Understanding KYC in Nigeria Financial Sector: A Legal Perspective

Contributor: Janet Udoka

Introduction

Over a billion people worldwide lack access to a formally recognized identity, a situation mirrored in Nigeria, where a significant portion of the population remains unidentified despite ongoing efforts. This is particularly prevalent in developing economies. Identity is crucial for meaningful engagement in political, social, and economic spheres, and without a reliable identification mechanism, individuals may not exercise their full human rights. Addressing identification gaps is urgent, especially in regions with limited access to formal identification. Establishing robust identification systems empowers individuals to assert their rights, participate in socio-economic activities, and access essential services, contributing to inclusive and equitable development and sustainable development^[1]. The precise verification of identity is indispensable to the Know Your Customer (KYC) processes essential for compliance with Anti-Money Laundering (AML) and Counter Financing of Terrorism (CFT) regulations.

Legal Framework Regulating KYC

The Money Laundering (Prohibition) Act in 2004 marked a significant milestone in Nigeria’s KYC laws, establishing a legal framework to combat money laundering and introducing customer due diligence as a key element of KYC adherence. Before this act, Nigeria had no clear KYC stipulations, leaving financial institutions without obligations to identify account beneficiaries or report suspicious transactions. The 2011 amendment granted greater enforcement authority to the Central Bank of Nigeria and the Economic and Financial Crimes Commission to uphold Anti-Money Laundering and Counter Financing of Terrorism regulations. Subsequent regulations, such as the 2013 Know Your Customer Guidelines, have built upon the MLPA to strengthen KYC compliance^[2].

On June 23, 2023, the Central Bank of Nigeria (CBN) issued the Customer Due Diligence Regulations 2023 (referred to as the “CDD Regulation”), representing a progression from the earlier three-tiered Know-Your-Customer Regulation released by the CBN in 2013. The New Anti-money Laundering Amendment Act 2023, notably, the issuance of the CDD Regulation coincided closely with the enactment of the Data Protection Act 2023, reflecting a heightened awareness of data protection concepts in Nigeria at the time^[3].

KEY IMPACT OF KYC ON THE FINANCIAL SECTOR AND LEGAL OBLIGATIONS

KYC requirements impact not only individuals but also institutions and businesses, necessitating collaborative efforts to effectively fulfil the obligations outlined in the respective regulations.

a. Individual And Legal Persons Obligations

i. Individual Due Diligence Requirements

Depending on the type of account held by the individual, financial institutions are mandated to collect the individual’s legal name along with any aliases used (such as maiden name), permanent address (comprising full physical address), residential address (where the customer can be contacted), telephone number, email address, and social media handle, as well as the date and place of birth. Additionally, institutions are required to obtain the individual’s Bank Verification Number (BVN), Tax Identification Number (TIN), among other pertinent details.^[4] In the instance of medium-value accounts, the individual information obtained is required to be verified against similar information in government official databases^[5].

ii. Legal Persons Due Diligence Requirements

Regarding legal entities and arrangements (such as companies and other institutions), the CDD Regulation mandates the acquisition of comprehensive information. This includes the institution’s name, mailing address, email address, phone number, registration number, registered address, business address, and valid identification such as the tax identification number. Additionally, institutions are required to gather details regarding the nature and purpose of the business or activities, as well as certified true copies of documentary evidence confirming legal existence, such as the certificate of incorporation^[6], Hence, individuals conducting business in Nigeria must adhere to these comprehensive information requirements. This obligation is reinforced by the Central Bank of Nigeria’s mandate for companies to furnish details regarding their beneficial owners^[7], the CDD regulation mandates that companies furnish the names and identification documents of individuals holding senior management positions within the organization. Additionally, it encompasses detailed provisions regarding the verification of customer identities. The CDD regulation specifically stipulates the obligation of wallet providers to authenticate the phone numbers of their customers through an autonomous process, which includes validation against the Nigerian Communications Commission database or geo-mapping^[8].

b. Obligations of Financial Institutions

a. Financial institutions are mandated to comprehend the ownership and control framework. Upon the establishment of new relationships or any alteration in ownership, they must identify and verify the identity of beneficial owners (BOs) who wield control through ownership or significant interests, including voting rights. This requirement extends to all account signatories, directors, and beneficial owners. They are subject to the identification and verification stipulations outlined in regulations 6 and 7 of these Regulations, among other provisions^[9]. Now, businesses have heightened due diligence requirements in terms of information to be obtained from customers.

b) The regulation also introduces a risk-based approach to customer verification. Financial institutions are obligated to evaluate the risks associated with each customer, transaction, or product. Depending on the assessed risks, they may employ varying levels of verification measures. Customers deemed to pose low risks may suffice with simpler checks, albeit continuous activity monitoring remains imperative. Conversely, customers identified as higher risk, such as non-residents or politically exposed persons, necessitate more thorough scrutiny. This entails gathering additional information, closely monitoring their transactions, and obtaining approval from higher-level management^[10].

c) A key aspect of the regulation is the imperative to maintain the confidentiality of suspicious activities and report them without alerting the suspected individuals. Financial institutions may rely on previous checks unless they have doubts about the accuracy of the information or if there have been significant changes in the customer’s situation. In such cases, they are required to conduct additional checks.^[11].

d) Financial institutions are mandated to retain records acquired through Customer Due Diligence (CDD) measures, along with account files, business correspondence, and the results of analyses, for a minimum of five years following the termination of a business relationship or the completion of an occasional transaction. Regular reviews of customer records must be conducted, with the frequency of these reviews determined by the customer’s risk level. This ensures compliance with regulatory standards and aids in the prevention of financial crimes.^[12].

EFFECT OF NON-COMPLIANCE
Failure to comply with the provisions of the Customer Due Diligence (CDD) regulation attracts administrative sanctions and penalties as specified in the Banks and Other Financial Institutions Act (BOFIA) 2020, and particularly in the Schedule to the CDD regulation^[13]. The applicable monetary penalties prescribed in the Schedule vary based on the class of Financial Institution (FI), including Payment Service Banks, Deposit Money Banks, and other Financial Institutions. These penalties also depend on the specific provision of the Customer Due Diligence (CDD) regulation that the FI has failed to comply with. The penalties range from Fifty Thousand Naira (N50,000) to Twenty Million Naira (N20,000,000)^[14].

IMPORTANCE OF KYC

The benefits of conducting Know Your Customer (KYC) due diligence are manifold, encompassing the prevention of criminal activity within your business, safeguarding the data of legitimate customers, and optimizing operational processes to enhance customer experiences, its benefits include;

1. Prevention of Criminal Activity: Implementing robust Know Your Customer (KYC) procedures is vital for preventing criminal activities, including but not limited to money laundering, fraud, theft, and other unlawful acts. Businesses that adopt stringent KYC measures can effectively protect their revenue streams and uphold their reputation within the marketplace.

2. Improvement of Customer Experience: Efficient document or data verification processes are integral to providing an enhanced customer experience. Automation allows for rapid identity verification, expediting transactions and interactions between customers and the business. This process builds customer trust and confidence, thereby increasing brand loyalty^[15].

Notwithstanding these benefits, the effectiveness of KYC procedures may be compromised by fragmented systems and slow processes. Each instance of identity verification represents a critical point in the customer journey, where delays or inefficiencies can alienate customers and disrupt their engagement with the business. Consequently, it is imperative to integrate KYC requests seamlessly into the digital application or transaction process to ensure they are conducted promptly and efficiently, minimizing disruption to the customer experience. Notwithstanding integrating KYC processes into the broader operational framework, businesses can mitigate the risks associated with criminal activities while simultaneously enhancing customer satisfaction and loyalty. This strategy promotes sustained growth and success in a competitive market environment^[16].

Conclusion
In conclusion, the implementation of robust Know Your Customer (KYC) procedures is indispensable for the integrity and efficiency of Nigeria’s financial sector, ensuring compliance with Anti-Money Laundering (AML) and Counter Financing of Terrorism (CFT) regulations. By mandating thorough due diligence for both individuals and legal entities, the regulatory framework fortifies financial institutions against illicit activities while fostering a secure and trustworthy environment for legitimate customers. Despite the challenges posed by fragmented systems and process inefficiencies, integrating KYC seamlessly into digital operations can enhance customer experience and operational efficiency. This dual focus on regulatory compliance and customer satisfaction not only mitigates financial crime risks but also contributes to the sustainable growth and stability of the financial sector in Nigeria.

1. KYC Innovations, Financial Inclusion and Integrity In Selected AFI Member Countries (AFI SPECIAL REPORT) available at file:///C:/Users/Eliot%20Esq/Desktop/Office%20Work/KYC-Innovations-Financial-Inclusion-Integrity-Selected-AFI-Member-Countries.pdf accessed May 2024. ↑
2. Nefe Emadamerho-Atori; Nigerian KYC Laws and Requirements You Should Know in 2024, available at https://dojah.io/blog/nigeria-kyc-laws?10k-fraud-free-transactions=true accessed May 2024. ↑
3. TEMPLARS Thought Lab; CBN Customer Due Diligence Regulations, 2023 – Key Highlights and Implications for Businesses and Financial Institutions, available at file:///C:/Users/Eliot%20Esq/Desktop/Office%20Work/CBN-Customer-Due-Diligence-Regulations-2023-%E2%80%93-Key-Highlights-and-Implications-for-Businesses-and-Financial-Institutions.pdf accessed may 2024. ↑
4. Paragraph 6(a) of the Customer Due Diligence Regulations 2023. ↑
5. Ibid. ↑
6. Paragraph 6(b) of the Customer Due Diligence Regulations 2023. ↑
7. The CBN AML/CFT/CPF regulation 2022, requires banks and other financial institutions to obtain information on the ultimate beneficial owners of companies. ↑
8. Paragraph 7(2)(e), of the Customer Due Diligence Regulations 2023. ↑
9. Paragraph 8, of the Customer Due Diligence Regulations, paragraph 10, CBN Guideline on Ultimate Beneficial Ownership of Legal Persons and Legal Arrangements ↑
10. Stren & Blan Partners, AN ANALYSIS OF THE IMPLICATIONS OF NIGERIA’S CUSTOMER DUE DILIGENCE (CDD) REGULATION 2023 (Jul 10, 2023) available at https://strenandblan.com/2023/07/10/an-analysis-of-the-implications-of-nigerias-customer-due-diligence-cdd-regulation-2023/ accessed May 2024. ↑
11. Ibid. ↑
12. Ibid. ↑
13. Paragraph 46, of the Customer Due Diligence Regulations 2023. ↑
14. Ibid. ↑
15. Onfido an Entrust company, The importance of know your customer, available at https://onfido.com/blog/the-importance-of-know-your-customer/ accessed May 2024. ↑
16. Ibid. ↑