The Securities and Exchange Commission of Pakistan (SECP) declared that the income tax returns and wealth statements do not completely establish the source of wealth/funds of customers of financial institutions.
The SECP was responding to a query about whether the SECP can solely rely on the Wealth Statement reported with the Income Tax Return of a client for enhanced verification of the Source of Wealth (SoW) and Source of Funds (SoF) of a particular customer.
The SECP has issued a new version of Frequently Asked Questions (FAQs) on anti-money laundering and countering the financing of terrorism (AML/CFT). The purpose of these FAQs is to facilitate understanding of SECPs’ regulated persons (RPs) under the AML/CFT regime and to meet evolving regulatory expectations for anti-money laundering and sanctions compliance. The SECP has especially focused on Customer Due Diligence (CDD), Politically Exposed Persons (PEPs), Targeted Financial Sanctions (TFS), and other AML/CFT-related obligations.
As per SECP’s viewpoint, the income tax returns and wealth statements do not completely establish the source of wealth/ funds of a customer and only provide evidence against income/wealth sources regarding the predicate offense of Tax Evasion. It is useful to obtain a wealth statement reported with an Income Tax return for the verification of the Source of Income/Wealth.
However, additional verification measures that could be applied for high-risk business relationships include, obtaining additional information on the intended nature of the business relationship, the reasons for intended or performed transactions, bank statements, and obtaining approval of senior management to commence or continue the business relationship, etc.
While routing of funds through banks is considered a safe mechanism under the risk factor of ‘Delivery channel’, however, it may please be noted that risk assessment and rating of a customer depends on the other three factors as well namely customer, product, and geography. It is important to note that as per FATF, AML/CFT obligations are imposed separately on every financial institution that is providing financial services.
Hence, in this case, banks are not responsible for the obligations of an SECP RP, and the responsibility for compliance with the AML/CFT Regulations will rest with the SECP RP. In case the bank shares the KYC documents or information of a customer (For example in the case of Roshan Digital Accounts-RDA) to facilitate the process of customer onboarding at the RP’s end, SECP regulations allow a mechanism for third party reliance on CDD.
RPs may avail of this facility after complying with the relevant requirements as specified in Regulation 24, Reliance on Third Parties”. So, if banks share their CDD, and the RP is in compliance with requirements of Regulation 24, the RP can rely on it, otherwise, the RP must carry out its own customer due-diligence measures, SECP said.
The risk categorization of a customer is based on a combination of factors such as customer, product, geography, and delivery channel. If a high-risk customer intends to purchase a low-risk product, he/she will be subjected to Enhanced Due Diligence (EDD) measures.
Solely relying on self-declaration by a customer may not be an appropriate customer due diligence (CDD) measure in terms of the AML/CFT regulatory framework. RPs should undertake steps to not only identify but also verify that the self-declaration is valid. Moreover, many customers would not be able to determine if they are indeed a PEP, or not, for example, because the customer may not be aware of the definition of a PEP, family member, or close associate of a PEP as defined in SECP Regulations.
To establish PEP status, RPs should actively engage with customers and obtain information relevant to establishing different elements of the PEP definition. To do this effectively, well-trained staff and effective information gathering using ‘PEP search softwares’ or through public databases such as Election Commission, parliamentarian’s tax directories, public website/disclosures by Public sector organizations and other public search portals, etc. should be used and document for record-keeping purposes, SECP added.
