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22 July 2021 Supervision Supervision label Q&A

Question:

Must exchange institutions establish and verify a customer's identity for transactions in which an amount is exchanged from one currency to another?

Answer:

Yes, given the risk-based approach as required by the Wwft, we consider it necessary for institutions providing currency exchange transactions (exchange institutions) to establish and verify the identity of their customers as described in Section 3(2), under a, of the Wwft, for transactions that involve the exchange of cash amounts from one currency to another.

Notes:
Pursuant to the Wwft, customer due diligence is required for a one-off transaction if the amount involved equals or exceeds EUR 15,000, and for two or more related transactions whose combined amount equals or exceeds EUR 15,000. The wording of the Wwft, the Explanatory Memorandum to the Wwft and the AMLD4 suggests that a risk-based approach must be used. This means that if there is a heightened risk of criminal activities, customer due diligence must also be performed for one-off transactions involving lower amounts.

Transaction of EUR 10,000 or more, in which cash is exchanged from one currency or denomination to another must always be notified without delay to the Financial Intelligence Unit (FIU-NL). Adequate notifications can be made to FIU-NL only if the customer's identify has first been established and verified.

Reasons for the threshold amount

An exchange institution is a financial enterprise that performs several cash transactions on a daily basis. It enters into short-term relationships with customers, many of whom are anonymous and are not resident in the Netherlands. In addition, cash is often delivered uncounted. Cash is not visible to authorities and is therefore anonymous. This means that exchange transactions entail a heightened risk of being used in money laundering and terrorist financing.

We therefore consider it necessary that a customer's identity is established and verified for all cash transactions of EUR 2,000 or more. A sanctions check must be performed above the threshold amount as a minimum.

Establishing and verifying a customer's identity should also combat smurfing behaviour. The monitoring of regular customers makes it possible to determine whether their transactions consistently remain below the EUR 10,000 reporting limit. Preparing detailed transaction profiles is a less appropriate course of action, given that many customers only come in once. Predefined scenarios, however, can be used to detect smurfing behaviour.

Subjective indicators that are relevant for exchange institutions

The AMLD4 sets out a non-exhaustive list of risk variables that must be used to determine the depth of customer due diligence. They are

  1. the purpose of an account or a relationship;
  2. the size of the assets deposited by a customer;
  3. the regularity or duration of the business relationship.

The AMLD4 contains a non-exhaustive list of factors that indicate potentially high-risk customers. Based on the list, firms that perform many cash transactions are considered to have a high inherent risk.

The Dutch Financial Intelligence Unit (FIU-NL) has published the following subjective money laundering indicators for exchange institutions:

  • Money is repeatedly exchanged from small denominations to large denominations
  • There is no legal economic explanation for exchanging a euro amount into a foreign currency amount
  • Large amounts in foreign currencies, divided into small denominations, are exchanged to euros
  • There is no legal economic explanation for the currencies exchanged and the frequency of the exchange transactions
  • Several exchange transactions are effected at different exchange offices/banks or at different branches of those exchange offices/banks
  • Money is delivered uncounted
  • The suspected person refuses to explain the origin of the money
  • There is an apparent intention to circumvent the notification limit
  • Past studies have shown that the exchange of pounds sterling and Scottish pounds in small denominations outside the United Kingdom is often linked to drug trafficking.

The Financial Action Task Force (FATF) also provides subjective indicators of what it considers to be high risks for exchange institutions. These are

  1. non-resident customers;
  2. anonymous transactions, which may include cash.

Risks we have observed in the market
We found repeated instances, as part of our investigation in early 2019, in which customers had decided not to proceed with a planned transaction once they were asked to present an identity document. Counter staff at the exchange institutions we investigated said they expected customers to try at another exchange institution or at a later time without having to present an identify document. With several exchange institutions located in a small geographical area, especially in Amsterdam, customers can simply keep trying. It is important to be able to establish a customer's identity, because if no identity document is presented, FIU-NL cannot be adequately notified of an intended unusual transaction.

Relevant laws and regulations

This Q&A page pertains to the following statutory provisions:

  • Section 3(5), under b, of the Wwft
    Parliamentary Papers of the House of Representatives 2017/18, 34808, 3, p. 3 (Explanatory Memorandum)
  • Section 13(3) in conjunction with Annex I to the AMLD4 ((EU) 2015/849)
    Section 18(3) in conjunction with Annex III to the AMLD4
  • Paragraph 1(e) of Annex III to the AMLD4
  • The FATF Recommendations 2012 (updated June 2019), p. 62-63.