NVB Industry Baselines: A Practical Approach to Risk-based Customer Due Diligence

Introduction

The Nederlandse Vereniging van Banken (NVB) has unveiled a groundbreaking set of guidelines known as the NVB Industry Baselines. These comprehensive guidelines, designed to better operationalise risk-based customer due diligence (CDD), empower banks to effectively combat money laundering (ML) and terrorist financing (TF), while ensuring a proportionate and streamlined approach for their customers.

The importance of these guidelines was underscored at our recent AML Rewind 2023 Webinar, where we had the opportunity to discuss their implications for the banking industry.

In this article, we will look into the core principles and key benefits of the NVB Industry Baselines, providing an overview of these transformative guidelines and their role in enhancing a bank's risk-based customer due diligence (CDD) practices.

What are the NVB Industry Baselines?

The NVB Industry Baselines are a set of principles that banks can use to develop their own risk-based CDD procedures. The guidelines cover a wide range of topics, including the identification and verification of the ultimate beneficial owner (UBO), the assessment of transaction risks, and the ongoing monitoring of clients.

The NVB Industry Baselines are being published in stages. The following baselines have been published so far:

• UBO identification and verification of the UBO’s identity
• Pseudo UBO
• EDD measures for EC high risk third countries
• Expected Transaction Profile (ETP)
• Client data actualisation (part of ODD)
• Ongoing Due Diligence (ODD);
• Models in alert and event generation
• Politically Exposed Persons (PEPs)
• Source of Funds (SoF)

The Sector Baselines published in 2023 were as follows:

• Not for profit organisations (NPOs);
• Crypto-Asset Service Providers (CASPs);
• Sex workers.

In preparation are Standards for Cash, Real Estate and Adverse media.

Why are the NVB Industry Baselines important?

The NVB Industry Baselines are important because they provide banks with a consistent and clear framework for implementing risk-based CDD. This will help to ensure that banks are taking a proportionate approach to AML/CFT compliance, which can help to reduce the burden on both banks and their customers.

Key principles of the NVB Industry Baselines

The key principles of the NVB Industry Baselines are:

• Focus on risk: Banks should assess and manage their money laundering and terrorist financing risks on a case-by-case basis.
• Proportionality: Banks should not apply more stringent CDD procedures than are necessary to mitigate the risks of money laundering and terrorist financing.
• Transparency: Banks should be transparent about their CDD procedures to their customers.
• Continuous improvement: Banks should continuously review and improve their CDD procedures.

Benefits of using the NVB Industry Baselines

There are a number of benefits to using the NVB Industry Baselines, including:

• Reduced risk of fines and penalties: By complying with the guidelines, banks can reduce the risk of being fined or penalised by the Dutch Central Bank (DNB).
• Improved customer satisfaction: By taking a more proportionate approach to AML/CFT compliance, banks can improve customer satisfaction.
• Enhanced efficiency: By using a risk-based approach, banks can save time and money by focusing their efforts on the highest-risk customers.

How can banks use the NVB Industry Baselines?

The NVB Industry Baselines are not prescriptive, so banks have some flexibility in how they implement them. However, the guidelines provide a good starting point for developing a risk-based CDD program that is tailored to the specific needs of the bank.

The NVB Industry Baselines provide practical examples to illustrate how banks can implement risk-based customer due diligence (CDD) practices. The following example demonstrates how banks can effectively utilise automated transaction monitoring (TM) and expected transaction profiles (ETP) to identify and mitigate potential risks associated with PEPs.

Let's say, a client is the parent of a PEP flagged by the bank's mature and sophisticated TM system. This is due to a pattern of unusual transactions resembling money laundering. This alert is generated despite the client being part of a low-risk client group 'retirees with average assets'.

The bank follows the Industry Baselines by:?

• Evaluating the alert and assessing whether the client's risk profile requires modification or additional mitigating measures.?
• Additionally, the bank periodically evaluates, backtests, and tunes its TM scenarios to ensure they are effective in detecting deviations or emerging risks, particularly for PEP-related transactions.

This example highlights the importance of combining ETP and TM to create a comprehensive risk management framework. ETP provides a baseline understanding of a client's typical transaction patterns, while TM acts as a 'safety net' to identify anomalies that may indicate potential risks, such as money laundering or terrorist financing.

The NVB Industry Baselines offer numerous practical examples to guide banks in implementing risk-based CDD practices.

Consider a Crypto-asset Service Provider (CASP) that has been registered with the Dutch Central Bank (DNB) for more than one year. The CASP's Ultimate Beneficial Owners (UBOs) and senior management reside outside the European Economic Area (EEA). Additionally, the CASP operates globally, providing crypto-asset services to a diverse clientele.

To assess this CASP's in accordance with the NVB Industry Baseline on Crypto-asset Service Providers, a financial institution should take the following measures:

• Verify DNB Registration: Confirm the CASP's registration status with DNB and ensure it is active and compliant with regulatory requirements.
• Evaluate Crypto-assets and Services: Review the CASP's website to gain insights into the types of crypto-assets it handles and the services it offers.
• Assess AML/CFT Policy: Obtain and review the CASP's AML/CFT policy to assess its adequacy and effectiveness in addressing anti-money laundering and countering the financing of terrorism (AML/CFT) risks.
• Review AML/CFT Audit Report: Obtain a copy of the CASP's most recent AML/CFT audit report to evaluate the effectiveness of its AML/CFT controls and identify areas for improvement.
• Conduct CASP’s Compliance Officer Interview: Engage in an interview with the CASP's responsible Compliance officer to gain a deeper understanding of its AML/CFT controls, client base, and risk assessment processes.
• Discuss with CASP’s Internal Audit: Engage in an interview with the CASP's Internal Audit department to assess the effectiveness of the CASP's AML/CFT control framework and identify any gaps or weaknesses.

Conclusion

In conclusion, the NVB Industry Baselines represent a groundbreaking shift in the approach to risk-based customer due diligence (CDD). By establishing clear principles and guidelines, they empower banks to effectively combat money laundering and terrorist financing (ML/TF) while ensuring a proportionate and streamlined approach for their customers.

At the heart of these guidelines lies a focus on risk assessment and mitigation. Through a structured process, banks can identify and assess their unique AML/CTF risks, allowing them to tailor their CDD procedures accordingly. This proportionate approach ensures that resources are allocated effectively, minimising the burden on both banks and their customers.

Furthermore, the NVB Industry Baselines emphasise transparency and continuous improvement. Banks are encouraged to openly communicate their CDD procedures to their customers, building trust and fostering a culture of compliance. Moreover, they are mandated to regularly review and refine their CDD practices, ensuring that they remain relevant and effective in the ever-evolving financial landscape.

In light of these transformative guidelines, we urge all banks to embrace the NVB Industry Baselines and adopt them as the foundation for their CDD programs. By doing so, they can take a proactive stance against financial crime, protect their institutions, safeguard their customers, and contribute to the overall integrity of the financial system. The time to act is now.

If you have questions about the guidelines or need assistance implementing them, please do not hesitate to reach out to me or my team.

By Pierre Simon