Proper due diligence: The mechanism for the protection of financial institutions in their business services
Autor: Krist Flores
Financial institutions usually offer various financial products, such as: opening bank accounts, loans, investment of funds in financial certificates, among others. In order to market their products to companies, financial institutions have an obligation to carry out due diligence on those companies that require their products or services.
Companies are subject to due diligence when they request financial services
When companies request a service, financial institutions carry out a due diligence in which they thoroughly evaluate corporate documents, identify the composition of the board of directors, the shareholding structure, the company’s beneficial owners, among others.
During this process, financial institutions must determine whether the company’s representative has sufficient authority to request a financial product. In other words, they have to certify whether the company has its due assembly, board minutes or statutes that grant an express power of attorney to the manager to request the corresponding service.
We emphasize that it cannot be assumed that such powers exist if the company representative belongs to the board of directors or, shareholding structure.
Identify who are the company’s shareholders
Banking institutions are obliged to break down the shareholding structure of the company applying for the financial product. If there is a company within that company that is a shareholder, and that company holds twenty percent (20%) or more of the shareholding structure, the bank must investigate such company to find out who its shareholders are.
In this scenario, if there are other legal entities with a 20% share, it is also necessary for due diligence to know the entire shareholding structure until the natural persons are identified, who would act as the final beneficiaries by shareholding control.
Regulations require financial institutions to carry out due diligence
In the Dominican Republic, financial intermediaries must carry out due diligence and identify the beneficial owners of the companies to which they offer a service. This regulation arises from Law No. 155-17, Against Money Laundering and the Financing of Terrorism, which identifies the Financial Obligated Subjects in its article 32. Therefore, there is the probability of identifying the beneficiaries of a company through effective control, by means of a declaration of final beneficiaries issued by the parent company or the company requesting the service.
Due diligence requirements
Similarly, the Superintendency of Banks issued instructions on due diligence addressed to financial intermediation entities, in accordance with the 40 recommendations of the Financial Action Task Force (FATF).
Those instructions cover the requirements that financial intermediation entities must consider in order to know not only their customers, but also their related parties, both natural and legal persons, national and foreign, beneficial owners, politically exposed persons (PEPs), non-profit organizations or non-governmental organizations, as well as those related to trust operations.
In order to carry out due diligence, financial entities must also consider the following regulations:
a) Article 55 of Monetary and Financial Law No. 183-02, regarding the prevention of money laundering and terrorist financing.
b) Numeral 9, of article 41, of Law No. 72-02, Against the Laundering of Assets Derived from the Illicit Trafficking of Drugs and Controlled Substances and Other Serious Offenses.
c) Law No. 267-08, on Terrorism, which creates the National Counter-Terrorism Committee and the National Counter-Terrorism Directorate.
A tool that mitigates legal risks
In short, it is crucial that financial institutions carry out proper due diligence, as it is a mechanism by which they can protect the transactions they carry out with their business customers and, consequently, mitigate the risks of money laundering and terrorist financing.
Similarly, it would reduce the chances of these banking institutions absorbing a negative impact in the legal and/or financial aspect.
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