. In this case, the compliance department will automatically request documentation that justifies this operation, such as, for example, contracts. If the department is not satisfied with the documentation provided and the origin of the funds is not clear, they can close the bank account and report that transaction to the financial crimes unit in your country of residence.  

The compliance department investigates the clients and ensures that no type of illicit activity is carried out. The activities considered as crimes are:  

  • Extortion or association with an organized criminal group 
  • Financing of terrorism 
  • Illicit trafficking of immigrants or human beings 
  • Sexual exploitation, including children 
  • Illegal drug trafficking 
  • Weapons trafficking 
  • Traffic of stolen products 
  • Corruption and bribes 
  • Fraud 
  • Money forgery 
  • Product piracy 
  • Environmental crimes 
  • Homicide 
  • Kidnappings 
  • Smuggling


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