How does CDD differ by sector?

Wealth management, also called private banking, offers banking and other financial services to wealthy individuals, their families and their businesses. Large transactions, complex and tailored products, and clients who expect confidentiality make it attractive to anyone hiding the origin of money or evading tax at home. For that reason SDD is not appropriate in this sector.

In higher-risk cases, the firm collects and verifies more information than usual and updates it regularly and whenever the client's profile changes materially, reviewing higher-risk clients at least once a year. It establishes the source of wealth and funds and, where the risk is especially high or the origin is doubtful, verifies it with documents: a recent pay slip, a salary letter signed by the employer, a sale contract for investments or a company, a lawyer's confirmation of a sale, a will or grant of probate, a signed confirmation of inheritance, or a company registry search confirming a sale. It also establishes where the funds will go.

Further safeguards include an internal review by someone independent of the relationship and, where suitable, senior management approval of new and existing clients; monitoring that flags transfers, wire payments, sharp changes in activity or links to higher-risk jurisdictions that do not fit the client's profile; watching public sources for news about clients and their associates; keeping cash and similar items away from relationship managers; and making sure trusts and private investment vehicles are used for genuine purposes, with the ultimate owner understood.

Investment management means managing an investor's assets to meet set goals, either on a discretionary basis, where the manager takes decisions for the client, or on an advisory basis, where the manager recommends and the client decides. Managers usually have relatively few clients, often wealthy individuals, trusts, companies or public bodies, and a custodian typically holds the assets, so the risk depends mostly on who the clients are.

Where a relationship is high risk, the firm applies EDD and also identifies, and where necessary verifies, the investors behind a client that is an unregulated investment vehicle, and understands the reason for any payment to or from a third party it has not verified. Where risk is low and the rules permit, SDD can apply.

Several parties are involved in running and distributing a fund, so the fund may know little about the people who invest. Where the fund itself is not an obliged entity, the fund manager remains responsible for AML/CFT compliance. Retail funds carry risk because they are often sold remotely, are quick to access and allow holdings to be transferred. Funds for a few wealthy investors or family offices can carry more risk, because investors who control the assets turn the fund into a personal asset-holding vehicle.

Who counts as the customer depends on how the investor arrives. An investor who buys units directly on their own account is the customer, as is a firm that buys in its own name while controlling the investment for others. High-risk cases call for EDD, such as source of funds checks, paying redemptions only to the original account or one in the customer's name, and closer monitoring. Where an intermediary is the registered owner and acts on its clients' instructions, the fund identifies and verifies the intermediary and, on a risk basis, the investors behind it, who are beneficial owners of the money invested. SDD, under which the fund verifies the intermediary and its own beneficial owners but not its underlying customers, is possible only if the intermediary is subject to, and effectively supervised under, AML rules at least as strict as the EU's, the risk is low, the intermediary's own CDD is robust and it will provide CDD information on its investors immediately on request.

Where the intermediary is not the registered owner, the end investor is the fund's customer, and the fund may rely on the intermediary under the conditions for third-party reliance; see Can a firm rely on a third party for CDD? Where a fund is designed for a small number of investors, the risk goes up, and where the risk increases EDD must apply.

Securities markets combine complexity, cross-border reach, high volumes, speed and a degree of anonymity when trading through intermediaries. Some products are highly liquid and easy to turn into cash, some are complex or bespoke and hard to value, and several providers may sit on each side of a trade, so a single firm may not see the whole transaction. Cash, by contrast, is generally not accepted.

CDD is scaled to that risk. Enhanced measures include background and adverse media searches, more information on an intermediary's customers and controls, verifying where the funds or wealth come from, checking the destination of funds and the reason for a transaction, paying redemptions to the original account or one in the customer's name, and more intensive monitoring. Simplified measures include collecting fewer identity documents, inferring the purpose of the relationship from the type of product, and less frequent updates or monitoring below a sensible threshold. International guidance also lists verifying identity after onboarding once account values pass a set amount; in Cyprus that is limited by the rule that verification is completed before or during onboarding.