FATF Recommendation 10

One of the main purposes of the Financial Action Task Force — FATF — is to define guidelines and promote the effective implementation of legal and operational measures to combat money laundering and terrorist financing. To this end, the FATF establishes the 40 Recommendations, and this article will specifically examine the tenth recommendation, which focuses on customer due diligence.

The FATF’s tenth recommendation sets out the general criteria related to the customer due diligence of financial institutions, prohibiting the creation of anonymous or fictitious accounts and promoting accurate customer identification.

This recommendation includes an interpretative note that extensively develops concepts such as risk factors in the customer relationship, individuals acting on behalf of the ultimate beneficiary, or specific provisions for life insurance policies.

The recommendation states that due diligence measures must be applied when:

• establishing business relationships;
• conducting occasional transactions that exceed a specified threshold;
• there is a reasonable suspicion of money laundering or terrorist financing;
• there are doubts regarding the accuracy of customer identification data.

To strengthen the implementation of due diligence measures, the tenth recommendation requires states to establish the mandatory nature of these mechanisms through legislation. The recommendation outlines a series of practices that should form the core of customer due diligence.

1. Identifying the customer and subsequently verifying their identity using reliable sources.
2. Identifying the ultimate beneficial owner and taking necessary measures to verify their identity. Additionally, understanding the ownership and control structure of legal entities.
3. Collecting information regarding the intended purpose and nature of the business relationship.
4. Conducting ongoing due diligence on the business relationship, analyzing transactions carried out throughout the relationship to ensure they are consistent with the institution’s knowledge of the customer.

One of the concepts developed in the interpretative note is the relationship between due diligence and tipping off. The FATF establishes that if there is suspicion that a business transaction is linked to terrorist financing or money laundering, the customer’s identity must be verified, and a suspicious transaction report must be submitted to the corresponding financial intelligence unit. 

At this point, the concept of tipping off comes into play. The FATF emphasizes that it is strictly prohibited to inform the customer about the initiation of a suspicious transaction report, requiring financial institutions to take all necessary measures to prevent this from happening.

If a financial institution is unable to carry out the practices outlined in the tenth recommendation, it must be required to refrain from establishing a business relationship with the customer or, if such a relationship has already begun, to terminate it. Additionally, consideration should be given to submitting a suspicious transaction report on the unidentified customer.

These practices should not only be applied at the beginning of a business relationship. Financial institutions must also extend this Recommendation to their existing customers, taking into account the level of risk they pose.