AML/CFT Client Identification Adoption of Electronic Means

JUDr. Tomáš Nielsen, JUDr. Tomáš Horáček, PhD., Mgr. Jan Přibyl

Although significant in importance, largely regulated by law, adopted in the Czech Republic over 20 years ago and as such affecting almost everybody, the measures against legitimisation of proceeds of crime and financing of terrorism (AML/CFT Measures) currently remain quite unknown even to a number of obligated entities.

At present, the AML/CFT Measures are governed namely by Act No. 253/2008 Sb., regulating selected measures against legitimisation of proceeds of crime and financing of terrorism, as amended (AML Act). Soon to be largely amended in line with the amended EU legislation as proposed in the articulated bill submitted to the Parliament of the Czech Republic for approval under No. 752, the AML Act is expected to introduce a number of changes.

Client Identification

At present, a significant part of business is conducted electronically. Yet, the option to use electronic means in this area is either restricted or made less clear by the current AML legislation. As stipulated in Section 8 of the AML Act, the obligated entities are to perform several fundamental duties including client identification; whereby a client, whether a private individual or person acting on behalf of the client, must be identified by the obligated entity for the first time in the personal presence of the identified (cf Section 8(1) of the AML Act). If strictly interpreted in line with law, the option to adopt electronic means for the purposes of first client identification is not feasible as the obligated entity is to maintain a physical contact at least with the client’s representative. Exemptions from the law are permitted, yet the option to adopt electronic means is quite minimal with a narrow reading of the aforementioned provision (although the modern technologies undoubtedly allow for distant identification while preserving all qualitative identification-related parameters; cf videoconferences, etc.). Changes thereto (and hence widened range of exemptions) are expected to be introduced by the amended AML Act.

Unlike in the case of first client identification, the electronic means can be widely used in executing further transactions with the already identified clients. As stipulated in Section 8(5) of the AML Act, the identity of the particular private individual performing the transaction is to be properly verified by the obligated entity – as the method of identifying such private individuals is not specified in the AML Act in detail, the option to adopt the electronic means is thus not prevented. The selected identification method (and hence associated responsibility) is at the discretion of the obligated entity; yet, the selected method should be secure enough so that the client in question could not be mistaken for someone else. The transaction-related risk factors play a crucial role, too – different transactions, even if performed by the same client, can be subject to different identification methods.

First Client Identification

At present, probably the only exemption enabling the obligated entities to identify the clients only electronically without physical presence is stipulated in Section 11(4) of the AML Act; namely with respect to distance contracts for financial services regulated by Section 1841 et seq. of the Czech Civil Code whereby a contract for financial services is any consumer contract for banking, lending, payment, insurance, supplementary insurance, FX, e-money and/or investment (trading) services.

In enjoying the aforementioned exemption, the involved entities are to comply with the terms and conditions stipulated by law, namely: the first payment made under the said contracts must be made via an account opened in the client’s name with a credit institution, whether domestic or foreign, operating in the EU and/or EEA; and the obligated entity must receive from the client a copy of a document confirming the existence of such account, copies of the relevant parts of the identity document and at least one additional document from which the identification details, type and serial number of the identification document, country (authority) having issued the submitted identity document and validity of the identification document could be ascertained (whereby the submitted copies must be legible and capable of storage for the period stipulated by law and the image of the identified person in the submitted identification document must allow for visual identification).

Given the above, the adoption of electronic means for the purposes of AML/CFT client identification is thus very limited at present.

Expected Changes

The amended AML Act is to introduce: changes to the existing exemption regarding the distant contracts for financial services executed with consumers; and an option to identify the clients using trust services.

The exemption currently stipulated in Section 11(4) of the AML Act (resp. Section 11(7) of the amended AML Act) is proposed to be significantly changed. Newly, the exemption will not apply only to the distant contracts for financial services executed with consumers as regulated by the Czech Civil Code but rather to all contracts for financial services. On the contrary, new several tightened and ambiguous measure will be introduced.

The amended AML Act explicitly states that the contracts for financial services must be in a written form. As stated in the explanatory report on the amended AML Act, the written form is already requested today with reference to Section 1822(2) of the Czech Civil Code. Yet, we are of the opinion that a reference to the provision under which the consumer receives from the entrepreneur at least one copy of the contract once the same is executed is not absolutely identical to the requirement for a written form.

The range of services to which the exemption is to apply is not clear, either. As the explanatory report itself admits, the financial services are not clearly defined by Czech law. A reference to the current list of financial services stipulated in Section 1841 of the Czech Civil Code could no longer be used as the list itself is said in the Czech Civil Code to apply only to the consumer contracts. Yet, the list will likely to continue to be used in practice as a starting point.

The amended AML Act further introduces a reduced range of obligated entities to which the aforementioned exemption will apply. At present, the exemption may and can be applied by any obligated entity; newly, it could be applied only by the credit and selected financial institutions stipulated in Sections 2(1)(a) and (b), points 1-11 of the amended AML Act – other obligated entities might newly be exempted.

It must further be taken into account that the exemption could newly be applied only if the obligated entity has no doubt as to the client’s real identity; in result of which the option to apply this exemption must thoroughly be considered by the obligated entity itself. As explicitly stated in the explanatory report and as the practice shows, the terms and conditions stipulated by law must be considered to stand for the legal minimum – it is up to the obligated entity itself to set further security measures.

Although appearing at first sight to be newly wider, the option to adopt electronic means also for the purposes of first client identification will – with the more restrictive conditions – be used in the end less often than today.

The use of electronic means for the purposes of first client identification, however, will significantly be affected by a brand new exemption related to trust services introduced with reference to Regulation (EU) No. 910/2014 of the European Parliament and of the Council of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market and repealing Directive 1999/93/EC (eIDAS Regulation) effective from 1 July 2016.

A client may be identified by the obligated entity even if not present – however, only if: the client discloses the identification details to the obligated entity as required by law together with other details; the identity of the respective private individual is verified by the obligated entity with a qualified trust services provider in line with the eIDAS Regulation; and the obligated entity has no doubt as to the client’s real identity. In practice, it means that the clients could be identified for the first time with the adoption of electronic means analogous to a digital signature. Unlike the contracts for financial services subject to a restrictive exemption, the option to use trust services for the purposes of first client identification is regulated less tightly as the trust services may be used by all obligated entities having no doubt as to the client’s real identity.

As in other cases, all risks must be thoroughly considered by the obligated entities and adequate measures to prevent erroneous client identification set; and, if necessary, additional methods of identification (such as a requirement to submit a copy of identification documents or further required information) be adopted.

Conclusion

With the AML/CFT measures, the adoption of electronic means is quite limited despite a wide use of information technologies today; namely as regards the first client identification where the clients or persons acting on their behalf are strongly preferred by law to show up in person (yet without compelling reasons stipulated by law).

Changes thereto might be introduced by the extensively amended AML Act currently submitted to the Parliament of the Czech Republic for approval. The adoption of electronic means for the identification purposes is likely to be affected the most by the proposed exemption introducing the option to use trust services in line with the eIDAS Regulation. Given the legislative process status, the approval and form of the approved amended AML Act remain under question – only practice will show what the new AML/CFT options to adopt electronic means will be.

 

Jan Přibyl

Tomáš Horáček

Tomáš Nielsen

(NIELSEN MEINL lawyers)