KYC, PEP, CCD, UBO? Words from everyday life

Did you go to a lawyer, a bank, an accounting firm, or perhaps you created a fiduciary asset management legal relationship and had to sign all kinds of identification documents and provide a lot of data? Today, we will find out the most important concepts used in this case. Let us look at what is meant by politically exposed person, ultimate beneficial owner, etc., because these are incredibly important in terms of preventing money laundering and terrorist financing.

The purpose of this article is to introduce the most important concepts, so the detailed rules will be explained later. There is a growing need for people involved in the business world to get to know the beneficial owners behind customers, partners, suppliers, and other business relationships. The relevant laws pervade our everyday life so much that they practically appear when opening a bank account, setting up a company, using a registered office provider or even when buying and selling real estate, if we use a real estate agent, etc.

We have already heard of a case where, following a suspicious transaction of money, the bank blocked someone’s account until they could prove the source of the funds. This could happen, for example, if a person received a maximum of HUF 500,000 per month before the arrival of a larger amount, but inherited HUF 100 million, this is a suspicious transaction of money for the bank’s compliance specialists until the confirmation is received. What does it mean to prove the source of the funds? Data or document confirming the legal source of the funds included in the transaction, in particular an official inheritance document, compensation, proof of wage income from employment, other proof of income (dividend-related document).

1. Ultimate Beneficial Owner, UBO

1.1 Beneficial owner is a natural person who

  • directly or indirectly owns at least 25% of the voting rights or the ownership share in a legal entity or an organization without legal personality, or
  • otherwise has effective management or control over the legal entity or organization without legal personality.

1.2 Furthermore, beneficial owner is a natural person who

  • has a decisive influence in a legal entity or an organization without legal personality.

1.3 The Hungarian law also establishes criteria for revealing the identity of the actual owner in the case of foundations (e.g.: the beneficiary of at least twenty-five percent of the foundation’s assets) and trust asset management contracts (e.g.: settlor).

1.4 It is important to emphasize that in the absence of a natural person defined in points 1.1 and 1.2, the executive officer of the legal entity or organization without legal personality is the actual owner.

2. Customer Due Diligence, CDD

This means identification of the client, risk classification, identity verification, getting to know the purpose and nature of the business relationship and transaction assignment and its continuous monitoring. This also includes the customer due diligence measures carried out by the service provider operating the gaming casino when registering the player.

In the event of establishing a business relationship, the service provider is obliged to carry out and record in writing the classification of the customer into a risk level.

3. Know Your Customer, KYC

As we have seen, performing identity verification and customer due diligence is a legal requirement. KYC documents may vary from country to country, but the general principle is that they should include the collection of information necessary to properly identify the beneficial owner and ensure the legitimacy of her/his activities.

4. Politically Exposed Person, PEP

In addition to the data specified by law, the client is also required to make a declaration regarding whether the beneficial owner is politically exposed person.

If the beneficial owner is a politically exposed person, the declaration must include which point of the legislation she/he is a politically exposed person.

According to the Hungarian law, a politically exposed person is a natural person who

  • performs an important public function, or
  • performed an important public function at least one year before the customer due diligence measures were carried out.

It is worth giving a few examples of what a person performing a public function means, for example, the prime minister, the minister, the state secretary, the parliamentarian, or a member of a similar legislative body.