Basics of KYC

Table of Contents

1. What is KYC?

What is KYC?

KYC every one knows as "Know Your Customer". But, Know your customer isn't so easy. It is an Ocean, the more you explore the more you want to know it.

KYC earlier was limited to?

a. Collection of data such as name, address, country of residence and occupation for individuals and name, physical business address, domicile and business type for entities and evidencing the data with appropriate documents; Screening the customer against AML and Sanctions lists provided by different countries (say UK/US) and international organizations (such as UN/EU) to find out whether banking customer has any 'Negative News' or 'PEP connection'; Generating risk (high, medium or low) for the profile of the customer; Note down the 'Products and Services' provided by the Bank; Note down the Transaction details of the customer and finally write AML Risk Summary.

b. Reviewing the customer based on risk perception in the bank. E.g., reviewing high risk customer every year, medium risk customer every three years and low risk customer every five years.

c. Reviewing the customer based on trigger generated by system (Say transaction Monitoring suspicion) or informed by the relationship manager (say change of constitution of an entity from Limited Partnership firm to Corporate or an individual won the election and now has become a PEP) or customer opting for newer products.

d. Monitoring the data in transactional accounts and try to find if there is any suspicion to be reported to the MLRO (Money Laundering Reporting Officer); who in turn report the suspicion to the FIU (Financial Intelligence Unit) of that country.

Let's find out below what has changed?

2. What is Going Beyond KYC?

Relationship managers are not just looking for getting accounts set up for customers but do a complete probe to find out:

a. What products will suit the customer?

b. What services can be enhanced to suit the customer?

c. Can this customer be given access to Private Banking?

d. Can the customer be given better FX rates?

e. Can I source more money from the customer beyond deposits to do investment in (say funds)?

f. Is the customer eligible to be given leveraged loans?

g. Can the customer be offered L/C (Letter of Credit) or bank guarantees?

h. What digitized products that can given to customer?

i. Can customized Tax planning be done for the customer?

j. How long can we sustain the customer?

k. Can customer fund Private funds (Hedge or Private Equity)?

l. Can the customer be given project finance?

m. Is the customer so huge that bank can trust and provide payable through accounts?

And the list goes on... the jist (conclusion) is KYC is just not "Know Your Customer" but knowing beyond what a customer can bring to the bank too.

3. What the Principle Objectives of KYC Policy in Banks?

The principle objectives of a KYC policy in a bank include:

  1. Ensuring that only legitimate and bona-fide customers are accepted.

  2. Ensuring that customers are properly identified to understand the risks they may pose to the bank.

  3. Verifying the identity of customers using reliable and independent documentation.

  4. Screening individuals to understand whether or not they are high risk PEP’s or have any negative news or both.

  5. Monitoring customer accounts and transactions to prevent or detect illegal activities

  6. Implementing processes to effectively manage the risks posed by customers trying to misuse facilities.

  7. Taking appropriate approvals from Business Unit (BU) heads and Business Unit (BU) AMLO's (AML Officers) for high-risk account openings.

4. What Risks are Mitigated by Effective KYC Policy?

Risks that are mitigated by KYC:

There are five types of risks that an effective KYC policy can help to mitigate:

1) Reputational Risk:

The reputation of a business is usually at the core of its success. The ability to attract good employees, customers, funding and business is dependent on reputation. Even if a business is otherwise doing all the right things, if customers are permitted to undertake illegal transactions through that business, its reputation could be irreparably damaged. A strong KYC policy helps to prevent a business from being used as a vehicle for illegal activities.

2) Operational Risk:

This is the risk of direct or indirect loss from faulty or failed internal processes, management and systems. In today's competitive environment, operational excellence is critical for competitive advantage. If a KYC policy is faulty or poorly implemented, then operational resources are wasted, there is an increased chance of being used by criminals for illegal purposes, time and money is then spent on legal and investigative actions and the business will be viewed as operationally unsound.

3) Legal Risk:

If a business is used as a vehicle for illegal activity by customers, it faces the risk of fines, penalties and injunctions; even forced discontinuance of operations.

Apart from regulatory risk, involvement in illegal activities could lead to third-party judgments and unenforceable contracts. In addition, professionals working within many financial and other professional sectors may also personally be subject to legal action or prosecution. Due to the nature of business, these risks can never entirely be eliminated. However, if a business does not have an effective KYC policy, it will be inviting legal risk. By strictly implementing and following a KYC policy, a business can mitigate legal risk to itself and its staff.

4) Financial Risk:

If a business does not adequately identify and verify customers, it may run the risk of unwittingly allowing a customer to pose as someone they are not. The consequences of this may be far reaching. If a business does not know the true identity of its customers, it will also be difficult to retrieve any money that the customer owes.

5) Concentration Risk:

This type of risk occurs on the assets side of a business if there is too much exposure to one customer or a group of related customers. It also occurs on the liabilities side if the business holds large concentrations of funds from one customer or group (in which case it faces liquidity risk if these funds are suddenly withdrawn). By implementing an effective KYC policy, a business can identify the entire scope of the asset and liability risk faced in relation to each customer and group of customers.

5. What are the Elements of KYC?

Banks should frame their KYC policies incorporating the following five key elements:

  1. Customer Acceptance Policy.

  2. Customer Identification Program.

  3. Monitoring of Transactions .

  4. Risk Management.

  5. Record Retention.

Let's understand each of the elements in detail below.

5.1. What is Customer Acceptance Policy (CAP)?

What are the norms for acceptance of a customer?

Inadequate understanding of a customer’s background and purpose for utilizing a bank account or any other banking product or service may expose Banks to risks. To avoid the same, every bank should develop a clear Customer Acceptance Policy laying down explicit criteria for acceptance of customers. The Customer Acceptance Policy must ensure that explicit guidelines are in place on the following aspects of customer relationship in the bank:

  • Banks should not allow the opening of or keep any anonymous account, or accounts in fictitious name, or account on behalf of other persons whose identity has not been disclosed or cannot be verified, or numbered customer account unless the details of the customer is fully known.

  • Parameters of risk perception are clearly defined in terms of the nature of business activity, location of customer and his clients, mode of payments, volume of turnover, social and financial status etc., to enable categorization of customers into low, medium and high risk. Customers requiring very high level of monitoring example, Politically Exposed Persons should necessarily be categorized even higher.

  • Banks should ensure documentation requirements and other information to be collected in respect of different categories of customers depending on perceived risk. Banks should ensure not to open an account or close an existing account where the bank is unable to apply appropriate customer due diligence measures (that is, bank is unable to verify the identity and or obtain documents required as per the risk categorization) due to non-cooperation of the customer or non-reliability of the data or information furnished to the bank. It is, however, necessary to have suitable built-in safeguards to avoid harassment of the customer. For example, decision by a bank to close an account should be taken at a reasonably high level after giving due notice to the customer explaining the reasons for such a decision.

  • Banks should check circumstances, in which a customer is permitted to act on behalf of another person or entity; should be clearly spelt out in conformity with the established law and practice of banking. This is required as there could be occasions when an account is operated by a mandate holder or where an account is opened by an intermediary in fiduciary capacity.

  • Banks should ensure whether necessary checks before opening a new account is done so as to ensure that the identity of the customer does not match with any person with known criminal background or with banned entities such as individual terrorists or terrorist organizations etc. For the purpose of risk categorization, individuals (other than High Net Worth) and entities whose identities and sources of wealth can be easily identified and transactions in whose accounts by and large conform to the known profile, may be categorized as low risk. Illustrative examples of low-risk customers could be salaried employees whose salary structures are well defined, people belonging to lower economic strata of the society whose accounts show small balances and low turnover, Government Departments and Government owned companies, regulators and statutory bodies etc. In such cases, the policy may require that only the basic requirements of verifying the identity and location of the customer are to be met.

  • Customers that are likely to pose a higher-than-average risk to the bank should be categorized as medium or high risk depending on customer's background, nature and location of activity, country of origin, sources of funds and his client profile, etc. Banks should apply enhanced due diligence measures based on the risk assessment, thereby requiring intensive ‘due diligence’ for higher risk customers.

5.2. What is Customer Identification Program (CIP)?

What is the essence of CIP?

A customer identification program or (CIP) is a set of procedures that are designed to enable a bank to have a reasonable belief that it knows the true identity of each of its customers. The CIP must include account opening procedures that specify the identifying information that will be obtained from each customer. It must also include reasonable and practical risk-based procedures for verifying the identity of each customer. The policy approved by the Board of banks should clearly spell out the Customer Identification Procedure to be carried out at different stages as given below.

  1. While establishing a banking relationship;

  2. While carrying out a financial transaction or;

  3. When the bank has a doubt about the authenticity or veracity or the adequacy of the previously obtained customer identification data.

Customer identification means identifying the customer and verifying his or her identity by using reliable, independent source documents, data or information. Banks need to obtain sufficient information necessary to establish, to their satisfaction, the identity of each new customer, and the purpose of the intended nature of banking relationship. Being satisfied means that the bank must be able to satisfy the competent authorities that due diligence was observed based on the risk profile of the customer in compliance with the extant guidelines in place. Besides risk perception, the nature of information or documents required would also depend on the type of customer (example, individual, corporates, Organizations, Trusts etcetera). For customers that are natural persons, the banks should obtain sufficient identification data to verify the identity of the customer, his address or location, and also his or her recent photograph. For customers that are legal persons or entities, the bank should:

  1. Verify the legal status of the legal person or entity through proper and relevant documents.

  2. Verify that any person purporting to act on behalf of the legal person or entity is so authorized and identify and verify the identity of that person,

  3. Understand the ownership and control structure of the customer and determine who are the natural persons who ultimately control the legal person.

  4. Determining whether the person appears on any lists of known or suspected terrorists or terrorist organizations provided to the financial institution by any government agency. Banks may, however, frame their own internal guidelines based on their experience of dealing with such persons or entities, normal bankers’ prudence and the legal requirements as per established practices. If the bank decides to accept such accounts in terms of the Customer Acceptance Policy, the bank should take reasonable measures to identify the beneficial owners and verify their identity in a manner so that it is satisfied that it knows who the beneficial owners are.

5.4. What is Monitoring of Transaction?

What monitoring of Transactions mean?

Ongoing monitoring is an essential element of effective KYC procedures. Banks can effectively control and reduce their risk only if they have an understanding of the normal and reasonable activity of the customer so that they have the means of identifying transactions that fall outside the regular pattern of activity. However, the extent of monitoring will also, depend on the risk sensitivity of the account.

Banks should pay special attention to all complex, unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose. Banks may prescribe threshold limits for a particular category of accounts and pay particular attention to the transactions which exceed these limits.

Transactions that involve large amounts of cash inconsistent with the normal and expected activity of the customer should particularly attract the attention of the bank. Very high account turnover inconsistent with the size of the balance maintained may indicate that funds are being 'washed' through the account. High-risk accounts have to be subjected to intensified monitoring.

Every bank should set key indicators for such accounts, taking note of the background of the customer, such as the country of origin, sources of funds, the type of transactions involved and other risk factors. Banks should identify suspicious transactions and file Suspicious Transaction Reports with the respective country’s Financial Intelligence Unit.

5.4. What is Risk Management?

What are the risks mitigated by effective KYC?

Every bank should and must have an affective KYC Policy and if the bank has international presence, there should be a common KYC Standards all across where it operates. Additions should be allowed in the global procedures where the jurisdictions are more stringent, however, no modifications of the KYC Standards should be allowed.

It is the responsibility of Board of Directors to ensure effective implementation of KYC program across bank. The KYC Policy should cover proper management oversight, systems and controls, segregation of duties and training. Banks should devise procedures for creating risk profiles of their existing and new customers and apply various anti-money laundering measures. Banks should be aware while introduction of new products whether or not additional customer due diligence is required. Banks should perform event driven review for any trigger event such as change in constitution, or name change or a new product is getting added in the customer’s profile. Banks’ internal audit and compliance functions should be doing independent evaluations of KYC Profiles and put forth their recommendations. Further, Banks must have an ongoing employee training program so that the members of the staff are adequately trained in KYC procedures. Training requirements should have different focuses for frontline staff and middle and back offices.

5.5. What is Record Keeping?

How to maintain KYC records?

Banks are required to maintain and preserve KYC records for a certain period of time as per the Record Keeping and Retention procedures of the bank “during”, and “post termination” of relationship. Record keeping and retention is concerned with the selection, classification, storage, retrieval and timely destruction of KYC information. This requires a structured approach in order to comply with the applicable laws and regulations and to meet business needs.

The Record keeping Policy should cover obligations and responsibilities of all staff at the Bank in relation to the management of official records. Under this policy, KYC department has an obligation to maintain official records and keep them in good order and condition. This obligation applies not only to the capture, storage, maintenance and disposal of physical records, but also to records in electronic form.

The Bank in its record keeping policy should define record retention periods for all categories of KYC records. These periods are based on

  1. Compliance and regulatory requirements.

  2. Cost benefits analysis of records.

Further, the records of KYC that should be retained throughout the life of a relationship of a customer with the bank are:

  1. Account opening or onboarding related forms.

  2. Records of Beneficial Owners, structured charts, constitutional documents, any other associated parties, personal documents of individuals, signature mandates, nomination forms, etc.

  3. Records of customer instructions.

  4. Records of transactions done in the accounts by the customer.

  5. Screening related documents.

  6. AML Risk Summaries of the customer profile.

5.6. What Customers A Banks Should Not Do Business with?

There are several customers with whom Banks should avoid doing business with, as given below:

1. Shell Banks and Shell Companies.

2. Parties Subject to Sanctions (US/EU/UN Sanctions).

3. Parties on the Fincen Special 311 Special Measure List.


4. Marijuana Related Businesses.

5. Unregistered Money Services Businesses.

6. Anonymous or Fictitious or numbered accounts.

7. Respondent Banks requesting Payable Through Accounts.

5.7. What is the meaning of CIP Exempt?

CIP Exemptions are reduced due diligence related to certain customer types e.g., customers those which are regulated such as Banks and Non Banking financial Institutions (like regulated Insurance companies or regulated investment advisors). Such entities are exempted as the money laundering or Terrorist financing risks are lower. For the CIP Exempt entities, verifying the identities of customer is not required.

Further, based on banks appetite, certain customers are also eligible for exclusion of identify and verify Bene Owners and Controlling parties such as Federally regulated banks or government or government agencies.

6. What is Customer Due Diligence?

Customer Due Diligence is most closely associated with the fight against money-laundering. Customer Due Diligence comprise of identifying the customer on the basis of documents, data or information obtained from a reliable and also, independent sources. Identifying, where applicable, the beneficial owner and taking risk-based and adequate measures to understand the ownership and control structure of the customer. Obtaining information on the purpose and intended nature of the business relationship. Conducting on-going monitoring of the business relationship including ensuring that the transactions being conducted are consistent with the knowledge of the customer, the business and risk profile, including, where necessary, the source of funds and ensuring that documents, data or information held are kept up-to-date.

Supervisors around the world are increasingly recognising the importance of ensuring that their banks have adequate controls and procedures in place so that they know the customers with whom they are dealing. Adequate due diligence on new and existing customers is a key part of these controls. Without this due diligence, banks can become subject to reputational, operational, legal and concentration risks, which can result in significant financial cost.

Customer Due Diligence is divided into two parts namely, SDD or (Simplified due diligence) and EDD or (Enhanced due diligence) based on the risk profiles of the customers.

The SDD is done for low and medium type of customers and EDD is done for the customers who pose most risk to the banks that is, high risk customers, and are vulnerable to money laundering or terrorist financing activities.

6.1. What is SDD and EDD?

1. Simplified Due Diligence:

Simplified Due Diligence is the lowest level of due diligence that can be completed on a customer. This is appropriate where there is little opportunity or risk of your services or customer becoming involved in money laundering or terrorist financing. For example, if banks customer is Regulated or listed on a regulated market, they may be perceived to be a lower risk.

2. Enhanced Due Diligence:

Customers that pose higher money laundering or terrorist financing risks present increased exposure to banks; due diligence policies, procedures, and processes should be enhanced as a result. Enhanced due diligence for higher-risk customers is especially critical in understanding their anticipated transactions and implementing a suspicious activity monitoring system that reduces the bank’s reputation, compliance, and transaction risks. Higher-risk customers and their transactions should be reviewed more closely at account opening and more frequently throughout the term of their relationship with the bank. The bank may determine that a customer poses a higher risk because of the customer’s business activity, ownership structure, anticipated or actual volume and types of transactions, including those transactions involving higher-risk jurisdictions, involvement of PEP and or negative news etc. Appropriate EDD forms are required to be uploaded in the KYC systems. Also, if profile have PEP involvement, relevant PEP assessment forms are required to be loaded in the KYC Systems.

6.2. What is Partial Due Diligence in CDD?

Partial Due Diligence is a new concept developed in certain banks. Partial due diligence are usually applied during periodic review (/refresh) in a bank and is not applicable to New Onboarding (/Business).

Partial Period reviews are done for certain client types like Mutual funds, Pension Funds, Endowment funds which do not often change their structure. Hence, KYC officer only does required due diligence (and not complete due diligence) as per the defined rules of partial due diligence in a bank. The requirements of such customer profiles are also not much as they usually are run by government or they are renowned in the market for very long (meaning, the information of such entities are easily available in public sources). Usually a Government proof (/.gov proof) or regulation proof (e.g., regulation pension funds), or latest Prospectus are collected along other few details for such customer profiles.

6.3. What is Product Due Diligence (PDD)?

PDD means Product Due Diligence. Regulators are increasingly focusing on the financial products and services provided to banking customers. There is a drive to ensure products and services sold to customers are properly assessed hence, certain global banks which provides high risk products to their customers such as custody services or ACH or RDC does enhanced due diligence on these products called Product Due Diligence. In product due diligence, transactions and patterns are monitored regularly and a detailed report of observations are stored in the KYC Profiles of such customers using these products. These product profile reports are used for two things:

  1. To generate Trigger Events.

  2. Risk upgradation (if applicable) during Preiodic Reviews.

6.4. What is Specialized Due Diligence?

Along with SDD, EDD, PDD, certain global banks are also interested to know more details of customer types which fall under High Risk Industry types. Examples of High Risk Industry types can be Correspondent Banks, Casinos, Third Party Payment Processors, Money Services Businesses, Arms Dealers.

These products which fall under high risk industry types go through additional questions or details. Example, the additional details that are required for correspondent banks are:

a. Are there any downstream correspondent arrangements already available with the respondent bank?

b. Does the respondent bank provide (in other currencies) or plan to provide payable through accounts?

c. What are the Other currency Nostro accounts that the respondent bank hold?

6.5. What is the role of Bearer Shares in CDD?

What do you mean by Companies issuing Bearer Shares?

Bearer shares are an equity security that is wholly owned by whoever holds the physical stock certificate. The issuing corporate does not register the owner of the stock or track transfers of ownership. Transferring the ownership of the stock involves only delivering the physical document. Bearer shares therefore lack the regulation and control of common shares because ownership is never recorded. Due to the higher ML/TF risks associated with bearer shares it is discouraged to onboard such companies offering bearer shares.

However, if the bearer shares are registered or recorded either by the company or by that country registrar, the risk is less hence, can be onboarded. However, proper view of risk rating for any over-rides needs to be discussed with AML officers.

6.6. What is the meaning of Beneficial Owner in CDD?

A Beneficial Owner is a person (individuals) or a legal person (Entities) who has rights to control the onboarding entity. Usually the beneficial owners hold some % of shares in the onboarding entity. These shares are generally ordinary shares. Since Ordinary shares have only one voting right in determining entity policies, if there are preferential share details available (whose holders can have multiple voting rights), the weightage should be given to the pref-shares than that of the ordinary shares while drill down of an onboarding entity. Beneficial owners can be found in any of the layers of onboarding entity (i.e., in first layer, second layer, third layer and etc.). If the layers are more than three, usually, a bank refers to them as "Complex Ownership". If the beneficial owner in any of the layer is an individual, such individual is called Ultimate Beneficial Owner (/UBO). The aim of any drill downs done on onboarding entity, should aim at finding the UBO's. The drill down in banks is usually stopped at 10% for High Risk Entities and 25% for Low and Medium Risk Entities.

6.7. What is the meaning of Account Controller in CDD?

Account Controllers also called, Authorized Signers are individuals who have the rights to operate an account as per the signature mandate collected from the onboarding customer. The details of the the account controllers are available either in account opening forms or in the board resolutions (for entities).

The signatures of authorized signatories are required to be saved in encrypted format and should be accessible only to those who are authorized to do so. Some of the countries mandate that the account controllers should be identified and verified with personal documents (such as Singapore and Hong Kong). Such controls should be internally built in the KYC systems of banks. Also, some countries (like Cayman Islands) are very particular on the personal documents to be attested by competent authorities in a particular format. KYC Officers in the banks should be vigilant and aware of such rules.

6.8. What is the meaning of Entity Controller in CDD?

Entity Controllers are of two types:

  1. Directors of the entity who have all the powers to take decisions on behalf of the onboarding entity and can have their individual influence on such decisions. KYC Officers should be vigilant about the type of director an individual is; for example, if the individual is an independent director, such director details are not required as per the CDD norms (unless the bank rule or the CDD rule supersedes).

  2. C-Suit or Chairman (also called President), Chief Executive Officer (/CEO), Chief Operating Officer (/COO) and Chief Financial Officer (CFO).

7. What are the different Customer Types?

Customer types are broadly divided into the following categories:

1. Individuals.

2. Family Offices (Family Offices, Hindu Un Divided Family).

3. Banks (Commercial Bank, Investment Bank, Savings Banks, Credit Unions).

4. NBFI (Broker Dealers, Insurance Companies, Finance Companies).

5. Corporate (Large, Small and Medium and publicly traded).

6. Holding Companies (SPV’s, RMBS, CMBS, PIC’s, PHC’s).

7. Government (Quazi Government, Supra Nationals, State Owned Enterprise’s).

8. Funds (Hedge, Private Equity, Real Estate, Mutual Funds and Pension funds).

9. Organizations (Trusts, Associations, Not for profit, Foundations, Societies).

10. Others (Money Services Business, Cash Intensive Business).

7.1. Individuals

1. Introduction:

Individuals can open account in any bank by filling the account opening form and submitting Identity and address proofs. They can also open joint accounts with their spouse, friends or relatives subject to jurisdictional rules. All the proofs of identity and address are required to be produced for the joint account holders too to complete the formalities of account opening.

2. Minimum CIP elements of individual account holders:

1. Legal name and any other Aliases names used.

2. Permanent and residential address.

3. Date of Birth.

4. Government Identification Number.

5. Nationality.

3. Acceptable Identity proofs at most of the banks:

1. Passport with photograph.

2. Permanent Residency Card or Smart Card with photograph.

3. Tax Identification Number if contains photograph.

4. Voter’s Identity Card.

5. Driving License.

4. Acceptable for address proofs at most of the banks:

1. Utility bills such as Telephone Bills or Electricity Bills.

2. Passport.

3. Other bank statements of account.

4. Driving License.

5. Voters Identity Card.

*Note: A single document cannot be used for both address proof and identity proof.

5. Additional details for individual account opening:

1. Country of residence proof (such as social security numbers in the United States).

2. Occupation details.

3. Source of Income.

4. Tax Identification Number.

5. Type of account.

6. Contact Details (Phone numbers and email address).

7. Currency of account.

8. Signature Mandate.

Lastly, each account opening form should and must contain provision for nominations for easy transfer of accounts in case of account holder’s demise.

7.2. Shops and Establishments

1. Introduction:

A Shops and establishments consist of shops, commercial establishments, restaurant, hotel, theatre, public amusement and other retail trade and businesses.

Shops and establishments should and must have sales tax and municipal tax certificates mandatorily. Some of the jurisdictions also require shops and establishments to register and get a Trade License. In India shops and establishments are required to obtain the Shops and Establishment Certificate also called, Gumasta Certificate.

2. The CDD requirements of Shops and Establishments are as given below:

1. Shops and establishment Act Certificate or, Municipal Corporation Department Certificate or Trade License.

2. Tax Identification Number.

3. Other Tax certificates such as VAT Certificate or Sales Tax Certificate.

4. Proof of address like utility bills in the name of shop or the establishment.

5. Identification and verification of owners of the shop or the establishment.

6. Signature Mandate.

Further, good news in India, that the registration of Shops and establishments is moving online. Example, Under the Karnataka Shops & Establishments Act 1961, e-Karmika is a user-friendly application for the online registration of shops and establishments.

7.3. Sole Proprietorship

1. Introduction:

This model is popular with small business owners, contractors and home based businesses. Sole proprietorships are easy to establish and dismantle. A Sole proprietorship is also known as the sole trader, individual entrepreneurship. A Sole proprietorship has a single owner with unlimited liability. Meaning, all the profits and losses that the Sole proprietor generates are owned by the Sole proprietor. The business owner is required to register with the appropriate local authorities, who will determine that the name submitted is not duplicated by another business entity. Furthermore, the business owner must complete a form submitted to the governing authority to acquire title as a “DBA” or "doing business as”. For example, in U.S. the local authority can be state of secretary office in certain states.

The license for a sole proprietary business entitles the owner to hire employees and enlist the services of independent consultants. There are over 20 million sole proprietorships operating in the United States and Canada, making it by far the most popular form of business ownership.

A Sole proprietor and the business are not separate. Meaning the business tax of a Sole proprietor is the same as personal tax of the sole proprietor. Some businesses, government agencies, consulting groups, etc. will not deal with sole proprietors as not having a legal structure is implied to be not having the same legitimacy and professionalism as incorporated businesses have. Raising capital for sole proprietorship is also more difficult as banks consider the same as more of personal loan.

Example, J. Willard Marriott started several businesses as a sole proprietor, beginning with a root beer stand that eventually became the A&W restaurant chain. But like all businesses, Sole proprietors need to obtain the necessary licenses and permits from states or central or federal government.

Regulations vary by industry, state and locality. For example, the issue agency for agricultural products related business activities can be the department of agriculture.

2. The CDD requirements of a sole proprietorship firm are as given below:

1. Activity of the proprietary concern.

2. Registration certificate or Trade license to operate as sole proprietor.

3. Tax Certificate.

4. Address proof in the name of the sole proprietorship firm.

5. Signature mandate.

7.4. Companies

1. Introduction:

A company is a legal entity set up by group of individuals to conduct business affairs. A company is separate and distinct from its owners. A company runs on the concept of limited liability meaning shareholders may take part in the profits through dividends and stock appreciation but are not personally liable for the company's debts. The initial groups of individuals who create the company are called promoters. Most of the Promoters prefer to run the company privately by issuing limited shares among themselves or to their known investors. Mars Incorporation, Dell Computers are the best examples of private companies.

They raise capital by selling their products and services, take help of banks or private equity funds and expand their businesses. Some of the private companies like Mac Donald's corporation expand through franchise models.

The private companies since are not required to be listed, Hence, they are not required to register themselves with security exchange regulators such as securities exchange commission or SEC in U.S.A.

A private company when becomes matured and has a confidence to face regulators, can further its business, be it in the form of research, infrastructure, or expansion by going public. Going public refers to a private company's initial public offering or IPO through a stock exchange. A company planning an IPO will typically select underwriters who are usually investment banks which takes the company to the stock exchange. They will also choose an exchange in which the shares will be issued and subsequently traded publicly. Investors or public buy shares in the company and contribute capital to a company’s shareholders' equity. Equity represents the shareholders' stake in the company.

2. Types of companies:

1. Private Companies limited by shares:

Companies Limited by shares means that the liability of the shareholders to creditors of the company is limited to the capital originally invested, that is, the nominal value of the shares and any premium paid in return for the issue of the shares by the company.

A shareholder's personal assets are thus protected in the event of the company's insolvency.

GmbH is an abbreviation of the German phrase “Gesellschaft mit beschränkter Haftung,” is a private limited company in Germany.

A société à responsabilité limitée (or SARL), is a form of private company that exists mainly in French-speaking countries, such as France, Luxembourg, Monaco etc.

In Netherlands is a besloten vennootschap or (BV) is a private limited company.

2. Private Companies limited by Guarantees:

A company limited by guarantee is a type of corporation used primarily for non-profit organizations or charitable institutions. A company limited by guarantee does not usually have a share capital or shareholders, but instead has members who act as guarantors of the company's liabilities. Each member undertakes to contribute an amount specified in the articles in the event of insolvency or of the winding up of the company. Both Companies limited by shares and Companies limited by Guarantees have suffix “Limited” in their name.

3. Public Limited Company:

A Public Limited Company or PLC is a business entity which offers its shares to be traded on the stock exchange for the general public. According to the regulations of the corporate law, a PLC has to compulsorily present its financial statements and position publicly to maintain transparency.

Société anonyme or SA is a French term for a public limited company.

N.V. is an acronym for the Dutch phrase "Naamloze Vennootschap." Appearing after a firm's name, it connotes incorporation means that the entity is the equivalent of a limited liability public company.

4. A Designated Activity Company or DAC:

Designated Activity Company is a private company limited by shares with the capacity, including the power, to do only those acts or things set out in its constitution or memorandum of association or a private company limited by guarantee and having a share capital with the capacity, including the power, to do only those acts or things set out in its constitution.

5. Private or Public Unlimited companies:

Unlimited companies are those where legal liability of individual shareholders and members is unlimited. Meaning, when formal liquidation happens and the company is unable to pay off its debts, the creditors will be able to use the personal assets of the directors and shareholders in order to pay off the liability. For such companies, usually financial accounts do not need to be filed with regulators, meaning the affairs of the company are largely kept hidden from competitors. This can mean that the unlimited company could look through the financial information of their competitors while keeping their own hidden.

6. Societas Europaea Company:

A societas Europaea is a public company registered in accordance with the corporate law of the European Union, introduced in 2004 with the Council Regulation on the Statute for a European Company. Such a company may more easily transfer to or merge with companies in other member states.

7. Royal Chartered Companies:

Royal Chartered Companies are companies created by the Royal Charter. This means they are granted power or a right by the monarch or by special order of a king or a queen. Examples of Royal Chartered Companies are East India Company, BBC, Bank Of England, etc.

8. Statutory Companies:

Statutory Companies are companies incorporated by means of a special act passed by the central or state legislature. They are mostly invested with compulsory powers and are responsible to carry out some special business of national importance. Some examples of statutory companies are The Reserve Bank of India or Life Insurance Corporation of India.

9. Limited Liability Company or LLC:

LLC is the US-specific form of a private limited company. It is a business structure that can combine the pass-through taxation of a partnership with the limited liability of a corporation.

10. Not for Profit Company:

A non-profit or not for profit company is a company incorporated for public benefit or other object relating to one or more cultural or social activities, or communal or group interest.

11. Municipal corporation:

A municipal corporation is a local government company that administer works at rural or urban areas.

12. Foreign Company:

Foreign company means any company or body incorporated outside its own jurisdiction.

A note of caution that foreign company should not be confused with foreign corporation.

A Foreign corporation is a term used in the United States to describe an existing corporation that conducts business in a state or jurisdiction other than where it was originally incorporated.

13. One Person Company:

One Person Company is a company that comprises a single person as a shareholder and is similar with private companies. This company gets all the benefits of a private company such as they have access to credits, bank loans, limited liability, legal protection, etc. This type of company has been introduced in India to encourage startups.

3. CDD requirements of a company:

1. Memorandum of association or Articles of incorporation.

The Memorandum of association is the primary document which has the Legal Name of the Company, Physical Address of the Registered Office, Objectives of the Company, Liability of Shareholders, Authorized Share Capital, Association and Formation of a Company.

2. Articles of association or bye laws.

An article of association is the secondary document, a document that specifies the regulations for a company's operations and defines the company's purpose.

The document lays out how tasks are to be accomplished within the organization, including the process for appointing directors and the handling of financial records.

In many countries, only the primary document is filed, and the secondary document remains private. In other countries, both documents are filed.

In civil law jurisdictions, the company's constitution is normally consolidated into a single document, often called the charter.

3. A certificate of incorporation.

It is a legal document that shows a company is formed and registered with registrar of a company.

4. Personal documents of Directors (Identity and Address proofs).

5. A structured chart or complete Drill down of owners till Ultimate Beneficial Owners (if any).

6. Identification of associated parties such as Auditors.

7. Financial Statements or Annual Report.

8. Tax Identification Number.

9. Signature Mandate.

Companies in U.S. are called corporations and are of two types:

1. C-Corporation: A C-Corporation, also known as a regular corporation, in the USA is a legal entity separate from its owners.

It can raise money through the listing of shares.

The tax by C-Corporations is paid at the corporate level, and shareholders are taxed on their dividend income.

2. S-Corporation: A corporation in the USA may choose to file for S-Corporation status by submitting a form to the Internal Revenue Service or IRS.

Once this filing is complete, the corporation is taxed on a pass-through basis, that is, the income from the business is passed through to the shareholders for purposes of tax computation. The rationale behind this is that the profits and losses can be added to the shareholders’ personal tax returns so that they have to pay taxes on profits only once, and not again when the profits are given back to the shareholders as dividend.

The advantage of an S-Corporation over a C-Corporation is that it does away with double taxation.

By the US corporate law, an S-Corporation cannot have over 100 shareholders, all of whom are required to be US citizens or residents.

* Note: The CDD requirements for companies which are publicly traded will not be so vast as the private companies as most of the banks apply CIP Exemption to such companies meaning, Beneficial ownership details and entity controller details might not be required to be identified or verified.

7.5. General Partnerships

1. Introduction:

A Partnership is a business made up of two or more partners, each sharing the business debts, liabilities, and assets. The partnerships can be established between individuals and businesses or a combination. A partnership is an entity distinct from its partners. However, in England and Wales, a partnership does not have separate legal personality. The owners are jointly and severally liable for any legal actions and debts of the company. In Short, it is a partnership in which partners share equally in both responsibility and liability.

2. Partnership Agreement:

A Partnership Agreement is a contract between two or more partners that is used to establish the following.

1. The responsibilities of the partners.

2. Profit and loss distribution of each partner.

3. Rules about the general partnership, like capital contributions, and financial reporting.

4. Management and Voting.

5. Election of partnership tax.

6. Partnership withdrawal.

7. Partnership dissolution.

8. Purpose of partnership.

9. Annual Report.

10. Meetings and Audit.

The purpose of a partnership agreement is to protect the partners investment, govern how the partnership will be managed, clearly define the rights and obligations of the partners, and determine the rules of engagement should a disagreement arise among the parties.

The partnership gives partners the ability to control operations more closely.

This allows for more swift and decisive management as compared to corporations, which must often slog through multiple levels of bureaucracy and red tape, further complicating and slowing down the implementation of new ideas.

The partners agree to proceed with major decisions if there's either a complete consensus or a majority vote.

The partners can even consider designate non-partner appointees to manage the partnerships similar to the board of directors in a corporation.

The cost of creating a general partnership is less than setting up a corporation or a limited liability partnership

Also, General partnerships likewise involve substantially less paperwork.

Further, the partnership firms register with registrar of companies to get certificate of registration.

The partnerships should have minimum two parties coming together to form a business or a firm. However, the partnerships can be between more than two parties. If the parties are individuals, identification and verification documents are required. However, if the partners are entities, relevant ownership drill down and controllers of those entity details will be required to fulfill CDD requirements.

3. CDD requirement of General Partnership:

1. Partnership Deed or Partnership Agreement.

2. Partnership Certificate or Partnership registration.

3. Financials (especially the details of Assets and Revenue).

4. Personal documents of all partners (address and ID proofs) or structure chart if the partners are corporates.

5. Associated party details such as Auditors.

6. Tax Identification Number.

7. Signature Mandate.

7.6. Limited Partnerships

2. Introduction:

A limited partnership is a partnership between at least one general partner and at least one limited partner. Usually there is only one general partner. But the Limited partnership structure does not restrict for one general partner. There can be more than one general partner in the structure. The general partner usually sets up the business and is the initial investor. The general partner is usually structured as Limited Liability Company in United States. The General partner is responsible for running the business hence, have unlimited liability towards the business. General Partner contribute the management and expertise in running the business.

While, Limited Partners contribute funds to run the business and their liability is limited to the funds they have invested. The Limited Partners are outside investors who invest in the business only for profit. Limited partnerships are often used in family estate planning and set up of investment vehicles.

Example, most of the Private equity funds and hedge funds are formed through limited partnerships.

Limited partners are considered passive investors because they contribute money to the partnership but don’t have control over decisions.

In United Kingdom, the limited partnerships are registered with companies house.

In United States, the limited partnerships are registered with respective states in the secretary of state’s office.

2. Limited Partnership Agreement:

A limited partnership firm is governed by an agreement between the general partner and the limited partner called the Limited partnership agreement.

The agreement will minimum have below details.

1. The name, address, and purpose of forming the partnership.

2. Whether limited partners have any voting rights regarding the day-to-day business decisions.

3. Details of how decisions will be made that is by unanimous vote or majority vote or majority vote based on percent ownership etc.

4. The names, percent ownership, and capital contributions of the partners.

5. Management roles of general partner.

6. Accounting and auditing information.

7. Details of how to transfer or buy out shares.

8. Details of how to dissolve the partnership.

The limited partnership firm may not file this agreement with secretary of state but is required to open a bank account. The general partner will form the partnership form by submitting the certificate of limited partnership with secretary of state. It is better to reserve the name with secretary of state however not mandatory. In case the name is not reserved and if the name is not available, the filing is delayed. A limited partnership in most of the states must continuously maintain a registered agent and file the certificate of limited partnership via them and not directly.

In United states, most states impose minimal reporting requirements on limited partnerships. However, States that require an annual report include North Dakota, Kansas, Oklahoma and Washington.

3. Advantages of a limited partnership include:

1. Personal asset protection: The limited partnership structure offers liability protection to its limited partners up to the amount of the investment they have made.

2. Pass-through taxation: A limited partnership's income is not taxed at the business level; instead, business profit and loss are "passed through" to the partners for reporting on their personal tax returns.

3. Full oversight: The general partner has complete management control of the limited partnership.

4. Investment Potential: Limited partnerships can generate capital investments by adding more limited partners.

In the United States, the limited partnership organization is most common among investment companies, film production companies and real estate investment projects.

The major disadvantage to the limited partnership is that the general partner must bear all legal liability for the management decisions taken.

4. The structure of a Limited Partnership firm.

A limited partnership must have at least one general partner and one limited partner.

The general partner manages the partnership and assumes personal liability in the firm. The limited partner whereas, is passive in management and assumes limited personal liability to the extent of their investments in the firm. Usually, the general partner provides the governance and management function and the Limited partners have some voting rights.

The partnership agreement spells out governance and functions of players of the Limited partnership firm.

5. CDD Requirements:

The CDD requirements of a limited partnership firms are as given below:

1. Limited Partnership Agreement.

2. Certificate of incorporation or Certificate of Limited Partnership.

3. Identification of General Partner and complete drill down of ownership of General Partner if it is an entity.

4. Ownership structure or organization chart of the Limited partnership.

5. Identification of controllers or members.

6. Tax Identification Number.

7. Financial Statements.

8. Identification of associated parties such as auditors.

9. Signature Mandate.

7.7. Limited Liability Partnerships

1. Introduction:

A Limited Liability Partnership is usually formed by a group of professionals. A group of professionals such as lawyers, accountants, consultants, and architects etc.

The above professionals like to form a Limited Liability Partnership for the below reasons:

1. All the partners have the right to manage the business directly.

2. In a general partnership, all partners share liability for any issue that may arise. While, in a Limited Liability Partnership, each partner is not responsible or liable for another partner's misconduct or negligence. Also, the liability is limited in terms of partners lose assets in the partnership, but not their own personal assets.

3. Limited Liability Partnerships are a flexible legal and tax entity that allows partners to benefit from economies of scale by working together.

4. As a legal partnership, a Limited Liability Partnership pays no corporate taxes. Limited Liability Partnership is a pass-through entity for tax purposes. Meaning, the tax is passed on to the individual partners.

2. Salient features of a Limited Liability Partnership:

1. The rights and duties of all partners are governed by an agreement between them called the Limited Liability Partnership Agreement.

2. The Limited Liability Partnership does not have to pay tax as an entity, but taxes the partners individually.

3. Limited Liability Partnerships can choose to appoint an executive team to take care of daily operations and management decisions. Alternatively, they can also opt to allow all partners equal participation in decision-making.

4. Limited Liability Partnership members receive distributions in the form of compensations.

5. Limited Liability Partnerships must carry insurance to cover lawsuits arising out of professional error.

6. The Limited Liability Partnership structure is available in countries like United Kingdom, United States of America, various Gulf countries, Australia and Singapore.

7. Limited Liability Partnership will have lesser compliance requirements as compared to a company.

8. Subsequent to incorporation, new partners can be admitted in the Limited Liability Partnership as per conditions and requirements of Limited Liability Partnership Agreement.

9. A minimum of two legal persons are required to register a Limited Liability Partnership.

10. Nonresidents can form a Limited Liability Partnership in most of the jurisdictions.

Further, to form LLP, the incorporation documents need to be submitted to the registrar of companies. Example, in United states, partners can file articles of organizations with state of secretary of that state where they wish to open Limited Liability Partnership. The Articles of Organization list basic business data such as the name and address of business and its partners.

3. The CDD requirements of a Limited Liability Partnership:

1. Certificate of Incorporation.

2. LLP agreements.

3. Identification and verification of Partners.

4. Ownership details (percent of partners holdings).

5. Financial Statements.

6. Tax Identification Number.

7. Associated party details such as auditor.

8. Signature Mandate.

7.8. Limited Liability Limited Partnerships

1. Introduction:

A limited liability limited partnership is essentially an ordinary limited partnership that elects to become a limited liability limited partnership. A limited liability limited partnerships have general partners and limited partners.

Unlike a Limited Partnership, where the general partner has the unlimited liability, the general partners in a limited liability limited partnership have limited liability. However, the limited partners, still typically do not have any say in how the business is run. A limited liability limited partnership allows liability for debts and obligations of the limited partnership to be transferred from the general partners to an external insurer, something that is not possible with a traditional LLP. In United States, limited liability limited partnerships are a very new type of partnership and aren't recognized in all states. The filing fees of a limited liability limited partnership vs. a limited partnership are usually higher.

The limited liability limited partnership comes with asset protection meaning, partnership assets are shielded from creditor claims against the individual partners including the general partner. In United States, states like California does not have a state statute allowing formation of a California limited liability limited partnership, but it does recognize limited liability limited partnerships formed under the laws of another state.

Each state in United States has rules to form a limited liability limited partnership but in general, to form a limited liability limited partnership, partners require filing certificates with the secretary of state office in that state. Limited liability limited partnerships are usually created by businesses associated with the real estate industry. For example, investors may choose to form a limited liability limited partnership when constructing a hotel chain or a number of commercial buildings.

A limited liability limited partnership gives them certain advantages and protections such as partners may lose their investment money, but they cannot be held personally liable for debts owed or unpaid taxes that belong to the limited liability limited partnership. Some other examples include publishing firms, car dealerships and asset management companies.

2. The CDD requirements of a Limited Liability Limited Partnership:

1. Certificate of Incorporation.

2. LLLP agreements.

3. Identification and verification of Partners.

4. Ownership details (percent of partners’ holdings).

5. Financial Statements.

6. Associated Party details such as auditors.

7. Tax Identification Number.

8. Signature Mandate.

7.9. Trusts

1. Introduction:

A trust is the simplest form of any structure that can be easily understood.

a. The settlor creates a trust for transferring property.

b. The trustee looks after the trust property as a fiduciary relationship. And,

c. The beneficiaries who ultimately will receive the property of the trust.

The trustee has fiduciary relationship means, that the trustee will work for the wellbeing of trust and protect the trust property till the time; the titles are transferred to beneficiaries. A settlor has different names in different jurisdictions such as Author, Settlor, Donor, Grantor, Sponsor and Trustor. All the words have the same meaning that is creator of the trust who also establishes the terms of the trust.

2. Trust Deed:

A Trust deed is a legal document which governs a trust and is made between the Settlor and the Trustee for benefitting a beneficiary or beneficiaries. At minimum this document will have the following details.

1. Objects: The object for which the trust is created is specified in this clause. This is very important clause as all the activities are undertaken for the fulfillment of these objectives.

2. Details of the Parties in the Trust Deed.

3. Acceptance of Funds: This clause has the details of from where or whom the trust can accept donations, grants, subscriptions, aids or contributions. And it shall not accept any such funds which is inconsistent with the objectives of the trust. 4. Details of Investments. It details how a trustee manages the funds of the trust and where should be these funds invested such as, in securities, to get good returns.

5. Power of the Trustees: The duties or responsibilities and the powers and limitation of the trustees are mentioned in this clause.

6. Accounts and Audit: The trustees are required to maintain proper books of accounts of all the assets, liabilities, income and expenditure of the trust and also get the accounts audited.

7. Winding up: The conditions as to when the trust is winding up and to whom trust's assets are distributed either directly or by way of resettlement.

3. Types of a Trusts:

1. Irrevocable Trust: An irrevocable trust is a type of trust where its terms cannot be modified, amended or terminated. The settlor, having effectively transferred all ownership of assets into the trust, legally removes all of their rights of ownership to the assets and the trust. The main reasons for setting up an irrevocable trust are for estate and tax considerations. The benefit of this type of trust for estate assets is that it removes all incidents of ownership, effectively removing the trust’s assets from the grantor's taxable estate. It also relieves the grantor of the tax liability on the income the assets generate. The irrevocable trusts are mainly prepared to avoid probate meaning, the legal process required to transfer ownership of assets from a deceased individual to a living beneficiary.

2. Revocable Trust: Revocable trusts are created during the lifetime of the trust maker or settlor and can be altered, changed, modified or revoked entirely by the settlor. In revocable trust structure, the grantor retains certain rights over the trust during his or her lifetime. These generally include the right to instruct the trustee to distribute all or any portion of the trust property, as the grantor desires, and the right to change or revoke the trust at any time. The trustee’s powers typically include the right to make discretionary distributions of income and principal to the grantor and, sometimes, to the grantor’s family, if the grantor becomes incapable of managing his or her own affairs. When a grantor dies, the trust acts like a will, and the property is distributed to the beneficiaries as directed by the trust agreement.

3. Fixed trust: In a fixed trust, the trust deed fixes the proportion of income and capital each beneficiary is entitled to throughout the income year. A trustee is bound to distribute the trust according to these fixed amounts.

4. Discretionary Trusts: A trust in which the number of shares of each beneficiary are not fixed by the settlor in the trust deed, but at the discretion of the trustees.

5. Living Trust: A Living trust (also called an "inter vivos" Trust) is simply a Trust that is created while the Settlor is alive. Different kinds of Living trusts can help avoid probate, reduce estate taxes, or set up long-term property management.

6. Testamentary Trust: A testamentary trust is a provision in a will that appoints a trustee to manage the assets of the deceased. It is frequently used when the beneficiary or beneficiaries are children or minors.

7. Asset Protection Trust: An asset protection trust is a type of trust that is designed to protect a person's assets from claims of creditors. These types of trusts are often set up in offshore jurisdictions where are the taxes are relaxed.

8. Charitable Trust: Charitable trusts are trusts which benefit a particular charity or the public in general. Typically, charitable trusts are established as part of an estate plan to lower or avoid the imposition of estate and gift tax.

9. Special Needs Trust: A special needs trust is one that is set up for a person who receives government benefits so as not to disqualify the beneficiary from such government benefits.

10. Spendthrift Trust: A trust that is established for a beneficiary that does not allow the beneficiary to sell or pledge away interests in the trust is known as a spendthrift trust. It is protected from the beneficiaries' creditors, until such time as the trust property is distributed out of the trust and given to the beneficiaries.

11. Totten Trust: A Totten trust (also referred to as a "Payable on Death" account) is a form of trust in which one party (the settlor or "grantor" of the trust) places money in a bank account or security with instructions that upon the settlor's death, whatever is in that account will pass to a named beneficiary.

12. Corporate Trust: A trust that a corporation creates to secure a bond or other debt security. That is, a corporate trust is effectively money set aside to ensure that bondholders are covered in the event of default on the issue.

13. Implied Trust: An implied trust may not be expressly defined as a trust in a will or other legal document, rather a court determines that a trust agreement exists by looking at the nature of the arrangement the parties have made. There are three types of implied trusts.

1. A statutory trust arises when a statute, or law, creates a trust.

2. A resulting trust occurs when one party receives an asset from another without paying for it, and a court determines the intent was not to transfer the property, but to have the receiving party simply hold the asset for the benefit of the person transferring it to them. If a court finds a resulting trust, it will typically return the property to the original transferring party.

3. A constructive trust is a remedy to a party improperly benefiting from an asset at the expense of a proper beneficiary that arises when a party has accidentally, mistakenly, or dishonestly received title to or possession of assets that belong to a beneficiary.

14. Bypass Trusts:

Bypass trusts are used in the United States as a legitimate tool to circumvent gift tax, and to minimize taxation of assets upon death of a married couple.

4. CDD requirements of a trust is as given below:

1. Trust Deed: An agreement between the Trust and Trustee.

2. Trust Registration Certificate.

3. Identification and verification documents for Settlor and Trustee and identification of beneficiaries.

4. There is no legal requirement for a trust to prepare financial statements but if trust deeds include such an obligation a copy of the same.

5. Tax forms.

6. Associated Third parties such Auditor.

7. Signature Mandate.

7.10. Offshore Trusts

1. Introduction:

There is no difference of the structure between Trusts and offshore Trusts. The Trust is still created by a document called "Trust Agreement “, by which the assets are transferred by one party called Grantor/Settlor to a second party called the "Trustee" for the benefit of designated persons called the "Beneficiaries". The Trust Agreement identifies the beneficiaries, establishes the manner in which the Trustee is to hold, invest and distribute the assets.

2. What makes the offshore trusts different?

It is used as a vehicle to hold personal assets of investors especially foreign investors. Offshore Trusts are usually exempt from local taxes where the assets are held. Example, a trust held by a non-resident UK in say BVI can avoid paying UK taxes. The non-resident trust would also be outside the scope of UK capital gains tax. Moving ahead, in normal trust, usually there is no role of a protector.

The role of protector comes to manage offshore trusts. In trust law, a protector is a person appointed under the trust deed to direct or restrain the trustees in relation to their administration of the trust. This additional level only comes up while forming offshore trusts as usually the non-resident investor cannot rely on the trustee of offshore jurisdiction completely. Hence, the investor brings in a corporate structure which acts as the protector of the offshore trusts.

The advantages of appointment of protectors are.

1. To deal with legal revenue changes in the offshore jurisdiction.

2. Protectors can easily deal with changes in circumstances like death, premature divorce and legal heir changes.

3. Approve the addition and removal of beneficiaries.

4. Approve trust distributions.

5. Approve investment decisions.

6. Approve the termination of trust.

3. Example:

Let us take an example of non-US investors holding assets in US to understand the role of offshore trusts better. The United States imposes Tax on the value of US assets held by non-US Domiciliary investor. The kinds of assets subject to US Tax include shares of Stocks, Bonds, Notes and other Securities and Real and Tangible Properties located in the United States. Hence, these assets are transferred by non-US Investor to an offshore corporation. The offshore corporation such created by the non-US investor with the help of agents, can now select a US Brokerage Firm to invest the liquid US Assets example, Stocks, Bonds, Etc. The non-US Investor then transfers the stock of the offshore corporation to the Offshore Trust. The Offshore Trust owns the stock of the offshore corporation and the offshore corporation owns the US Assets. After the transfer, the non-US investor is the Beneficiary of the Offshore Trust which owns stock of the offshore corporation, which is not a US Asset.

4. How offshore trusts are helping the non-US investors?

1. Confidentiality: Only the name of the offshore corporation is known to the US Broker firm and the information of its directors. But the non-US investor name is not known to the broker firm in US. Ultimately, the non-US investor gets the benefit as he is the beneficiary of the trust which is holding the offshore corporations’ assets.

2. Authority: The non-US investor through its offshore corporation can guide his or her investments and get the benefit by transferring the assets to the offshore trust.

3. Protection: The Offshore Trust owns the shares of the offshore corporation. Hence, the non-US Investor’s creditors and other US Government Agencies are thereby prevented from confiscating the shares of the offshore corporation.

4. Avoid probate: The Offshore Trust owns the shares of the offshore corporation, both before and after the death of the Non-US Investor. The shares of the offshore corporation or the benefits there from, pass according to the settlors wishes, which are stated in the Trust Agreement.

5. Protector: Appointment of protector saves a lot of time of the non-US Investor.

7.10. Societies

1. Introduction:

A society is a non-commercial organization popular in India. The society in India is guided by the rule that profit made through the working of a society is to be put back to the working of that society. Meaning prohibition of payment of any dividends to its members as part of profit earned. The society is driven by an objective which is mentioned on the covering letter while filing society documents to registrar of companies or societies.

Society registration can be done for following purposes:

1. Promotion of fine arts.

2. Diffusion of political education.

3. Grant of charitable assistance.

4. Promotion of science and literature.

5. Creation of military orphan funds.

6. Maintenance or foundation of galleries or public museum.

7. Maintenance or foundation of reading rooms or libraries.

8. Promotion or diffusion or instruction of useful knowledge.

9. Collections of natural history.

10. Collections of mechanical and philosophical inventions, designs, or instruments.

In India, minimum of seven people are required to form a society. However, under the Jammu and Kashmir Act, and Telangana Area Act, only 5 persons can form a society. To form a society, the memorandum of association has to be filed with the Registrar of Societies. Memorandum of Association has the following information:

1. Name of the Society.

2. Registered office of the Society.

3. Area of operation of Society.

4. Aims and objects of Society.

5. Details of the income and property of the Society.

6. Members of governing body.

7. Liability and Legal claims.

8. Desirous persons or details of who are desirous to form the Society.

The societies are governed by the Articles of Association or also called the rules and regulations of the society and has the following information:

1. Name of the Society.

2. Definitions and Interpretations.

3. Membership details.

4. Eligibility for membership for each class.

5. Representation of Society, Trust, Institution, Firm and other body.

6. Admission Fee and subscription.

7. Register of Members.

8. Termination or cessation of membership.

9. Rights and privileges of members.

10. Duties of the members.

11. General Body and meetings.

12. Governing Body.

13. Quorum & Proceedings at governing body meetings.

14. Reserved matters.

15. Nomination for election of members of governing body.

16. Election procedures.

17. Term of office.

18. Vacancies in the Society.

19. Functions and powers of governing body.

20. Powers and duties of constituents of the governing body.

21. Readmission.

22. Branches of the subcommittee.

23. Seal of the Society.

24. Funds of the Society.

25. Management of funds and accounts operation.

26. Audit of Society.

27. Annual report requirements if any.

28. Annual list of governing body.

29. Books and accounts.

30. Legal proceedings.

2. Governing Body:

A society is directed by the Governing Body. The governing body of the society shall be the governors, council, directors, committee, trustees or other body to whom by the rules and regulations of the society the management of its affairs is entrusted.

Further, functions of Governing Body as given below:

1. To prepare and execute detailed plans and programs for the establishment of the Society and carry on its administration and management after such establishment.

2. To receive grants and contributions and to have custody of the funds of the Society.

3. To prepare the budget estimates of the Society for each year, and to sanction the expenditure within the limits of the budget.

4. To prepare and maintain accounts and other relevant records and annual statement of accounts including the balance sheet of the Society.

5. To open and operate bank accounts.

6. To approve the work program and list of activities submitted by the Society and periodically monitor the same.

7. To appoint or employ, temporarily or permanently, any person or persons that may be required for the purposes of the Society and to pay them, wages and salaries and other remunerations and allow them suitable perquisites, and benefits of provident fund, pension, gratuity and other facilities.

8. To enter into agreement or arrangements for and on behalf of the Society.

9. To sue and defend all legal proceedings on behalf of the Society.

10. To appoint committees or sub-committees, group, task force comprising of its Members and or staff of the Society for the disposal of any business of the Society or to take up any special activity on behalf of the Governing Body and delegate to it such powers as considered necessary. Any such committee or subcommittee, group, task force shall report to the Governing Body.

11. To delegate to such extent as it may deem necessary, any of its powers to any officer or committee of the Governing Body.

12. To consider and pass such resolutions on the annual report, the annual accounts and the financial estimates of the Society as it thinks fit.

3. Salient Features of a Society:

The charitable organization can be formed in India as a society under societies registration act, 1860.

1. Apart from individuals in India, a society can also be formed by corporates and foreigners.

2. A tax imposed on a society is one imposed on the society and not on its members.

3. A society is a separate legal entity separate from its members. Hence, a society has all the rights to sue its own members for any misconduct noted.

4. A Society can acquire and hold property and can sue and be sued.

5. A Society is usually in possession of funds and properties provided by the members or by other persons by way of donation etc.

6. A President, Vice President, Secretary and Treasurer are appointed by the society to run its affairs usually elected by members of the society.

7. The society should maintain regular account books and get them audited and present them to the members at the general meeting and file them with the Registrar for scrutiny.

4. CDD requirements of a Society as given below:

1. Society Registration Certificate.

2. Identification and verification of all Members of Society.

3. Tax document.

4. Memorandum of Association and Articles of Society (/by-laws of the society).

5. Financial Statements.

6. Identification of associated parties such as auditors of the society.

7. Signature Mandate.

7.11. Clubs

1. Introduction:

A club is a voluntary association of individuals for social purposes of recreation or for advancement of such objects as donation, useful arts, politics, or protection and development of their common interest, etcetera. It has a definite organization governed by certain rules, regulations, deed of settlement or bye-laws to which the members conform. A club may be a “Members Club” or a “Proprietary Club”. In the members club, the properties of the club vest in the members, while in proprietary club, an individual or a firm or a limited company owns the property while the members are allowed to make use of that property on certain terms. In either case, the club should be registered either as a Company, or as a Society mandatorily.

2. The Laws behind setting up a club:

An integral aspect of starting a club is getting together all the members and establishing the rules, which can be considered fair for all. The rules should be accompanied with proper punishments in case they are flouted. However, the owners should be flexible about the rules and make sure only ones accepted by all the members are maintained. New rules can be added over time following consultation with the members. However, for the rules to be effective they need to be properly and strictly implemented. The new members of a club should be provided complete details of the laws when they are inducted. Later on, whenever the laws are updated, the members should be informed of the same.

3. Financial Aspects of a Club:

There are various expenses for a club like the different activities, lectures, and printing flyers. A club can look to its established members for financial assistance. There are other ways in which they can generate operational capital like membership fees and activity fees. These organizations can also look to fundraisers for getting some much-needed financial stability. Nowadays there are several governmental organizations and corporations that provide clubs with financial aid. The owners can use the grant forms provided by these entities and see if they are eligible to receive financial aid from them.

4. Different Kinds of Clubs:

The first step in starting a club is to make a decision on the type of club it is going to be and then think of an attractive name. Ideally, the club should have a central theme, which can attract people with similar interests. Normally, the clubs deal with the following areas:

1. Sports.

2. Socializing.

3. Advocacy.

4. Professional development.

5. Creating awareness on important and critical issues.

6. Religion.

7. Volunteering.

8. Culture.

9. Sharing information.

10. Finance.

5. Governing Body of a Club:

The leadership of a club should be properly identified in order to ensure that it functions properly. The following is the most general form of a governing body of a club in case they are formed as an association or society. It may differ from country to country and structure of the club.

1. President: President will act as the leader by running the club, its meetings and also implementing its rules.

2. Vice-President: The Vice-President will operate when the President is not there. He or she should be a trustworthy individual and capable of enforcing the rules.

3. Captain: The captain of the club is the most influential member of a club with the exception of its owners. These individuals are trusted by both the President and the Vice President and have the right to voice his or her opinion on critical matters.

4. Lieutenants: The lieutenants have the lowest rank in the hierarchical structure of a club. They can implement the rules if the senior members are not there and can cast votes on important matters. They are trusted by the captains and also guide the recruits on various matters related to the club. There are 2 major types of recruits in a club – the head recruit and the other recruits. The head recruits are capable of voting but the same cannot be said of the normal recruits who have negligible authority.

Further, if the club is in the form of corporates, the structure will have Chairman, board of directors followed by managers who are the caretakers of the club.

6. The CDD requirements of a club are as given below:

1. Rules and Regulations or Bye-laws of the club.

2. Registration or incorporation in the case of registered bodies.

3. Identify and verify the members and officers of the club.

4. Financial Statements.

5. Tax Identification Number (If applicable).

6. Associated parties such as auditors.

7. Signature Mandate.

7.12. Money Service Business

1. Introduction:

Money Services Business “is any” Business which transmits or converts money. By definition, a money services business is a business which deals in at least one of the following:

1. Currency dealer or exchanger.

2. Check Casher.

3. Issuer of traveler's checks, money orders or stored value.

4. Seller or redeemer of traveler's checks, money orders or stored value.

5. Money transmitter.

6. Postal Services dealing in any of the above services.

Let us understand each of the above services, in detail as given below.

1. Currency dealer or exchanger:

The Currency dealer or exchangers are into Businesses that buy, sell or exchange the currencies by applying exchange rate plus some commission. They typically operate along international borders, airports, or near communities with high populations of foreign individuals.

2. Check Casher:

The Check cashers are businesses that provide customers with an easy way to turn their paycheck, or other checks, into cash without having to rely on a bank account. Check-cashing businesses generally stay open 24 hours, and give easy, quick access to cash when people need it.

3. Issuer of traveler's checks, money orders or stored value:

An issuer is a business ultimately responsible for payment of traveler's checks, money orders or stored value.

4. Seller or redeemer of traveler's checks, money orders or stored value:

A seller is a business that sells traveler’s checks or money orders or stored value cards to others. A redeemer is a business that accepts instruments in exchange for currency. For example, a hotel that provides a customer with $1,500 in cash in exchange for the customer’s $1,500 in traveler’s checks is a redeemer.

5. Money transmitter:

Money transmitter is responsible for receipt or sending money on behalf of it’s customers domestically or internationally across borders.

6. Postal Service:

Postal services providing all the above services as an MSB.

2. Who are Principals of Money services business and who are agents?

1. Principal: A principal of a money services business is an entity which registers with regulators of that country example a United Kingdom based MSB must register with HMRC and a US based MSB register with the Financial Crimes Enforcement Network or FinCEN.

MSB principal needs to adhere with a number of different records keeping, reporting, and anti-money laundering requirements with its regulator.

A principal MSB must supply with regulator information about itself such as the type of business in which it is engaged, financial institutions and bank accounts through which the transactions may be taking place, the ownership or control of the MSB, and the number of different branches and or agents which are operating in that country.

Money service business Principals are mandatorily required to have an anti-money laundering compliance program in place, whose AML Program should minimum have the following.

1. Development of internal policies, procedures, and related controls.

2. Designation of a compliance officer.

3. A thorough and ongoing training program, and.

4. Independent review for compliance.

In addition, regulators may ask MSB principals to report cash transactions and suspicious transactions. The Principal MSB may open its own branches in various states or countries reporting to the headquarters. Examples of largest principal MSB companies in the world are Western Union and MoneyGram.

2. The Agents: To become an agent of MSB, it needs to sign a binding agreement with it’s principal MSB called “Agent Agreement” outlining the various roles and responsibilities of the agent. A principal typically provides its agents with access to technology, systems, forms, advertising and marketing stuff, written processes and procedures necessary to maintain compliance with laws and the terms of the Agent Agreement.


a. It is not necessary that an agent should have only one principal, it can have various principals.

b. Most Countries or U.S. states also require licensing for firms providing check cashing, check sales or money transmittal or simply the MSB services.

3. MSB regulators of the world:

1. United Kingdom: MSB’s must register with either the Financial Conduct Authority or HMRC, depending on the specifics of their business.

2. United States: In the United States, MSBs must register with the Financial Crimes Enforcement Network or (Fincen), be reviewed by the Internal Revenue Service or (IRS), and comply with any relevant state and federal laws.

3. Canada: Broadly similar to the United States in terms of regulations, MSBs in Canada must register with the Financial Transactions and Reports Analysis Centre of Canada or (Fintrac).

4. Hong Kong: In Hong Kong, MSBs are known as money service operators or (MSO’s), and are required to apply for a license from the Customs and Excise Department in order to conduct business. MSOs in Hong Kong must abide by the Anti-Money and Counter-Terrorist Financing (Financial Institutions) Ordinance.

4. CDD requirements of Money Services Business:

1. License to act as Money Services Business granted from state or federal.

2. Certificate of incorporation.

3. Memorandum of association and Articles of Association.

4. Rules of MSB if separate from the Articles of association.

5. Financial Statements or Annual Report.

6. Associated parties of MSB such as list of agents or auditors.

7. AML Letter containing all Pillars of the AML Program.

8. Tax Identification Number

9. Regulation Proof (if applicable).

10. Listing Proof (If applicable)

11. Ownership details and Controllers of MSB.

12. Signature Mandate.

* Note:

1. If all the Pillars of AML program are not available in AML letter, a secondary document can be used to substantiate the pillar requirements. For Example, if the AML letter does not mention the appointment of AML officer, and AML officer is available in the annual report, the same can be considered.

2. Most of the MSB’s are Publicly traded companies such as Money Gram or Western Union. Hence, a proof of stock exchange is sufficient to close such profiles.

3. Other MSB’s are either standalone with limited ownerships or owner being it’s parent company. The Ownership details of such MSB’s are available in the Annual Reports.

4. Typically, a written contract called an “Agent Agreement” is established between the two parties outlining the various roles and responsibilities. A principal typically provides its agents with access to technology, systems, forms, advertising and marketing, and to written processes and procedures necessary to maintaining compliance with various federal and state laws and to the terms of the Agent Agreement.

5. An MSB, while acting as an agent to one or more Principal MSBs, the MSB may also act as a principal itself for the provision of other financial services such as say check cashing. In such case, the KYC Officer should not only collect the Agent Agreements but also the License to act as a principal too.

5. Enhanced Due Diligence of MSB:

1. What are the Types of products and services offered by the money services business?

A money services business should help its banking organization understand the following.

a. The categories of services engaged in by the particular money service business;

b. Whether the money service business is a “principal” (with a fleet of agents) or an agent of another money services business;

c. Whether the money services business is new or an established operation; and - whether or not money services represent a primary or ancillary aspect of the business (such as a grocery store that derives a small fraction of its overall revenue from cashing checks).

2. What Locations and Markets is served by the money services business?

A money services business should help its banking organization understand the following:

a. the markets it targets;

b. The locations it serves; meaning, whether it offers international services; and or whether it caters exclusively to local residents.

3. What is the anticipated account activity?

A money services business should help its banking organization understand:

a. The services the business intends to use, such as currency deposits or withdrawals, check deposits, or funds transfers;

b. The branch locations the business intends to use.

c. Estimated transaction amounts.

d. Any external or seasonal factors that may impact expected transactions.

7.13. Non-Profit Organization

1. Introduction:

A non-profit organization is mission-driven, which requires the management, members or boards to set objectives aimed at achieving them. In a non-profit organization, income is not distributed to the group members, directors, or officers. The objective of the nonprofit organization is to serve the public in some way, whether through the offering of goods, services, or a combination of the two. Example, enriching the lives of people in the community.

Non-profit organizations apply for tax-exempt status, so that the organization itself may be exempt from income tax and other taxes. Non-profit organization can generate income through fundraising activities or revenue that results from services they provide. The operational objectives of a nonprofit organization relate to the management of funds and resources to achieve specific tasks. Non-profit organizations are subject to stringent governance requirements, mainly because they usually use donor or grant funding to do their work. This makes them accountable to their donors and the grant programs, as well as to the public whose taxes go toward grant funding. Governance objectives include the establishment of sound policies for issues such as compensation, purchasing and procurement, human resource and volunteer management and asset and risk management. Nonprofit organizations may also exist to collect income just to dispense to other qualifying charities. Non-profit organization have members when they are formed as an association or society or clubs. Non-profit organization have board of directors if they are in the form of a corporate. Non-profit organization has board of governors or board of directors if they are in the form of foundation. And the non-profit organizations in the form of trust are maintained by the trustees or board of trustees.

A non-profit organization work for religious, scientific, charitable, educational, literary, public safety or cruelty-prevention causes or purposes. Examples of non-profit organizations include hospitals, universities, national charities, churches, foundations etc.

2. Specifics of non-profit organization in some countries:

In the United States, nonprofit organizations are formed by filing bylaws or articles of incorporation or both in the state in which they expect to operate.

The act of incorporation creates a legal entity enabling the organization to be treated as a distinct body by law and to enter into business dealings, form contracts, and own property as individuals or for-profit corporations can. Non-profit organizations request 501(c)(3) status from the IRS to attain tax exempt status. Also, all nonprofit organizations at US are required to have a board consisting of at least three directors. During registration at the state level, nonprofits must supply the names and home addresses of each founding director. At Australia, nonprofit organizations include trade unions, charitable entities, co-operatives, universities and hospitals, political parties, religious groups, incorporated associations, not-for-profit companies, trusts and more. A nonprofit organization in Australia can choose from a number of legal forms depending on the needs and activities of the organization. Example, co-operative, company limited by guarantee, unincorporated association, incorporated association (by the Associations Incorporation Act 1985) or incorporated association or council (by the Commonwealth Aboriginal Councils and Associations Act 1976).

In India, Non-profit organization may be registered as a Society, or as a Trust, or as a Section 8 Company, under the Companies Act, 2013. The Hong Kong Company Registry provides a memorandum of procedure for applying to Registrar of Companies for a License under Section 21 of the Companies Ordinance (Cap.32) for a limited company for the purpose of promoting commerce, art, science, religion, charity, or any other useful object. At France, non-profits are called associations. They are based on a law enacted 1 July 1901. At Israel non-profit organizations are usually established as registered nonprofit associations or public benefit companies. At Japan, non-profit organizations are given corporate status to assist them in conducting business transactions. Here, a non-profit organization is any citizen's group that serves the public interest and does not produce a profit for its members.

At New Zealand, nonprofit organizations usually are established as incorporated societies or charitable trusts.

3. CDD requirements for Non-profit organization:

1. Certificate of Incorporation.

2. Constitutional documents depending on the structure of the Non-profit organization.

3. Identification and verification documents for the key Members or Key Controllers.

4. Identification and verification documents for the beneficial owners.

5. Annual report or, Form 990 if exempt organization from United States.

6. FCRA certificate if non-profit organization is from India and contributions are received from abroad.

7. Associated parties such as auditor.

8. Signature Mandate.

7.14. Charitable Organizations

1. Introduction:

Charitable organization falls under the category of non-profit organization hence, are generally tax exempt. Meaning they do not have to pay taxes. Charitable organization can be based on educational, religious or even based on public interest activities. Charitable organization can be run privately as well as publicly. The laws and regulations to govern charitable organizations vary from country to country. They are called charitable organizations or charities as they get funds in the form of gift or donations. Donations that are done to charitable organization are only qualified for the tax-deductibility. In countries like United States, the other income of charitable organizations may fall into “Unrelated Business taxable income”, meaning income of the charitable organization which is not related to its primary purpose or goal.

2. Activities of Charitable Organizations which are:

1. Relief to the needy people such as people in distress, poverty or who are underprivileged.

2. Charitable organizations supporting Education say for scholarships or fellowships.

3. Charitable organizations supporting for scientific research.

4. Charitable organizations supporting religious affiliations.

5. Charitable organizations supporting philanthropic activities.

3. Structure of Charitable Organizations:

Most of the charitable organizations are in the form of trusts or foundations. But a charitable organization can be in other forms such as association or society too. Let us now understand the basic rules of a charitable organization followed by almost all countries.

1. No part of a charitable organization’s assets shall benefit any people who are members, directors, officers or its agents.

2. Charitable organization must have a legal, charitable purpose.

3. The tax exemption is allowed only to the extent of charitable activities and not beyond.

4. Charitable organizations must have a record of all the donors and accounts related how the donations were utilized.

5. Some countries have specific rules for donations from foreigners. Example, Registration under foreign contribution regulation act or FCRA gives Indian charitable organizations the authorization to receive donations from foreign sources.

4. Difference between a Private Charitable Organization and Public Charitable Organization:

The private charitable organizations get their funds from family, corporation, or individuals. They mainly use their donation funds for providing grants to the individuals who need it, or to the organizations involved in charitable activities. Example, the Walton Family Foundation, the Coca-Cola Foundation.

The public charitable organizations get their grants from the state or central Government as well as from the individuals and private organizations. Examples of public charitable organizations can be Churches, Universities, Hospitals, and medical research groups.

5. CDD requirements of a Charitable organization:

1. Certificate of incorporation or registration.

2. Tax forms or tax exemption forms (example form 990).

3. Constitutional documents (as per the structure of the organization).

4. Identification and verification of Key Controllers.

5. Ownership structure chart and complete drill down till Ultimate beneficial owners (if any).

6. Financial Statements or annual report.

7. Associated parties such as auditors.

8. Signature Mandate.

6. Enhanced Due Diligence requirement of Charitable Organizations:

1. Purpose or Objective of the Charitable Organization.

2. Details of Contributions, Gifts, Grants and similar amounts received in the current financial year.

3. Details of Investment income if any.

4. List of major Donors or contributors.

5. List of major receivers of donations.

6. Total Assets of the Organization.

7. Unrelated Business incomes (if any).

8. Receipt of funds from special events or activities (if any).

9. Total Revenue of the organization.

10. Any other Source of Wealth separate from contributions received.

7.15. Non-Governmental Organizations

1. Introduction:

A Non-Governmental Organization is a not-for profit, voluntary citizen’s group that is organized on a local, national or international level to address issues in support of the public good. Non-Governmental Organization is Task-oriented and made up of people with a common interest. Non-Governmental Organization performs a variety of services and humanitarian functions such as save life or alleviate suffering. Non-Governmental Organization brings citizens’ concerns to Governments. Non-Governmental Organization monitors policy and program implementation. Non-Governmental Organization encourages participation of civil society stakeholders at the community level. In simple words, NGO can be described as any non-profit organization that is independent of government. Also, NGOs are mostly subgroup of organizations founded by citizens, which include clubs and associations.

2. Legal structures applicable for NGO’s are:

1. Not for profit Companies.

2. Societies.

3. Associations or Unincorporated and voluntary associations.

4. Trusts, charities and foundation.

5. Lobby Groups.

3. Types of NGO’s:

a. General categories of NGO's are:

1. Operational NGO's: Operational NGO's whose primary purpose is the design and implementation of development-related projects, and

2. Advocacy NGO's: Advocacy NGO's whose primary purpose is to defend or promote a specific cause.

b. NGO’s classified as per their orientation as given below:

1. Charities: NGO's directed at meeting the needs of disadvantaged people and groups.

2. Services: NGO's which provide healthcare and education.

3. Participation: Self-help projects with help of locals.

4. Empowerment: Aim to help poor people understand the social, political and economic factors affecting their lives.

c. NGO's categorization based on Level of operations are:

1. Community-based organizations: Community-based organizations works to meet community needs.

2. City-wide organizations: City-wide organizations include chambers of commerce and industry, coalitions of business, ethnic or educational groups, and community organizations.

3. State NGO's include state-level organizations, associations, and groups.

4. National NGO's include national organizations such as Y.M.C.A’s and Y.W.C.A’s, professional associations, and similar groups.

5. International NGO’s range from secular agencies, such as Save the Children, to religious groups.

4. Organization structure of an NGO:

Generally, the organization of an NGO consists of the following.

1. The Board of Directors: An NGO Board is a legal requirement in most countries in order to get it officially registered with the local authorities. Many NGO’s stipulate that membership in a board is voluntary and non-remunerative.

2. The General Assembly: The General Assembly is the highest body that guides and advises the overall development and progress of an NGO. A general assembly may or may not be required by law and not all NGOs have a general assembly, but such a body helps in creating a good transparent image for the NGO.

3. The Staff: Staff members of an NGO are responsible for the day-to-day functioning, and implementing of its programs and projects.

Note: The above structure is not generic may vary from country to country too.

7.16. Association

1. Introduction:

Associations are independent legal entities, registered under the laws of the country where they are based. Associations are formed for a specific purpose or goal. Each association elects its own executive committee or board of directors and a president. Many associations have an executive office, which is accountable to its board of directors. The associations are governed by the rules and regulations which are to be filed to the registrar of companies along with Memorandum of association.

2. Structure of an Association:

On the top of the structure is the governing body of the association.

The governing body of the association can be a general assembly or board of directors or executive committee depending on the size of the association.

The second layer has a president who is the executive head of the Association.

President is elected by the executive members in general or based on the rules of association written. The president shall preside over all the meetings of the Association.

All the activities of the Association shall be carried on with the guidance and instruction of the President. The president is one among members operating bank accounts.

The third layer is an elected Vice-President.

The Vice-President shall carry on all the duties of the President during the absence of the President. The fourth layer is Secretary:

Secretary shall call the Meetings such as Executive Committee meeting, Annual General Body meeting and sometimes need based Special General Body meeting.

Secretary shall keep all the records and minutes of the meetings

The fifth layer is the Treasurer:

Treasurer shall be the custodian of all the Assets and Records of the Association. Treasurer shall maintain all the documents, Bills, Receipts, Vouchers and Statutory Books.

Treasurer shall get the Accounts audited every year and present the same in the Annual General Body meeting.

3. Types of associations.

1. Professional Association: A professional association seeks to further a particular profession, the interests of individuals engaged in that profession and the public interest. Example, a bar association which is a professional association of lawyers.

2. Voluntary Association: A voluntary association, is a group of individuals who enter into an agreement, usually as volunteers, to form a body to accomplish a purpose. Example a trade association.

3. Clubs: An association dedicated to a particular interest or activity. Example, a football club.

4. International Associations: International Associations are based on a formal instrument of agreement between the governments of nation states. Example, the Union of International Associations which is a research institute and documentation center based in Brussels, Belgium.

5. Civic Association: A civic association is to provide a mechanism through which the members can undertake discussions with local government or within the community itself. Example, the D.C. Federation of Civic Association dedicated to informing, representing, and supporting the residents of the District of Columbia.

6. Mission Association: Mission Association is established for prayer and mutual support among members. Example, India Missions Association.

4. The CDD requirements of an Association:

1. Registration Certificate of the Association.

2. Rules and Regulations of Association.

The rules and regulations of association has minimum details such as.

  1. The executive committees’ election, tenure, powers and duties.

  2. The role of President, vice president, secretary and treasurer.

  3. Meeting notices and other formalities.

  4. Conduct of General body meetings and its frequencies.

  5. Annual account and bank account maintenance.

  6. Association office working hours.

3. Memorandum of an association, which is filed with the Registrar of Companies. It contains the details such as:

  1. Name and objectives of the Association.

  2. Names, addresses and occupations of the members of the governing body.

4. Identification and verification of executive members of association.

5. Financials of Association.

6. Associated Parties such as auditors.

7. Tax Identification Number (If applicable).

8. Signature Mandate.

7.17. Foundations

1. Introduction:

Do you know that the Foundations were first introduced in The Bahamas in December 2004 following the Bahamas Foundations act. To define, a foundation is a nonprofit corporation or a charitable trust that makes grants to organizations, institutions, or individuals for charitable purposes such as science, education, culture, and religion. The foundations are mostly are classified as tax-exempt as they exist to serve the public good. Foundation raises funds by soliciting and asking donations and grants. Mostly, a Foundation is governed by its board of directors or board of trustees as per its structure. A Foundations source of funds can be from a single individual, a family, a corporation or Government or combination. Usually, the founder of the foundation retains various rights over the administration of the foundation, often including the ability to dissolve the foundation and sometimes even allowing the altering of the rules for its administration.

2. Types of Foundations:

There are two foundation types namely,

A. Private foundations and,

B. Public Foundations.

A. Private Foundation:

A private foundation is a non-profit charitable entity, which is generally created by a single sponsor, usually an individual or business. Meaning, to run a private foundation, the money comes from a family, an individual, or a corporation. An example of a private foundation is the Bill and Melinda Gates Foundation. Private foundations must give away a certain amount of their assets every year. Hence, the private foundations you see are all active grant-makers. A private foundation, in the United States, is a charitable organization described in the Internal Revenue Code by section 509. A private foundation is necessarily a 501(c)(3) exempt organization. But Private foundations must pay a nominal excise tax on their net investment income. A private foundation does not generally solicit funds from the public. You may note that not all foundations engage in philanthropy. Some private foundations are used for estate planning purposes too. You may also note that when assets are contributed to a private foundation, they are excluded from the donor’s estate and, as a result, are not subject to either federal or state estate taxes. If a donor were to give appreciated stock to a private foundation, the donor would be entitled to receive an income tax deduction for the full, fair-market value of the stock.

Most of the Private foundation document of establishment will contain the following information:

1. Purpose of the foundation.

2. Economic activity.

3. Supervision and management information.

4. Auditor Details.

5. Details of the statutes or articles of incorporation.

6. Provisions for the dissolution of the entity.

7. Details of corporate and private donors and their tax status.

In the United States, there are several restrictions and requirements on private foundations. The main one's are:

1. Restrictions on the sponsor not dealing between private foundations and their substantial contributors.

2. Foundation annually distribute income for charitable purposes;

3. All U.S. tax-exempt organizations submit annual filings to the Internal Revenue Service or IRS. Private foundations file Form 990-PF.

4. Limits on Private foundation holdings in private businesses.

5. A private foundation may be governed solely by its donors or by a board consisting of family and or other individuals chosen by the donors.

There are two distinct categories of private foundations:

1. Non-Operating Foundations

2. Operating Foundations

a. Non-Operating Foundations.

These foundations typically make grants to public charities, and they make up the vast majority of the private foundation community. They can also conduct their own direct charitable activities, but running their own programs usually is not their primary focus. Generally, a non-operating foundation must make an annual distribution equal to roughly 5% of its prior year’s average net investment assets.

b. Operating Foundations:

Operating Foundations predominantly undertakes charitable activities and must be significantly involved in its own projects in a continuing and sustaining fashion. Examples might include the operation of a museum, zoo, library, or research facility. To ensure that operating foundations are adequately engaged in directly carrying out their charitable activities, each year, they are required to spend the major portion of their investment income (say 85%) directly on the active conduct of their charitable operations.

B. Public Foundations.

A public foundation is also called grant-making public charity. It gets its money from many different sources, such as individuals, corporates, other foundations and government agencies. However, none of the single donor can give grants more than 50% of the total of the assets. They often have a tax-exemption and in most countries, they do not need to give or donate some minimum funds. An example of a public foundation is “Save the Children Federation”. Public foundations in U.S.A file Form 990 to Internal Revenue Service or IRS. Mostly the Object of the public foundation is to have a social or environmental impact. In order to do that, most of the public charities operate by conducting projects and being active on the ground. When donating to a public foundation, donors can have tax deductions on their contribution. There is no rule that public foundations cannot make grants themselves. A public Foundation is governed by a board of directors however, the majority of the board must be not be related by marriage or blood.

3. The Structure of a Foundation:

Structure of the foundation can be a trust or a corporate.

If the trust is a foundation, let us learn the players of the foundation:

1. The trust is formed by a founder or grantor or settlor. Founder can be an individual or corporate or a family.

2. The trustees or board of trustees take care of the day-to-day activities of the trust.

3. The beneficiaries of a foundation are usually those for whose benefit the trust has been created. Usually, the foundations are created for a purpose such as charity or grant making, accordingly, are the beneficiaries as per the purpose of formation of the trust.

If the trust is a corporate, the players of the foundation are:

1. Board of Directors/Council members: The board of directors are elected by the founders of the trust. The board of directors and the founders also elect a chairman to chair the meetings such as general body meeting and is usually is the head of the board. Certain Foundations can also be run by the council of elected members directly who have contractual duties rather than fiduciary duties.

2. The President or Manager: The president or manager manages the foundation and takes necessary guidance from board of directors. The president usually takes care of investments related to the foundation, its day-to-day administration and collates the grant receiver’s information and put the proposal to the board for grant making. Some foundations also raise funds to make grants which is also taken care by the president and his/her team.

Further, the documents of the foundation need to be collected as per the structure of the foundation. If the foundation is tax exempt, necessary forms too are required to be collected.

4. Enhanced Due Diligence questions applicable to Foundation:

1. What is the purpose or objective of the foundation?

2. Who are the major donors or contributors of the foundation?

3. Who are the major receivers of the donations?

4. Which are the Jurisdictions where the grants are made?

5. Which are the Jurisdictions from where major donations are received?

6. What is the source of wealth and source of funds of the foundation?

7.18. Mutual Fund

1. Introduction:

A mutual fund is a professionally-managed investment fund. The term Mutual Fund is typically used in the United States, Canada, and India. It is run by a fund manager or asset manager or by an Asset Management Company. The mutual fund raises capital by pooling funds from investors who may not be comfortable in dealing securities themselves. Investors benefit from good rate of returns for their investment as the Mutual fund hires specialist fund managers who exactly know where to invest and how to profit. Investors in a mutual fund are not limited to individuals even business corporations can invest in mutual funds. As per the risk-taking capacity of the investor, the fund managers of a mutual fund design portfolios. A Portfolio is a basket having diverse securities such as shares, bonds or commodities or combination. The pool of funds is put in these different portfolios created by the fund manager. Hence, Mutual funds are best known for investment diversification. Further, mutual funds typically are Open-ended enabling investors to enter and exit the fund anytime.

2. Similar structures of a mutual fund include:

1. The SICAV in Europe: SICAV is an acronym in French for société d'investissement à capital variable, which can be translated as 'Investment Company with Variable Capital‘.

2. Open-ended investment company or (OEIC) in the UK: Mutual funds are more extensively regulated than any other pooled investment vehicles say a hedge funds, for example, Mutual funds must comply with a strict set of rules that are monitored by the Securities and Exchange Commission in United States. In United Kingdom, OEIC is regulated by the FCA.

3. Types of Mutual Funds:

1. Equity funds: The mutual fund scheme invests in stocks. Stocks such as growth stocks, income funds, value stocks, large-cap stocks, mid-cap stocks, small-cap stocks, or combinations of these.

2. Fixed income funds: The mutual funds that invest in fixed income securities such as government bonds, corporate bonds, municipal bonds, etc.

3. Money market mutual funds: The mutual fund scheme invest in short-term fixed income securities such as government bonds, treasury bills, bankers’ acceptances, commercial paper and certificates of deposit. They are generally a safer investment, but with a lower potential return then other types of mutual funds.

4. Balanced funds: The mutual fund scheme invest in a mix of equities and fixed income securities. Balanced Funds are also called as Hybrid Funds.

5. Index funds: The mutual fund scheme invest in Index funds. The value of the mutual fund will go up or down as the index goes up or down.

6. Fund-of-funds: The mutual fund scheme invest funds in other funds.

7. Socially-responsible funds (or ethical funds): The scheme of such mutual funds invest only in companies that meet the criteria of certain guidelines or beliefs. For example, some socially-responsible funds do not invest in "sin" industries such as tobacco, alcoholic beverages, weapons, or nuclear power.

8. Specialty Fund: A mutual fund or other fund that invests predominantly or exclusively in a single industry, sector, or region of the world. For example, a specialty fund may invest only in energy companies, or, even more narrowly, only in natural gas companies.

4. Prospectus:

Mutual funds use a document called a prospectus to disclose information about the fund to investors. The mutual funds to include important information in the prospectus, including:

  1. The fund’s investment objectives or goals: The investment objective of a fund will be either capital appreciation or income; or a combination of the two.

2. Its strategies for reaching those goals: The principal strategies of the fund tell you how the fund intends to achieve its investment objective.

3. The principal risks of investing in the fund: All investments in funds involve risk of financial loss. The reward for taking on risk is the potential for a greater investment return. An investor with a high-risk tolerance is generally willing to risk losing money in order to seek larger investment gains. On the other hand, an investor with a low-risk tolerance may favor investments in funds that are generally more stable in value.

4. The fund’s fees and expenses: There are front loads or exit loads and other administration fees that an investor should and must know prior to investing in a fund.

5. Its past performance: The past performance trends gives an idea to the investor about return on investment.

5. NAV:

An investor purchases a shares or units in a mutual funds. When investor buy units or shares of a mutual fund, the investor is actually buying the performance of its portfolio. A share of a mutual fund represents investments in many different stocks (or other securities) instead of just one holding. The price of a mutual fund share is referred to as the net asset value or NAV per share. Mutual fund shares can typically be purchased or redeemed as needed at the fund's current Net asset value. Redeem or redemption is nothing but a process of withdrawing units from a mutual fund scheme. The Net asset value does not fluctuate like stocks and is calculated or settled at the end of each trading day.

The formula for Net Asset Value is as given below:

Total Asset Value - Expense Ratio / Number of Outstanding units.

6. Loads or fees related to mutual funds:

1. Front-end load is a single charge paid by the investor when they purchase shares of the mutual fund.

2. Back-end load is one-time fee paid when investor redeem or sell mutual fund shares.

3. Level load funds are yearly charges and will be a fixed percentage taken from the fund's assets.

4. No-load funds usually do not charge any sales fee or commission, as long as you keep your money invested for a specified period.

7. Structure of a Mutual Fund:

A mutual fund is organized either as a company or as a business trust. A mutual fund that is set up in the form of a trust includes sponsor, trustees, Fund manager, custodian and a transfer agent. A mutual fund that is set up in the form of a corporate includes a sponsor, Board of directors, fund manager, custodian and transfer agent. The role of a sponsor is to set up the mutual fund and hire trustees or board of directors who have the responsibility for the management of the mutual funds business affairs. The fund manager is responsible for implementing a mutual fund’s investment strategy and managing its trading activities. A Mutual fund custodian is responsible for securing and managing the securities held within a mutual fund. And, a mutual fund transfer agent maintain records of unit holders or shareholders and prepare and mail for shareholder account statements. Lastly, Unit holders or shareholders invest in a mutual fund.

8. CDD requirements of a Mutual Fund:

1. Mutual Fund registration certificate or certificate of incorporation.

2. License of the Mutual Fund or regulation proof (as per Jurisdictional requirement).

3. Prospectus.

4. Constitutional documents as per fund structure (Trust Deed or M O A and AOA).

5. Financial Statements or Annual Report.

6. Ownership details of the Mutual Funds.

7. Identification and verification documents of controlling parties (Example, List of Directors or, trustees).

8. Identification of Investment manager and complete ownership details if not regulated.

9. Investment Management agreement between the Fund and the Fund Manager.

10. Asset under Management details.

11. Identification of associated parties {custodian, transfer agent, auditors and other associated parties (if any)}.

12. Signature Mandate.

9. Enhanced Due Diligence for Mutual Funds:

1. Is mutual fund investing in any kind of digital currency?

Well banks are bit apprehensive on Mutual funds investing in digital currency and make additional information seeking and due diligence during transactions monitoring.

2. What type of other instruments does mutual fund invest in other than digital currency?

These details give an idea to KYC officer whether the Mutual fund is investing in risky currency funds or derivatives or commodities businesses.

3. How much A U M does the mutual fund holds?

This question will give the details of the wealth being managed by the mutual funds.

4. Does the mutual funds have any foreigner or any foreign financial institutions as it’s investors?

This information will help transaction monitoring executives in a bank.

7.19. Private Equity Fund:

1. History of Private Equity Fund:

It all started in 19th century when merchant bankers in London and Paris financed industrial concerns. The first notable investment was from credit mobilier a french banking company created by Pereire brothers joined hands with Jay Cooke to finance United Stated Transcontinental rail road. Later, John Pierpont Morgan would finance railroads and other industrial companies throughout the United States.

In certain respects, John Pierpont Morgan's 1901 acquisition of Carnegie Steel Company from Andrew Carnegie and Henry Phipps represents the first true major buyout and a seed for today’s Private equity business.

2. Role of a Private Equity Firm:

Private Equity Firm is an investment management company that makes investments in the private equity of startup or operating companies through a variety of investment strategies, such as leveraged buyout, venture capital, and growth capital. Private equity firms will receive a periodic management fee as well as a share in the profits earned from the private equity fund managed. Private equity firms characteristically make longer-hold investments in target industry sectors or specific investment areas where they have expertise.

3. Constitution of Private Equity Fund:

Most private equity funds are organized as limited partnerships governed by Limited partnership agreements. The general partner is the private equity firm managing the fund. The structure of the Private equity firms are mostly LLC’s, LP’s or incorporations. The limited partners such as Pension Funds, Insurance Companies, Endowments, family offices etcetera are contributing capital to run the fund. The private equity firms then invest the pooled funds in various strategies.

4. Private Equity Funds Structure:

Private equity funds are structured as closed-end investment vehicles as they are usually long-term investment structures in nature. The fund manager sets forth the rules and regulations governing the fund. General Partner contributes around 1% to 3%, of the total fund investment size and the remaining investment is made by investors. Pension Funds, Labor Unions, Insurance companies, Universities, Endowments, large wealthy families or individuals, Foundations, etcetera are the investors in a private equity fund.

The minimum investment required by a private equity fund from investors is $200,000 or more. Initially the word private was used as the investment was done in stocks such a company which was not traded in a stock exchange. But today private equity funds also invest in publicly traded companies and make them private or get them delisted from stock exchange after purchasing considerable amount of equity stocks. Unlike hedge funds, private equity investment is not a one-time investment by investors.

Rather, a capital call, also known as a "draw down," is the act of collecting funds from limited partners whenever the need arises. When an investor buys into a private equity fund, the firm makes an agreement with the investor that these funds will be available when the firm requests them. Private equity firms typically issue capital calls when an investment deal has been reached and is nearing close. Investors are given sufficient time, which is usually between a week and 10 days, to provide the required funds.

5. Investment Strategies of Private Equity Funds:

1. Leveraged Buyout:

Leveraged buyout or Buyout refers to a strategy of making equity investments in a target company.

Let us see how it happens.

A private equity fund borrows certain amount from a bank called financial sponsor, about 60% to 80% required to take over a target company. To this, it adds its own fund taking contributions from its own partners, the limited partners. With the total available investment, the Private equity fund buys all the shares of the target company. The target company is usually an underperforming company but has all the potential to become a valued company. The private equity fund restructures this company or streamlines it within a time span say about three years. The objective of the private equity fund is to increase the value of the company so that it is ready for an early sale. When the target company becomes a valued company, the acquired company is sold off for a profit. With the money obtained firstly, the original loan is paid off with interest to the bank. The remaining profit is shared among the partners.

2. Growth Capital:

The private equity fund invests in relatively mature companies that are looking for capital to expand or restructure operations or to enter new markets or finance a major acquisition without a change of control of the business.

3. Venture Capital:

Venture Capital is a private equity fund investment made in a seed or startup company, or in less mature companies.

4. Distressed and Special Situations:

In distressed private equity strategy, Private equity fund invest in troubled companies' Debt or Equity to take control of the companies during bankruptcy or restructuring processes, turn the companies around, and eventually sell them or take them public.

5. Secondaries:

Private equity funds occasionally liquidate or sell illiquid private equity investments via secondary transactions to a secondary private equity fund.

Example, Secondary firm Lexington Partners has agreed to purchase a private equity fund portfolio worth about £470 million from Lloyds Banking Group.

6. Mezzanine Capital:

Mezzanine capital refers to preferred equity securities. Mezzanine capital, is often used by smaller companies that are unable to access the high yield market. This form of financing is often used by private equity investors to reduce the amount of equity capital required to finance a leveraged buyout or major expansion.

The other strategies of private equity fund can be in:

1. Real estate.

2. Infrastructure, meaning investments in various public works e.g., bridges, tunnels, toll roads, airports, public transportation, and other public works that are made typically as part of a privatization initiative on the part of a government entity

3. Energy and Power,

4. Fund of funds meaning investing in other private equity funds,

5. Royalty funds and etcetera.

6. CDD Requirements of Private Equity Funds:

1. Limited Partnership Agreement.

2. Private Placement Memorandum of the Fund.

3. Controlling parties of the private equity fund.

4. Ownership (the limited partners’ holding percentages) details through a structured chart.

5. Constitutional documents of General Partner.

6. Associated parties of Private Equity Fund.

7. Asset under Management details of the fund.

8. Signature Mandate.

7.20. Statutory Bodies

1. Introduction:

Statutory bodies or Regulatory bodies are entities created by an Act of Parliament or state legislatures. They are usually established to carry out specific functions which a government considers may be more effectively performed outside a traditional departmental executive structure. They fulfill the need for some operational independence from the government; funding arrangements that are not reliant on the annual appropriations processes; or to establish a separate legal entity. They are typically found in countries which are governed under parliamentary democracy form of political setup. Under law, statutory bodies are organizations with the authority to check that the activities of a business or organization are legal and follow official rules. The statutory bodies, however, may be established to allow a certain level of independence from government, the government is still responsible to ensure that taxpayers funds expended in the operations of statutory bodies are spent in the most efficient, effective and economic manner. These bodies are subject to varying degrees of ministerial control which are specified in the statutory body’s enabling legislation.

Ministers are responsible to Parliament for the operation of all government boards and agencies within their portfolios, and are required to table their annual reports in Parliament. A state delegates its authority to a statutory authority for several reasons that is transparency, accountability, and efficiency. The definition of a ‘statutory body’ may differ depending upon the legislation.

Examples of statutory bodies can be Central Banks.

All statutory bodies are established and operate under the provisions of their own enabling legislation, which sets out the purpose and specific powers of the agency. The enabling legislation may also include provisions i.e.

The levels of fees to be charged for services / products provided by the statutory body

The power of the statutory body to borrow or invest funds

Whether the board can delegate powers to officers of the statutory body; and

Whether the body represents the State.

2. CDD requirements of Statutory Bodies.

1. A copy of Statute or Legislation under which they are formed.

2. Identification of Key Controllers such as board of directors.

3. Ownership details through structured chart.

4. Associated Parties such as auditors and ministers who have a say in the statutory body.

5. Financials or Annual Report.

6. Signature Mandate.

7.21. Special Purpose Vehicle

1. Introduction:

Special Purpose Vehicle, also known as Special Purpose Entity, or a Special Project Vehicle called differently in different countries, is nothing but a legal entity that is formed by its parent company or Sponsor Company for a specific purpose. When this specific purpose gets accomplished, the Special Purpose Vehicle is dissolved by the parent or sponsor company. Hence, a special purpose entity has limited rights, with respect to, what might be required to attain that purpose and its life is destined to end when the purpose is attained.

The purpose for creation of Special Purpose Vehicle is usually to undertake a very risky project to protect the parent company and its reputation. Special Purpose Vehicles are also created to securitize assets in a separate entity that is often kept as “off the balance sheet” item in the financials of the parent company. When the transactions winds up, the Special Purpose Vehicle will sell its assets to redeem the outstanding securities, re-paying investors and lenders.

2. Legal Entity forms to create a Special Purpose Vehicle:

The legal entity forms of a Special Purpose Vehicle can be:

1. A Corporation.

2. A Trust.

3. A Limited Partnership.

4. A Limited Liability Company.

3. Salient features of a Special Purpose Vehicle:

1. Special Purpose Vehicles are bankruptcy-remote companies. Meaning, there is no impact on the parent company if the Special Purpose Vehicle goes bankrupt or vice versa.

2. Special Purpose Vehicle distances itself from the sponsor, both in terms of management and ownership. This is because; if the Special Purpose Vehicle were to be owned or controlled by the sponsor, there will be no difference between a subsidiary and a Special Purpose Vehicle.

3. After its formation the Special Purpose Vehicle becomes an indirect source of financing for its parent or sponsor.

4. Special Purpose Vehicles protects its investors from negative financial impact of its parent or sponsor, as it is legally protected and is a separate entity from its parent or sponsor.

5. In the context of raising capital, the Special Purpose Vehicle usually is structured as Limited Liability Company, where all investors of a given investment are pooled together into a single entity.

6. The actions of the Special Purpose Vehicles are usually very tightly controlled and they are only allowed to finance, buy and sell assets.

7. The advantage of Special Purpose Vehicles is that they can be created with very low costs. 8. You can hold multiple properties under one Special Purpose Vehicle.

8. Special Purpose Vehicles are created for limited operations such as acquire and finance specific property or assets.

9. A Special Purpose Vehicle can be intended to even promote trade as an alternative to direct dealings.

10. Special Purpose Vehicles are used to securitize loans.

4. Abuses associated to Special Purpose Vehicles:

1. Special Purpose Vehicles can be used as tools in order to hide losses and fabricate earnings.

2. Too much of securitization lead to the housing bubble, which ultimately lead to global recession.

3. Special Purpose Vehicles can be used to manage regulatory requirements. For example, to meet Basel II Tier 1 capital ratio requirement.

4. The exact exposure levels of financial institutions are hidden behind their Special Purpose Vehicles.

5. Common uses of SPVs are as follows:

1. Securitization of loans or receivables.

2. In order to own one asset by multiple parties.

3. Creating the Special Purpose Vehicle not only allows the corporation to legally isolate the risks of any risky projects but also, share this risk with investors of such projects.

4. Some types of assets can be hard to transfer. Hence, a sponsor entity may create the Special Purpose Vehicle to own these assets. After owning the assets, it then transfers these assets by simply selling the whole Special Purpose Vehicle as part of a mergers and acquisitions process.

5. Some of the jurisdiction allows saving huge corporate taxes. Hence, the sponsor entity to save tax, transfers its assets in those tax heaven jurisdictions.

6. As discussed previously, if the Special Purpose Vehicle is loss making, the balance sheet of the sponsor entity is un-affected.

7. The special purpose entity can raise funds from the market.

8. The Special Purpose Vehicle is created to finance a project, for example a large venture or infrastructure project.

9. A regulatory standard that applies to Special Purpose Vehicles assets is not the same as to the parent company’s assets on balance sheet.

10. Put several assets such as real assets under one entity.

6. Downsides of Special Purpose Vehicles.

1. Transfer of existing properties into a Special Purpose Vehicle could be liable to stamp duty, legal costs, higher rate tax brackets and capital gains tax.

2. Special Purpose Vehicles may not have equal access to capital or access to the same rates given that these structures do not have the same credit profile as that of the parent.

3. Market-to-market accounting rules may be triggered if an asset is sold.

4. It is also possible that the regulatory environment could shift, creating significant new challenges for companies using these structures.

5. Negative public sentiment towards these structures is another potential risk.

6. Investor loses its direct connect with the sponsor or parent. The investor will instead rely on the person or entity in charge of managing the Special Purpose Vehicle to relay updates and information.

7. Tax implications of Special Purpose Vehicle:

The failure to achieve tax neutrality would usually result in taxes being imposed once on the income of the sponsor and once again on the distributions from the Special Purpose Vehicle. This “double tax” would most likely make Special Purpose Vehicles unprofitable for the sponsor. Hence, there are a number of ways to design Special Purpose Vehicle to achieve tax neutrality. One of the best ways is Special Purpose Vehicles are incorporated in a tax haven jurisdiction, where they are treated as “exempted companies.” An exempted company is not permitted to conduct business and in return is awarded a total tax holiday for few years (e.g., in tax heaven Cayman tax holiday is for twenty years, with the possibility of a ten-year extension).

Let us assume that the sponsor is from US and created a Special Purpose Vehicle in Cayman, because such entities are not organized or created in the United States, they are not subject to U.S. federal income tax, except to the extent that their income arises from doing business in the United States. However, the organizational documents for the Special Purpose Vehicle can limit it so that for purposes of the U.S. Internal Revenue Code of 1986, it can be construed as not being “engaged in U.S. trade or business.”

Another example of a Special Purpose Vehicle is an investment trust that issues pass-through certificates is tax neutral; that is, the trust is ignored for tax purposes or there is no taxation at the trust level and the certificate owners are subject to tax.

8. Securitization with respect to Special Purpose Vehicles:

Securitization is conversion of a loan book of a financial institution into marketable securities. The process goes like this.

The Financial institution transfers or sells the loan portfolio to the Special Purpose Vehicle. Special Purpose Vehicle with the help of investment banker, converts the loans to bonds and sells the same to the investors. The Special Purpose Vehicle transfers this amount to the sponsor, so that the sponsor can close its loan book. Investors get coupons for the purchase of bonds which actually flows from the E M I (Equated Monthly Installments)/re-payments by the loan holders who are the customers of the financial institution. The investment banker also helps the Special Purpose Vehicle to get each of the bonds rated. You may note that any asset type like mortgages, receivables, royalties, rentals, that produces income can be securitized.

a. Actors in securitization process.

The first actor in a securitization process is the sponsor also called the originator or the promoter or the parent. The sponsor is that financial institution which has got asset comprising of a variety of loans and receivables like residential mortgage, commercial mortgage, Car loans, student loans, lease receivables, hire purchase receivables etc., and wishes to pool its above assets type for securitization. The main reason for Securitization is that it allows the lender financial institution to remove associated assets from its balance sheets. With less liability on their balance sheets, they can underwrite additional loans.

The second actor in the securitization process is Co-Sponsors. Here, you may note that all securitization processes will not have co-sponsors. Sometimes one or more legal entities are involved in the type of loans being securitized. Hence, these entities also participate actively during securitization process and tie up with the main sponsor for creation of Special Purpose Vehicle. These legal entities are called co-sponsors.

The third actor in the securitization process is the arranger or Investment Bank. The sponsor usually will not directly do the securitization as they are not experts in this field. Hence, they approach investment banks to seek help. Investment banks are active in tax heavens and such jurisdictions where the sponsor wishes to create Special Purpose Vehicle. With connection with Trust and company service providers, they create the Special Purpose Vehicle for the sponsor. They also, underwrite the risk and in future also help sponsors to sell the securities to the relevant investors. The Investment bank also help the sponsor to structure the securities. Example, picks up and pool assets of similar nature considering factors such as maturities and interest rates.

The fourth actor is the Special Purpose Vehicle itself. The investment banks initiate transfer or sale of assets from sponsor to the Special Purpose Vehicles using binding agreements. The sponsor if is knowledgeable enough can do this itself. After the transfer of assets to the Special Purpose Vehicle, the Special Purpose Vehicle with the help of investment bank converts these assets to salable bonds. The investment bank helps the Special Purpose Vehicle to synchronize the bonds with the maturity of securitized loans or receivables.

There are certain fancy names which are associated with these bonds such as “pass through certificate”, “pay through certificate”, “interest only certificate”, “principal only certificate” and etcetera.

The fifth actor in the securitization process is the Investor. Generally, Investment banks with its connection helps sponsor sell these bonds to its own investor base mostly a cluster of entities that have funds with them to invest. For example, Insurance Companies, other banks, Hedge or Private equity funds etc. The coupons or the interests of the investments are paid from the receivables of the assets. Example, if the assets are mortgage loans the monthly installments paid by the mortgage holder is paid as coupons to the investor. The sixth actor in the securitization process is the Credit Rating Agency. The bonds have to be publicly issued. Hence, they require credit rating by a good credit rating agency so that they become more attractive and easily acceptable.

Hence, these bonds are rated at least by one credit rating agency at the end of process of securitization. The issues could also be guaranteed by external guarantor institutions like merchant bankers which would enhance the credit worthiness of the certificates and would be readily acceptable to investors. Of course, this rating guarantee provides to the investor with regard to the timely payment of principal and interest by the Special Purpose Vehicle.

b. The above actors are the main actors in the securitization process. But there are other roles mostly taken care by the arranger or the investment bank itself. They are:

1. Liquidity providers: Liquidity providers are usually banks which provide the Special Purpose Vehicle with necessary cash to avoid any unsteadiness of the cash flow to the investors.

2. Tax and accounting advisers: These professionals’ structures transactions in such a way to allow minimizing the tax impact on the securities issued.

3. Auditors: In tax heavens such as Cayman Islands, Luxembourg, the annual accounts of securitization vehicles have to be audited by one or more independent auditors.

4. Legal advisers: As the legal structure and legal opinions are crucial to securitization, considerable legal work goes into documentation. A typical transaction would involve numerous documents such as sale and purchase agreements, offering documents, etc.

5. Paying agent: The paying agent is the bank that has agreed to settle the payments on the securities issued to investors. Payments are usually made via a clearing system.

6. Custodian: The custodian bank is responsible for the safekeeping of securities.

7. Asset managers: Asset managers are responsible for selecting underlying assets, monitoring the portfolio and, if foreseen, replacing underlying assets. They are common in CDO’s or Structured Credit transactions.

8. Credit Rating Agencies: These are agencies who give ratings to the bonds.

c. Mortgage-Backed Securities:

Since, we already understood the process of securitization, it is easy for us now to understand the mortgage-backed securities. In the securitization process if the underlying assets are mortgages, they are called Mortgage-backed securities. If in the above process of securitization, the type of loan being securitized if is “Residential Mortgage” than it is called Residential Mortgage-backed securities; If is Commercial Mortgage than it is called Commercial Mortgage-backed securities. If the individual loans such as auto loans, credit card debt, mortgages, corporate debt etcetera are bundled or repackaged into securities and sold to investors, such complex structured financial products are called, collateralized debt obligations or a CDO. They are called collateralized because the promised repayments of the loans are the collateral that gives the collateralized debt obligations their value. Lastly, a collateralized loan obligation is a type of structured credit. To purchase the portfolio of loans, the CLO raises money by selling debt and equity securities. The debt and equity securities are sold in tranches, where each CLO tranche has a different priority of claim on cash-flow distributions and exposure to risk of loss from the underlying collateral pool. Cash-flow distributions begin with the senior-most debt tranches of the CLO capital structure and flow down to the bottom equity tranche, a distribution methodology that is referred to as a waterfall.

The most senior and highest-rated AAA tranche has "The lowest yield", but enjoys the highest claim on the cash-flow distributions and is the most loss-remote.

Similarly, the Mezzanine tranche which is a small layer positioned between the senior tranche (mostly AAA) and a junior tranche or unrated, typically called equity tranche, pay higher coupons but are more exposed to loss and have lower ratings.

To summarize, Securitization products such as RMBS, CMBS, CDO’s and CLO’s all rely on the underlying loans to receive payments paid by the borrowers of the financial institution.

d. Qualifying SPV:

Qualifying Special Purpose Vehicle (or simply, Q SPV). A “qualifying” Special Purpose Vehicle is a Special Purpose Vehicle that meets the requirements set forth in Financial Accounting Standards, (FAS 140). To be a qualifying Special Purpose Vehicle means that,

1. The SPV is “demonstrably distinct” from the sponsor, the SPV is significantly limited in its permitted activities, and these activities are entirely specified by the legal documents defining its existence.

2. The SPV holds only “passive” receivables that is, there are no decisions to be made, and has the right, if any, to sell or otherwise dispose of noncash receivables only in “automatic response” to the occurrence of certain events. The term “demonstrably distinct,” means that the sponsor cannot have the ability to unilaterally dissolve the Special Purpose Vehicle, and that at least 10 percent of the fair value (of its beneficial interests) must be held by unrelated third parties.

9. Challenges during Customer Due Diligence of Special Purpose Vehicles:

The challenges during customer due diligence of Special Purpose Vehicles is:

1. Special Purpose Vehicles are not operational and may not have any employees.

2. They may not have management structures.

3. They may not have individuals identified as a chief executive officer, president, or general manager, making it difficult to identify a single individual who would meet the controller’s definition.

4. A Special Purpose Vehicle can be owned by its sponsor or investors or, interestingly, no one. Hence, identifying individual beneficial owners under the ownership can be a challenge.

5. Some Special Purpose Vehicles are established as so-called "orphan trusts" the sole shareholder is a trust controlled by a corporate trustee. In this situation, no single individual can be identified as a beneficial owner.

10. Special Purpose Vehicle Incorporation:

1. No governmental approval is required for the incorporation of the Special Purpose Vehicle, nor is there any requirement to publicize an intention to incorporate. Special Purpose Vehicle is generally incorporated with limited liability.

2. Special Purpose Vehicle can generally be completed within 24 hours by delivery of two signed copies of the memorandum of association and articles of association to the Registrar of Companies.

3. Special Purpose Vehicles have unrestricted powers and is capable of exercising all the functions of a natural person, irrespective of corporate benefit.

4. The incorporation of Special Purpose Vehicle requires minimum one director and there are no residency requirements for directors. The directors of the Special Purpose Vehicle are responsible for the conduct of its day‐to‐day business and management.

5. Special Purpose Vehicle must have at least one shareholder. Example, for the standard securitization Special Purpose Vehicle the shareholder will be the trustee of a Cayman STAR trust.

6. There is no minimum authorized or issued share capital for Special Purpose Vehicle. Fractional shares and shares of no-par value may be issued. Shares may be issued fully, partly or nil paid.

7. Special Purpose Vehicle can transfer its shares if the transfer is expressly or impliedly permitted by the company’s articles of association.

8. Generally, there is no requirement that Special Purpose Vehicle appoint an auditor or file financial statements with the Registrar of Companies or any other governmental authority. But Special Purpose Vehicle must keep proper records of account with respect to all transactions as necessary to give a true and fair view of the state of the company’s affairs and explanation of its transactions.

9. Special Purpose Vehicle is required to pay a fee in jurisdiction of its birth at the time of its incorporation and each year thereafter.

10. Generally, no taxes are imposed in jurisdictions like Cayman upon Special Purpose Vehicle or its shareholders.

11. Stamp duty applies in most of the jurisdictions.

11. Customer Due Diligence for Special Purpose Vehicles (Securitization):

1. Identification of legal structure of Special Purpose Vehicle: Special Purpose Vehicles are required to be recognized as corporations, LLC’s, LPs, or trusts in-order to apply the specific CDD requirements under that legal entity.

2. Identification of Sponsor and Co-sponsor: The first step of CDD of Special Purpose Vehicle is to identify who has or have transferred the assets to the Special Purpose Vehicle or formed Special Purpose Vehicle for specific purpose. In short, the parent or sponsor of the fund.

3. Identification of Depositor: Where, the assets which are often acquired from multiple originators, the role of depositor comes into picture. Depositor is also a bankruptcy-remote Special Purpose Vehicle or entity that acts as a central repository for the collection and pooling of the assets to be securitized and transferring the same to the issuer or the Special Purpose Vehicle created for issue of bonds.

4. Identification of Servicer: “Obligors” are those who have taken the loan from the financial institutions and hence, owe the financial institution for payments on the underlying loans. As obligors are often not informed about the sale of their payment obligation, the originator, in many cases, maintains the customer relationship as servicer. The servicer is the entity that collects principal and interest payments from obligors. However, in some cases even specialized servicers tend to carry out the role of servicer for a fee. Hence, the details of the “servicer” need to be collected during CDD of the Special Purpose Vehicle.

5. Identification of arranger: Arrangers are mostly the investment banks who structure the bonds for the sponsors including designing of tranches of assets backed bonds.

6. Identification of Underwriters: The role of underwriters in structured finance or securitization process is raise funds for the Special Purpose Vehicle by analyzing investor demand. Underwriters buy at a discount a specified amount of the offer of asset-backed bonds before reselling it to investors. In addition to marketing and selling these securities, underwriters also provide liquidity support in the secondary trading market. In most of the cases, the underwriter is the arranger itself.

7. Identification of Issuer: Issuer is the Special Purpose Vehicle itself who issues the bonds in market.

8. Ownership and Controlling Parties: A special-purpose Vehicle ownership details and controller details are identified in the agreements or documents of legal status of that Special Purpose Vehicle. For example, if the Special Purpose Vehicle is Trust, the trust deed, If the Special Purpose Vehicle is corporate, the Memorandum of Association or Articles of Association, If the Special Purpose Vehicle is an LLC, the LLC agreement, If the Special Purpose Vehicle is in the form of Limited Partnership, the LP agreements will have the details of owners and controllers. The same can be also collected through a structured charts and Record of directors available with the client directly.

9. The Authorized Signers: The signatory details have immense importance for Special Purpose Vehicles as this entity type involve in the maximum number of transactions in cash and Cheques then wires. This is collected from client directly mostly through board resolutions.

10. The annual reports or financials of the SPV especially for the information of Assets and Revenue of the SPV.

12. Customer Due Diligence (Normal SPV):

1. Identification of legal structure of Special Purpose Vehicle.

2. Constitutional documents applicable to the structure of the SPV.

3. Financial Statements.

4. Tax ID number.

5. Ownership details such as organizational charts.

6. Controllers of the SPV (such as Trustee or Directors or General partners as per the SPV structure).

7. Associated parties such as sponsors/parent details, auditors, Project Managers, Asset Managers etc.

8. Signature Mandate.

Note: It is important to look at Special Purpose Vehicle from all angles, there can be hidden information’s which should be probed properly.

7.22. Correspondent Banking

1. Introduction:

Correspondent banking is a bilateral agreement based on contracts between two banks one providing financial services and the other receiving the financial services. The bank which provides the financial services is called correspondent bank and the bank which receives financial services is called a respondent bank. Respondent bank approaches the correspondent bank as they do not have physical presence in those jurisdictions where correspondent banks have good hold and good reputation, not only that, the respondent bank does not deal in the currency which correspondent bank deals in that country.

2. Services that a correspondent bank provides to a respondent bank:

1. Treasury Services and Cash Management Services.

2. Custodial Services.

3. Credit or Financing services.

4. International wire transfers of funds.

5. Check Clearing.

6. Foreign Exchange Services.

7. Processing Documentation.

8. Managing International Investments.

9. Cash management services. and,

10. Fixed Deposits.

3. Account Opening of Correspondent Banking:

A Respondent Bank opens a current account with correspondent bank to do its transactions such as wire transfer or Check clearing. However, there is no restriction that respondent bank should not open a savings account with correspondent bank. It may do so if correspondent bank is paying good interest. In the books of respondent bank, the current account it maintains with Correspondent bank is called as Nostro account. The Correspondent bank in its book calls this same current account as its Vostro Account. Nostro is a term derived from the Latin word for "ours," and Vostro is derived from the Latin word for "yours". You may note that the Nostro account is foreign currency account and Vostro account is the local currency account.

4. Why a correspondent bank needs to do a complete customer due diligence on its respondent bank?

1. A bank cannot provide Correspondent Bank activities to another bank without first complying with strict due diligence obligations.

2. This is done not only for compliance with regulations but also as part of risk management requirements to ensure that the bank providing the correspondent services knows with whom it is conducting business. You may note that all the relationship opening with Respondent bank will not mandatorily lead to High Risk. The risk score of various factors also determines the risk score.

3. The risk profile will determine what reasonable due diligence or enhanced due diligence the Correspondent Bank will require to perform.

5. CDD of Correspondent Banking Relation:

1. Regulatory Status of the respondent bank:

This requirement is utmost top priority requirement as correspondent bank will have a comfort zone if the bank it is tying relationship with is regulated and being supervised by someone in that jurisdiction. Usually, bank’s regulatory status can be ascertained by getting a proof from the central bank’s repository or website of that country. The bank of international settlement site can be used to get the link of central bank’s website.

2. Domicile Information:

This is the second most important requirement as the correspondent bank can decide whether or not to go ahead and do business with the respondent bank based on the information on geographic locations.

The information of geographic location required from respondent bank is:

1. The jurisdiction where the Applicant Bank has physical presence.

2. The jurisdiction where ultimate parent is incorporated and or headquartered. 3. The jurisdictions where its branches are located.

3. The jurisdictions where its subsidiaries are located.

3. Ownership and Control:

The correspondent bank not only has to know the reputation of the respondent bank but also the people who own it should also have good reputation in the market. The following information needs to be collected either publicly or from client if not available publicly:

1. If respondent bank is publicly held, whether its shares are traded on an exchange in a jurisdiction with an adequately recognized regulatory framework sometimes also called equivalent jurisdictions.

2. If privately held, the structured chart or information on complete drill down till Ultimate Beneficial Owner is known to the correspondent bank.

3. If the respondent bank is formed by law, the statute or the law under which the bank was formed needs to be obtained.

4. If the onboarding entity is central bank, most central banks are government owned but act autonomously based on their mandate or created through law. Hence, on minimum level the mandate or statute needs to be collected.

You may also note, some major central banks today still have elements of private ownership hence, this information should also be available with the correspondent bank. You may note that some central banks like the Bank of Japan and the Swiss National Bank are listed on exchanges and the Federal Reserve is also part owned by the commercial banks that make up its body. Such information should be identified and noted in the KYC profile of respondent bank.

4. Controlling Parties:

The controlling party’s information of the respondent bank may include the members of their Board of Directors or Supervisory Board, Executive Committee or its equivalent. Sometimes, the ministries (such as ministry of finance) may control the Bank; the selected people who have maximum control over the bank management should be collected in such scenarios.

5. Type of Businesses and Customer Base:

The correspondent bank should know what kind of bank it is onboarding example, a commercial bank, a wholesale bank, an investment bank or a global bank. Also, types of financial products and services the Respondent Bank offers to its customers, and depending upon the risk associated with the respondent Bank, the geographic markets reached should also be collected.

Let us learn some of the examples of types of businesses which are as given below:

1. Retail Banking:

Retail banking, also known as consumer banking, refers to the services banks provide to individual customers. Common retail banking services include checking and savings accounts, mortgages, credit cards, and auto loans.

2. Commercial Banking:

A commercial bank is a financial institution that accepts deposits, offers checking account services, makes various loans, and offers basic financial products like certificates of deposit and savings accounts to individuals and businesses.

3. Wholesale Banking:

Wholesale banking refers to banking services sold to large clients, such as other banks, other financial institutions, government agencies, large corporations, and real estate developers.

4. Private Banking / Wealth Management:

Private banking involves providing financial management services to High-Net-Worth Individuals. Private banking provides investment-related advice and aims to address the entire financial circumstances of each client. Wealth management generally involves advice and execution of investments on behalf of affluent clients.

5. Investment Banking:

Investment banking is a category of financial services that specializes primarily in buying/selling securities and underwriting the issuance of new equity shares to help companies raise capital.

6. Transactional Banking:

Transactional banking is a specialized bank providing treasury services and product offering that includes cross border payments, risk mitigation, cash management services, trade financial deals. These services enable safe cash and securities transactions around the global financial framework.

7. Custodian Banking:

A custodian bank, or simply custodian, is a specialized financial institution responsible for safeguarding financial assets/securities such as stocks, bonds, commodities and foreign exchange.

8. Broker/Dealer:

A broker-dealer is a bank that is in the business of buying and selling securities for its own account or on behalf of its customers.

9. Development Banks:

Development banks are financial institutions that provide long-term credit for capital-intensive investments spread over a long period and yielding low rates of return, such as urban infrastructure, mining and heavy industry, and irrigation systems.

Going ahead, the correspondent banks should and must know the customer base of the Respondent Bank, meaning the type of customers the Respondent Bank is giving services to. Examples include but not exhaustive, are as given below.

1. Retail Customers.

2. Corporates.

3. Financial Institutions (like banks, insurance companies or brokerage firms or finance companies etc.)

4. Non-Profit organizations or Charity Foundations.

5. Societies.

6. Third Party Payment Processors.

7. Clubs and Casino's.

8. Arms and ammunitions firms.

9. Money Services Businesses.

10. Funds (such as hedge funds, Private Equity Funds, Mutual Funds etc.).

6. Customer Visit Certificate:

The correspondent bank can collect this information through any of its representative who must have visited the physical location of correspondent bank and has collected detailed information of the departments and key personnel working there. This is the most important check as this is the only genuine proof the correspondent bank has that the respondent bank is not a shell bank.

7. Anti-Money Laundering Controls:

The correspondent bank should and must collect the following AML related documents mandatorily to know the AML controls that the respondent bank has in place:

1. Wolfsberg Questionnaire.

2. Copy of the AML Policies and Procedures.

3. Copy of the USA Patriot Act Certification, (if applicable).

4. Name and Contact Details of the Respondent Bank’s Compliance Officer.

8. List of Nostro Accounts (if applicable):

This information is collected by the correspondent bank for two main reasons which are as given below.

1. The respondent bank is already known about the conduct towards its account with correspondent bank. and,

2. Is there any chance of nested accounts? This information can be collected through Bankers almanac or directly from customer.

9. Financials:

The details of the Financials should be obtained from the latest financial statements or Annual report. Most the correspondent banks collect the details of Assets and Revenue.

10. Source of Wealth:

The major source of wealth of banks are usually updated in its website, the same is also available in bankers’ almanac. The sources of funds examples are primarily deposits, borrowed capital and shareholders' funds etcetera.

11. Expected Activities:

Expected activities in each of the transactional products that respondent will use should be collected. This collection helps to conduct Expected versus actual analysis during periodic review of the bank customer.

12. Signature Mandate:

Apart from above, the following details should be collected, if the correspondent bank is offering transactional products to its respondent bank:

1. Purpose of account.

2. Estimated volume of transactions.

3. Estimated value of transactions.

4. Jurisdictions of transactions.

5. Type of Fund transfers which majorly are, Cash, Cheque or Wire Transfers.

6. ACH estimates.

6. Products of Banks:

Important products and services that a correspondent bank offers its respondent bank. The list goes like this.

a. Treasury Services:

The correspondent banks under treasury services extend solutions such as Liquidity Management, Payments, Foreign Exchange, Receivables Management, Trade Services and Escrow accounts.

b. Documentary Services:

Documentary services include letter of credit or Standby letter of credit and Bank Guarantees.

c. Asset Management Services:

Asset management services include investment advisory solutions, Custodial Services, Transfer Agency and Fund accounting services, Administrator services.

d. Wealth Management and Brokerage:

These services include prime broker and executing broker services, private banking services, Wealth planning solutions, Investments and lending services.

e. Credit Services:

Credit services include interbank short-term loans, Loan Syndications, Collection and Payment of Credit Instruments, Bills of Exchange etc.

f. Payment Services:

Payment services include Checks clearing including clearing cash letters, issuing of drafts and, ACH and wire transfer services.

g. Cash Management Services:

Cash Management Services include collecting payments, disbursements, covering shortfalls, forecasting cash needs, investing idle funds.

h. Foreign Exchange Services:

Forex services mainly involve currency exchanges and currency trade services.

7. Public Documents and information of Respondent Bank:

1. Annual Report: The following information you may get from the annual report:

a. Address of Head office.

b. Details of incorporation.

c. Details of Listing.

d. Details of subsidiaries.

e. Details of branches.

f. Details of Customer base and type of businesses.

g. Ownership and controlling party information with biographies (if available).

h. Information of governance structure of the bank.

i. Products and Services the Respondent Bank provides to its customers.

j. Auditor details.

k. Financial Statements (especially, Assets and Revenue).

The annual report of US is Form 10 K. This is similar to the annual report submitted by public companies in US. Hence, public banks will have certain information as given below:

a. List of subsidiaries available in Exhibit 22 inside 10 K form.

b. Proxy Statements having ownership details.

c. Other details as listed in Annual Report.

2. Bankers Almanac:

Bankers Almanac collects most of the information that is required for onboarding a bank. The special requirements which are available in ‘Bankers Almanac’ probably not available in any other sources are:

a. Size of the bank.

b. Spread of the bank.

c. Copy of banking license or equivalent document.

d. List of Nostro Accounts.

e. List of bank branches with addresses.

f. Bank’s Head office address.

4. Bank of international settlement site:

It Contain List of websites of Central Bank.

3. FDIC-Bank Find:

It contains the details such as locations, History, Identifications and financials of US banks are available here.

4. Beta Company House:

The details of filing history and officers for all UK banks are available in this site.

5. Thomson Reuters Avox data:

It includes corporate hierarchies, registered address information, industry sector codes and company identifiers.

6. Certificate of incorporation:

COI are usually available in respective country company registries. Just Google with say “Hong Kong Company Registry” and you get the site details. The certificate of incorporation of companies or banks for all states in US is available in e-secretary of state site.

7. Screening observations for respondent Bank:

1. Negative News: The bank and banking corporations usually have too many negative news including fines, penalties and insider trading practices. However, this news should be seen in the light of present reputation of the bank in that country. You may also consider bank’s financial strength, customer base and width of businesses while assessing Negative News Analysis.

2. Politically Exposed Persons: Banks usually have controllers who are PEP’s. While doing screening the officers should look at the designation of the officer and wherever required, should ask its respondent bank whether the directors or chairman in question are having complete hold on the bank or bank related operations or not.

3. Sanctions Match: There can be indirect relations of the respondent banks with sanctions jurisdictions which are often come in light during screening. The sanctions team should make proper recommendations to the onboarding officer during onboarding.

8. AML Risk Summary of a Respondent bank:

It should minimum contain the following:

The mention of high-risk products offered to the client such as Ach or lockbox.

The mention of high-risk geographies where the bank, branch or its subsidiaries have presence in.

The mention of respondent bank’s customers who are deemed to be of high risk in nature such as a “Money Services Business”.

Mention of any offshore banking unit that the bank may have.

Any sanctions related hit or association.

Any Negative news or PEP involvement in the profile.

Any high-risk services or products offered by the respondent bank to its customers.

Any associations found with offshore centers or secrecy heavens.

10. Risk Factors associated with Respondent Banks:

The correspondent bank needs to take risk-based approach while and also after onboarding the respondent bank and consider the below risks for risk calculations:

1. Customer risk factors: Correspondent banks should consider the "Foreign correspondent bank" to be a high-risk customer type.

2. Ownership risk factors: Ownership structure such as complex ownership structure or cyclical ownership and banks issuing bearer shares should be looked into while calculating risks.

3. Country or geographic risks: Country risks such as countries with inadequate AML or CFT systems, countries subject to sanctions or embargos, countries involved with funding or supporting of terrorist activities, or those with significant levels of corruption.

4. Product and service risks: Respondent bank requiring high risk products.

5. Transaction risks: Respondent bank does high volume or high value or both high volume and value of transactions.

6. Delivery channel risk: Delivery channels include private banking, anonymous transactions, and payments received from unknown third parties.

11. Enhanced Due Diligence of a correspondent bank:

1. Does the respondent bank gives, Nested or Downstream Correspondent Banking services?

Well! ‘Nested’ (or ‘Downstream’) correspondent banking refers to respondent bank giving access of its Nostro account to its banking or financial institution customers enabling them with varied services of correspondent banking without opening an account and without having to go through the cumbersome onboarding process at Correspondent banks end.

2. Does Respondent bank allow Payable through accounts to its customer?

Payable-through accounts, also called pass through accounts, is the usage of Nostro account of respondent bank, directly or indirectly by customers of the respondent bank, which are usually the corporates or any structures which are not financial institutions, to do transactions without having to go through initial checks at respondent banks, such as clearing their own Checks, do wire transfers and ACH transactions. These transactions can be done directly or through maintenance of sub accounts at respondent Bank.

3. What are the lists of Nostro Accounts?

List of Nostro accounts is respondent banks account maintained with other correspondent banks in other foreign currencies.

4. Size of the Bank.

In terms of Global presence what is the size of the bank. This information is made available in the Bankers almanac.

5. What are the Number of branches and subsidiaries and their location information of the Respondent bank?

This information is usually available in the bank website or annual reports.

12. Product features of the respondent banks which correspondent bank should know:

Below are the product features offered by the respondent bank which correspondent banks should know and monitor:

1. Private banking.

2. Offshore international activity.

3. Wire transfer and cash-management functions.

4. Transactions in which the primary beneficiary is undisclosed.

5. Loans guarantee schemes.

6. Deals with travelers checks.

7. Deals in Foreign exchange transactions with other correspondent banks.

8. International remittances and have branches in other countries.

9. Payment services prepaid products, automatic clearing house.

10. Remote deposit capture.

11. Trade-financing transactions with unusual pricing features.

12. Payable through accounts and nested accounts if any, being operated via other correspondent banks.

7.23. Non Banking Financial Institution

1. Introduction:

Apart from banking entities, there are investment entities such as investment advisors, risk transfer entities such as insurance companies, Credit institutions such as Finance companies, and so on. They are financial institutions but do not have banking license hence, they are termed as "non-banking financial Institutions". There are also small size businesses such as pawn shops, cashier's check issuers, check cashiers, payday lending, currency exchanges, and microloan organizations. They are also, are part of non-banking financial institutions. Non-Banking Financial Institutions are doing functions akin to that of banks; however, there are a few differences such as, several jurisdictions restrict Non-Banking Financial Institutions providing demand deposits to its customers.

They are not a part of the payment and settlement system and as such cannot issue checks to its customers, and in most of the jurisdictions, deposit insurance facility is not available for Non-Banking Financial Institutions. All the Non-Banking Financial Institutions are required to get registered. However, in some countries un-incorporated non-banking financial institutions are available.

2. Broad categorization of different types of Non-Banking Financial Institutions:

1. Insurance Company: An Insurance company is a financial institution which provides protection from financial losses for individuals and entities who are policy holders.

2. Investment Management Company: An Investment management company is a financial institution, principally engaged in investing in securities. Usually, they are regulated entities. Example, these companies in the United States are regulated by the U.S. Securities and Exchange Commission and must be registered under the Investment Company Act of 1940. Investment companies invest money on behalf of their clients who, in return, share in the profits and losses.

3. Loan Companies or Finance Companies: Loan Companies or Finance Companies are financial institutions carrying on as its principal business, providing of finance whether by making loans or advances.

4. Infrastructure Finance Company: The Infrastructure Finance Company is yet another financial institution engaged in the principal business of infrastructure loan. The credit facility such as term loans, project loans, etc. are granted by these companies to the borrowers in the specific infrastructure sectors Viz. Transport, Energy, Water and Sanitation, Communication, and Social and Commercial Infrastructure.

6. Micro Finance Institution: A microfinance institution is an organization that offers financial services to low-income population. These loans are generally issued to finance entrepreneurs who run micro-enterprises in developing countries. Examples of micro-enterprises include basket-making, sewing, street vending and raising poultry.

7. Leasing Company: A leasing company provides a physical asset or service for use by a commercial client or individuals for an established period of time in return for regular payments.

8. Brokerage Company: A brokerage company's main duty is to act as a middleman that connects buyers and sellers of securities, and facilitate a smooth transaction.

9. Asset Finance Company: An Asset Finance company is a financial institution carrying on as its principal business the financing of physical assets supporting productive or economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipment, moving on own power and general-purpose industrial machines.

10. Money Services Businesses: A money services business is a financial institution doing businesses of transmitting or converting money and related instruments.

11. Third Party Payment Processor: A Third-party payment processor is a financial institution, that allows merchants to transact online payments when they don't own a merchant account.

12. Venture Capitalist Firm: A Venture capitalist Firm provide funding to startup ventures and also, supporting small companies that wish to expand but do not have access to equities markets.

3. CDD requirements of Non-Banking Financial institutions:

1. NBFI License.

2. NBFI Registration Certificate or certificate of incorporation as applicable.

3. Constitutional documents such as Memorandum of Association and Articles of Association.

4. Ownership structure of the NBFI.

5. Tax certificates or Tax Identification number.

6. Identification and Verification of Controlling parties and if controllers are entities, the complete ownership structure of such entities.

7. Any other associated parties such as auditors.

8. Signature Mandate.

7.24. Micro Finance Institutions

1. Introduction:

Microfinance is the provision of financial services to low-income clients who traditionally lack access to banking and related services. They are very popular in India, Bangladesh and Indonesia. Microfinance is not just about giving micro credit to the poor rather it is an economic development tool whose objective is to assist poor to work their way out of poverty. It covers a wide range of services like credit, savings, insurance, remittance and also non-financial services like training, counseling etc. With financial inclusion emerging as a major policy objective in the country, Microfinance has occupied center stage as a promising conduit for extending financial services to unbanked sections of population especially the poor.

2. Salient features of Microfinance:

· Borrowers are from the low-income group.

· Loans are of small amount – micro loans.

· Short duration loans.

· Loans are offered without collaterals.

· High frequency of repayment.

· Loans are generally taken for income generation purpose.

2. CDD requirements of Micro Finance Institutions:

MFIs are registered as societies or trusts or companies or NBFI’s accordingly the CDD documents are collected.

7.25. State-Owned Entity/Enterprise

1. Introduction:

A State-Owned Enterprise or (SOE) is a body formed by the government through legal means so that it can take part in commercial activities. State-owned enterprises are independent bodies partially or wholly owned by government. They are also called ‘’Public entities’’ or ‘’Public sector undertakings’’ or ‘’government owned companies’’. A State-Owned Enterprise are legal entities established via a legislation, decree, resolution, executive order, etcetera. The SOE board of directors play a central function in the governance. The board of directors carries ultimate responsibility, including through its fiduciary duty, for SOE's performance. In this capacity, the board of directors acts essentially as an intermediary between the state as a shareholder, and the company and its executive management.

An SOE means any company in which not less than fifty-one per cent of the paid-up share capital is held by the Central or federal Government, or by any State Government or Governments, or partly by the Central or federal Government and partly by one or more State Governments.

*Note: The KYC officer should differentiate a SOE from government agencies or state entities established to pursue purely nonfinancial objectives.

State Owned Enterprises primarily operate in the domain of infrastructure (e.g., railway companies), strategic goods and services (e.g., postal services, arms manufacturing and procurement), natural resources and energy (e.g., nuclear facilities, alternative energy delivery), politically sensitive business, broadcasting, banking, demerit goods (e.g., alcoholic beverages), and merit goods (healthcare). State owned enterprises are usually beneficial because they reduce politicians' influence over the services provided.

2. CDD requirements of a State-owned enterprise:

1. Certificate of incorporation or Statute.

2. Constitutional documents (such as Memorandum of association or articles of association).

3. Identification and verification of Key controllers or directors.

4. Complete Drill down of the intermediary owners till the ultimate beneficial owners.

5. Financial Statements or Annual Report.

6. Associated parties such as auditors.

7. Signature Mandate.

7.26. Insurance Company

1. Introduction:

The first company which thought about protection along with making money by selling protection was, Insurance company. Insurance companies thought about life and constructed protection vehicles called Life, accident and health insurances. Insurance companies thought about businesses and constructed General Insurances such as auto Insurance, Property Insurance, Marine insurance, Fire insurance etc. There are also other insurances provided by the insurance companies such as Liability insurance and Guarantee insurance.

To explain:

1. Life insurance policies pay a death benefit as a lump sum upon the death of the insured to their beneficiaries.

2. Accident and health Insurance cover benefits in case of sickness, accidental injury or accidental death.

3. Property insurance helps cover stuff the policy holders own like home or car when damaged.

4. Liability insurance also called casualty insurance is a policy that offers protection to businesses and individuals from risk that they may be held legally or sued for negligence, malpractice or injury. This insurance policy protects the insured from legal payouts and costs for which the policyholder is deemed to be responsible.

5. Financial Guarantee insurance policy covers a lender from liability resulting from the failure of the borrower to repay the loan. It may also cover losses from a decrease in interest rates to the detriment of the lender. Financial guarantee insurance may cover different types of loans, but, in most U.S. states, usually does not include mortgages or certain credit lines.

There are also investments linked insurance schemes are a category of goal-based financial solutions that offer dual benefits of protection and Investment. Policy holders Insurance Plan is linked to the capital market and monies are invested in equity or debt funds depending upon risk appetite of the policy holder.

2. Salient features of Insurance Company:

  1. Role of Insurance companies is to operate by pooling risks amongst a large number of policyholders.

  2. Role of Insurance is to provide financial support and reduce uncertainties in business and human life.

  3. Those Individuals and Businesses purchasing insurance policies are called policy holders.

  4. By selling protection, Insurance companies receive premiums from the policy holders.

  5. The policy coverage and terms and conditions are given in the Prospectus of the insurance scheme.

  6. The policy holders will receive the protection amount as per the policy guidelines only when such incidents occur for which the policy holder holds the policy for.

  7. The policy holder does not get the money just like that, the policy holder needs to claim for the amount with the insurance company.

  8. Once all the formalities from insurance companies’ side are completed, the insurance company will disburse the claim.

  9. Life insurance is also required to be claimed by the nominees or beneficiaries nominated by the policy holder.

  10. Insurance companies can be important for the stability of financial systems mainly because they are large investors in financial markets

3. Annuities:

Annuities are retirement income products sold by insurance companies.

They include:

1. Lifetime Annuities:

Lifetime annuities pay regular income to the investor which is an income for life. Certain schemes will pay a nominated beneficiary an income for life after the primary investor die however, this is an option if chosen. Lifetime annuities include basic lifetime annuities and investment-linked annuities.

2. Fixed-Term Annuities:

Fixed-term annuities, which pay regular income for a set period, usually five or ten years, and then a ‘maturity amount’ at the end that investor, can use to buy another retirement income product or take as cash.

4. CDD requirements of Insurance Company:

1. Certificate of incorporation or Registration certificate.

2. Regulation proof of Insurance Company (if regulated).

3. Identifying the beneficial owners, and taking reasonable measures to verify the identity of the beneficial owners of the insurance company.

4. Directors and or officers who control the insurance company.

5. Prospectus.

6. Constitutional documents (Memorandum of Association and Articles of Association).

7. Tax Certificate (if applicable as per jurisdiction).

8. Associated parties such as auditors.

9. Financial Statements or Annual Report.

10. Signature Mandate.

7.27. Broker Dealers

1. Who are Securities Broker Dealers?

a. Introduction:

Securities Broker Dealers do business of sale and purchase of securities for self or for its customers. The securities broker dealers’ service to both individuals and institutional customers. Securities Broker Dealers have different compensation models based on the services provided by them. There is a small difference between broker and dealers of securities. Let us check the difference. Securities brokers arrange for the purchase or sale of stocks, bonds, and other securities on their customers' behalf. While, Securities dealers’ trade in securities on their own account. You may note that principal and dealer can be used interchangeably. Also, some dealers assist firms in issuing new securities in the capital markets. However, certain major banks especially the investment banks are both brokers and dealers and hence, combined they are called broker dealers.

b. Some of the salient features of Broker Dealers are:

  1. Without a brokerage account, an investor can't trade stocks.

  2. The broker dealers give the investor access to the stock exchanges.

  3. Broker Dealers are highly regulated in order to prevent fraud and mismanagement. Example, broker dealers in US are regulated by the Securities and Exchange Commission. Also, Broker dealers are required to register with Financial Industry Regulatory Authority or FINRA at US.

  4. You should also know that broker-dealers are self-regulatory organizations and are subject to applicable antifraud provisions and rules under the federal securities laws.

  5. First stage of Money Laundering is difficult in securities industry as cash component is not involved.

  6. However, the securities industry mostly runs on electronic transfers. Hence, use of broker dealers usually happens in the second stage after the money has been placed in financial institution and requires further layering to obscure source of funds.

  7. Some of the largest known broker dealers are, Fidelity Investments, Charles Schwab, Wells Fargo Advisors, TD Ameritrade etcetera.

2. Who are full-service brokers and who are discount brokers?

A Full-service broker provides one-on-one personal services. Such services include.

1. Research and advise on where to invest, which stock to purchase and which stock to sell etcetera.

2. Complete retirement planning Meaning, the process of determining retirement income goals and the actions and decisions necessary to achieve those goals.

3. Tax planning or reduction of the total tax liability.

4. Estate planning meaning, the preparation of tasks to manage an individual's asset base in the event of their death.

5. Personal investment strategies that will help cover the cost of a child’s education, a home purchase, or other financial goals.

While, a discount broker is a stockbroker who carries out buy and sell orders at a reduced commission rate. Discount brokers carry out only orders at cheaper costs, Meaning, they typically just execute orders for their clients. They do not offer personal consultations, advice or research on securities.

3. What are the vulnerabilities of Securities Broker Dealers?

1. Securities Broker Dealers can provide opportunities to quickly carry out transactions across borders with a relative degree of anonymity of the investors.

2. Broker dealers do not have to do high levels of suspicious transaction reporting relative to say banking industry.

3. Broker dealers often deal in varied products of securities and product variations of securities in different jurisdictions.

4. Broker dealers can enable possibility of Insider trading, market manipulation and securities related frauds.

5. Broker dealers can convert securities holdings to cash without significant loss of principal. 6. Broker dealers enable wire transfers to and from multiple jurisdictions.

6. The high commission provided to employees of broker dealers lead to employees helping clients to launder money without detection for retaining them.

4. In the context of a brokerage firm who is a Registered Principal?

Registered Principal would oversee the sales and trading functions, supervise an investment firm's regulatory compliance or its overall operations.

Permitted activities include trading, market making, underwriting, and advertising. You may note that sales and advertising literature must be approved by a principal prior to use. Individuals involved in investment banking may also be required to be Registered Principals.

In US the Financial Industry Regulatory Authority or (FINRA), as well as other regulatory bodies, requires individuals to pass the FINRA Series 24 exam on top of the usual exams required for broker-dealers, such as the FINRA Series 7 before they can become a Registered Principal.

Those who wish to be Registered Options Principals will need to pass the FINRA Series 4 Exam.

5. What are the CDD requirements for broker dealers?

1. Constitutional documents (such as Memorandum of association and Articles of Association) and Certificate of incorporation.

2. Registration Certificate or License (such as broker dealers registering with FINRA and obtaining license at United States.)

3. Regulatory proof; {such as Broker dealers registered with securities and exchange commission (IAPD) at United States.}

4. Listing proof (If applicable).

5. Ownership details in case the Broker Dealers are not regulated.

6. Identification and verification of Controllers.

7. AML Program (as per Jurisdictional Requirement).

8. Major Customer types of the broker dealers.

9. Financial Statements or Annual Reports.

10. Signature Mandate.

7.28. Arms Manufacturers and Dealers

1. Introduction:

The arms industry is a global business of manufacturing weapons, military technology and equipment, and marketing and selling of Arms. It consists of commercial industry involved in research and development, production, and the service of military material, equipment, and facilities. Arms producing companies, also referred to as defense contractors or military industry, produce arms mainly for the armed forces of states. Departments of government also operate in the arms industry, buying and selling weapons, ammunitions and other military items. Products include guns, ammunition, missiles, military aircraft, military vehicles, ships, electronic systems, and more. The arms industry also provides other logistical and operational support. “Arms Dealer” means an entity, which by way of trade or business, buys, sells, tests, exports or imports arms or ammunitions. The manufacture of arms and ammunition are regulated in various countries. Example, in India, it is regulated under a licensing system established by the Arms Acts (1959) and Arms Rules (1962) and is under Government domain. Private sector is not allowed in this sector. Generally, the defense ministries or Ministry of Home affairs licenses these companies.

2. CDD requirements of Arms Manufacturers and Dealers:

The CDD requirements for Arms Manufacturers and Dealers are same as per the corporate CDD requirements. The additional CDD requirements for Arms Manufacturers and Dealers are:

1. License from government to act as manufacturer or dealer of arms.

2. Safeguard measures taken by manufacturer ensuring storage of arms and ammunition.

3. Major Suppliers, dealers and intermediary agents and brokers information.

4. Major Buyers of arms and ammunition.

7.29. Diamond Dealers

1. Introduction:

The diamond sector is usually categorized as Designated Non-Financial Business and Professions. Diamonds is a commodity traded in international markets and, the diamond trade is a dynamic international trading sector. They are also used not only for trade but also for investment purposes, although probably to a limited extent. Diamonds are traded mainly through dozens of bourses and cutting and polishing centers around the globe. Diamonds are also used as a form of currency, which distinguishes this industry from other trade-based sectors.

The use of diamonds as a form of currency or as a means of payment is of significance from an AML or CFT perspective. The demand for diamonds remains high. The diamond trade is global in nature and can be highly complex. The characteristics of the trade vary along the supply chain and by location, whether it is African mining countries, diamond trading centers like Belgium, US, Israel and Dubai, or manufacturing centers such as India and China.

2. Understanding the Diamond Pipeline:

1. Rough Diamond Cutting and Polishing:

The beauty of a diamond is realized through cutting, faceting and polishing. Cutting and polishing centers exist in several parts of the world, with major centers existing in Belgium, India, Israel and China. Once the diamonds are cut and polished, they are ready for use in jewelry and are moved along the "pipeline" to be utilized in diamond jewelry manufacturing and sales. The transformation from a rough to a polished diamond is another vulnerable stage, as a diamond becomes much more difficult to track once it has been cut and polished.

2. Diamonds Dealers:

Once the diamonds have been cut and polished, they are ready to be sold for use in jewelry and, to a very limited but growing market, as an investment product. Diamond dealers are the first merchants of diamonds after they have been cut and polished, and often handle hundreds of millions of dollars’ worth of diamonds every year. These dealers usually operate from the major diamond dealing centers of the world including Antwerp, London, New York, Tel Aviv and in Dubai, India and China. Their clients include other diamond dealers, large diamond jewelry manufacturers and diamond wholesalers.

3. Diamond Wholesalers:

This segment of the industry deals in smaller amounts of diamonds. They often deal with specific products, such as size or quality spectrums of diamonds or diamonds with fancy cuts or patented cut styles and they are often involved in branding their diamonds. This segment of the industry usually sells to jewelry retailers.

4. Diamond Manufacturers:

Jewelry is manufactured and may be sold to jewelry wholesalers and then on to jewelry retailers. Increasingly, the manufacturer is selling directly to jewelry retailers and consumers.

5. Jewelry Retailers:

A diamond jewelry sale is the driver of the diamond industry and this occurs through retail jewelry sales. All of the processes that have previously occurred are in support of this segment of the industry. Diamond jewelry sales occur in virtually all countries of the world through brick and mortar vendors. Vendors exist as single independent stores or large corporate chains with hundreds of stores. Increasingly the internet is being utilized to market and directly sell diamonds and diamond jewelry to the consumer.

3. Kimberly Process and rough diamonds:

The Kimberley Process is an international, multi-stakeholder initiative created to increase transparency and oversight in the diamond industry in order to eliminate trade in conflict diamonds, or rough diamonds sold by rebel groups or their allies to fund conflict against legitimate governments. The Kimberley Process, which became operational in 2003, controls trade in rough diamonds between participating countries through domestic implementation of a certification scheme that makes the trade more transparent and secure; and prohibits trade with non-participants. Fifty-four participants representing 81 countries participate in the Kimberley Process, with industry and civil society participating as observers. Rough diamonds must be shipped in sealed containers and exported with a Kimberley Process Certificate that certifies that the rough diamonds have not benefited rebel movements.

4. CDD requirements of a Diamond Dealer:

1. Identify the self-regulatory body that oversees the diamond dealers (country specific requirement).

2. If dealer deals in raw diamond, collect Kimberly process certificate.

3. Certificate of incorporation or dealership registration (as applicable).

4. Constitutional documents such as Memorandum of articles and articles of association.

5. Ownership structure and Controllers such as directors or officers of diamond dealers.

6. Availability of AML Compliance Program (as required by the jurisdiction if applicable).

7. Identification and verification of AML Officer (Country specific requirement).

8. Dealer License (Country Specific requirement).

9. Financials or annual report

10. Signature Mandate.

5. The EDD questions applicable for Diamond Dealers are as given below:

1. Who are your major clients?

2. Who are your major suppliers?

3. Do you have agents or brokers or intermediaries (if any)?

4. What is the shipment mode for the diamonds?

5. Do you have Bill of Entry or documents evidencing import of rough diamonds?

6. Do you have Kimberly Certification in case of Rough Diamonds?

7. Which jurisdiction does the dealer has major businesses with?

7.30. Real Estate Companies

1. Introduction:

The real estate sector is one of the most globally recognized sectors. The real estate sector comprises four sub sectors namely, housing, retail, hospitality, and commercial. The growth of this sector is well complemented by the growth of the corporate environment and the demand for office space as well as urban and semi-urban accommodations.

2. Players of Real Estate:

1. Real Estate Developers: Real estate developers play a leading role in the industry, bridging the gap between construction ability and the customer’s need. Developers offer value in terms of design, cost, functionality and location. They work hard to absorb international trends, analyze the customers’ expectations and deliver quality realty products based on their experience.

2. Financial players: Banks, Offshore and domestic funds including private equity funds, foreign institutional investors, real estate funds or (REIT’s), mutual funds and hedge funds normally invest in real estate business.

3. Architects: Architect’s plan, design, and oversees the construction of buildings. To practice architecture means to provide services in connection with the design and construction of buildings and the space within the site surrounding the buildings

4. Contractors: A general contractor is responsible for the day-to-day oversight of a construction site, management of vendors and trades, and communication of information to involved parties throughout the course of a building project.

5. Environmental consultants: Environmental consultants identify sources of pollution and degradation for landowners, real estate developers and government agencies. They perform scientific investigations to discern a property's soil, water and air conditions, monitor for hazards and propose solutions to limit pollution and hazardous conditions.

6. Appraisers: Real estate appraisers play a key role in the process of valuing, selling and buying of homes. Their common duties include appraising homes, commercial real estate and other properties, preparing appraisal reports, keeping up-to-date on the local real estate market and handling additional responsibilities as needed. Real estate appraisers often specialize in commercial or residential properties. The daily duties of a real estate appraiser may include preparing reports on a property's value, inspecting and photographing a property and working on legal descriptions and data regarding multiple real estate properties.

7. Real estate leasing agents and sales brokers: Real estate agents and brokers facilitate the sale or leasing of real property. Brokers and agents usually specialize in either retail, office, residential, industrial, or land; however, their responsibilities are the same across property type. Depending on the industry, brokers and agents' responsibilities can range from obtaining the property listing, marketing the property, showing the property, negotiating with buyers or sellers, helping to arrange financing for the client, preparing contracts, and organizing the closing.

8. Property Managers: A property manager or estate manager is a person or firm charged with operating a real estate property for a fee.

* Note, every country in the world is making efforts to put up regulations across Real Estate in order, to protect the interest of consumers, to promote fair play in real estate transactions and to ensure timely execution of projects. Some countries already have made significant improvements in this field, where there are real estate acts built and real estates are registered.

3. CDD requirements of Real Estate:

CDD requirements will follow normal course of requirements of company or a corporate structure.

However, additional EDD information to be obtained are as follows:

1. Real estate financiers or lender information.

2. Identification and verification of Property manager. In case the property manager is an entity, a complete drill down of such corporate is required.

7.31. Mining Company:

1. Introduction:

Mining is the extraction of valuable minerals or other geological materials from the earth from an ore body, lode, vein, seam, or reef, which forms the mineralized package of economic interest to the miner.

Ores recovered by mining include metals, coal, oil shale, gemstones, limestone, dimension stone, rock salt, potash, gravel, and clay.

Mining is required to obtain any material that cannot be grown through agricultural processes, or created artificially in a laboratory or factory.

Mining in a wider sense includes extraction of any non-renewable resource such as petroleum, natural gas, or even water.

In most of the countries, the Coal Mines are reserved for the State-owned-entities or public sector.

However, captive mining can be by private companies engaged in production of iron and steel and chances of sub-lease for coal mining to private parties is possible. Some country governments have opened up the mining sector to foreign direct investment too.

2. CDD Information:

CDD requirements will follow normal course of requirements of company or a corporate structure.

However, Additional EDD information to be obtained is as follows:

1. Major Suppliers of the mining company.

2. Location of mining sites.

3. Source of mining operation funding.

4. Major buyers.

5. Mining License.

7.32. Travel Agents

1. Introduction:

Travel Company Agents or Agencies are companies who make arrangements of tickets for travel by air, rail, ship, help in provision of passport, visa, etc. It may also arrange accommodation, tours, entertainment and other tourism related services. Travel agents today have many options of business entity to choose from and the business plan for the venture would play a major role in finding the right fit. Most travel agents choose to have a Private Limited Company as it is one of the most widely used and recognized forms of businesses offering a host of benefits. The services provided by a travel agent are taxable and so travel agents are required to obtain a service tax registration in most of the countries.

However, small scale travel agents have the option of availing service tax exemption in case of some aggregate turnover as defined by the countries. Travel agents are required to register with Government as approved Travel Agents. This is not mandatory in many countries but, it is beneficial and provides recognition for the travel agent.

The aim and objective of the scheme for recognition of Travel Agent or Agency is to encourage quality standard and service in this tourism industry. International Air Transport Association or IATA is the trade association for the world’s airlines, representing some 240 airlines or 84% of total air traffic. IATA offers comprehensive training and professional development services for travel agents, and IATA accreditation is a very important seal of approval recognized worldwide.

Therefore, it is important for travel agent to consider becoming IATA members, and enjoy access to a range of tools and benefits.

2. CDD requirements of Travel Agency firms:

CDD requirements will follow normal course of requirements of company or a corporate structure.

However, Additional CDD information to be obtained is as follows:

1. Service Tax Certificate.

2. Travel agent License.

3. IATA Affiliation Certificate (if applicable).

7.33. Production Companies/Houses

1. Introduction:

A production company provides the physical basis for works in the realms of the performing arts, new media art, film, television, radio, and video. The production company may be directly responsible for fundraising for the production or may accomplish this through a parent company, partner, or private investor. It handles budgeting, scheduling, scripting, the supply with talent and resources, the organization of staff, the production itself, post-production, distribution, and marketing. Production companies are often either owned or under contract with a media conglomerate, film studio, entertainment company, or Motion Picture Company, who act as the production company's partner or parent company.

This has become known as the "studio system".

In the case of TV, a TV production company would serve under a television network. Production companies can work together in co-productions. A production company is usually run by a producer or director, but can also be run by a career executive.

In entertainment, a production company relies highly on talent or a well-known entertainment franchise to raise the value of an entertainment project and draw out larger audiences. This gives the entertainment industry a democratized power structure to ensure that both the companies and talent receive their fair share of pay and recognition for work done on a production.

The entertainment industry is centered on funding (example, studio investments, private investments, or self-investments either from earnings from previous productions or personal wealth), projects (example, scripts and entertainment franchises), and talent (Example, actors, directors, screenwriters, and crew).

Production companies are judged and ranked based on the amount of funding it has, as well the productions it has completed or been involved with in the past.

If a production company has major funding either through earnings, studio investors, or private investors, and has done or been involved with big budget productions in the past, it is considered to be a major production company.

These companies often work with well-known and expensive talent.

If a production company does not have much funding and has not done or been involved with any big budget productions, it is considered to be a small production company. These companies often work with up-and-coming talent. Further, Small production companies will either grow to become a major production company, a subsidiary completely owned by another company, or remain small.

2. CDD requirements of Production Companies/Houses:

CDD requirements will follow normal course of requirements of company or a corporate structure.

However, Additional CDD information to be obtained is as follows:

1. Copy of Contracts such as with a media conglomerate, film studio, entertainment company, or Motion Picture Company.

2. Major Contributors or Financers.

3. Other Networking parties involved.

7.34. Joint Ventures

1. Introduction:

Let us get started to understand how joint ventures help companies to become global companies within no time if managed properly.

You must have heard about Wilmar International.

Let us see its expansion to understand the joint venture model.

Kuok Group, now a key shareholder of Wilmar, incorporated Federal Flour Mills, now known as FFM Berhad, in Malaysia in 1966.

In 1988, the Kuok Group formed a joint venture, Southseas Oils & Fats, with Top Glory, a subsidiary of COFCO in Hong Kong, to build China’s first large-scale modern refinery, drum and consumer pack plant in Shenzhen.

The plant was commissioned in 1990 and became a huge success.

In 1993 Wilmar, ventured into China through a Joint Venture with Archer Daniels Midland (ADM) and Top Glory, a subsidiary of COFCO, and started construction of East Ocean Grains Industry which at the time was the first large, integrated oils and grains manufacturing complex in China.

Following its huge success, Wilmar and ADM went on about three years later to build five large-scale crushing plants mainly along the coast.

In the same year, formed a Joint Venture with the Adani Group of India to refine edible oils and manufacture consumer pack edible oils in Bangladesh.

In 1999, Wilmar through a Joint Venture with the Adani Group in India, the first project, a 600 Metric Tons per day oil refinery and consumer pack plant in Mundra, Gujarat commenced operation in 2000 and was expanded by another 1,000 Metric Tons per day in 2002. The Joint Venture operates 45 plants in eight locations in India today and its ‘Fortune’ brand is the country’s top-selling consumer pack soft oils.

In 2004 Wilmar, established a joint Venture with Pyramid Ltd to build the first 200 Metric Tons per day refinery and consumer pack oil plant in Colombo, Sri Lanka. It is today the country’s largest refinery, consumer pack oil and specialty fats manufacturer.

In 2005 Wilmar, entered a Joint Venture for an oil refinery project in Yuzhny, Ukraine and in 2008 merged it with NMGK which had refineries, crushing plants, margarine, mayonnaise and soap manufacturing plants in Russia. The Yuzhny plant is the largest refinery in Ukraine and NMGK is the largest seller of table margarine, mayonnaise and sauces in Russia.

In 2014 Wilmar formed a Joint Venture with Great Wall Food Stuff Industry Company Limited, the leading sugar company in Myanmar. The Joint Venture operates two sugar mills, a bio-ethanol plant and an organic compound fertilizer plant.

Hope you have observed how step by step through Joint Ventures Wilmar has grown as a group.

Today it is a leading agribusiness group in Asia and one of the largest globally.

The Group has over 500 manufacturing plants in 19 countries.

Extensive distribution network covering China, India, Indonesia and some 50 other countries.

Even Kellogg's, an American multinational food manufacturing could not stop having a Joint Venture with Wilmar international to enter Chinese market to sell cereals and other snack foods to consumers in China.

Joining hands together with Wilmar resulted in a profitable synergic relationship for both the companies as Wilmar International provided extensive distribution and supply chain network to Kellogg International and also Kellogg managed to enter into a new geography with this agreement and relationship.

From the story of Wilmar, we understand that Joint Venture, managed properly is a good model to get into other countries and establish the brand.

2. Joint Venture Detail:

A joint venture is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task.

This task can be a new project or any other business activity.

In short, a joint Venture also means a shared ownership, a shared returns and risks, and a shared governance model.

Advantages of Joint Venture:

1. A Joint Venture is a way to establish business other countries.

2. A company can access a new market through a joint venture model.

3. Joint Venture enables to gain scale efficiencies by combining assets and operations.

4. Joint Venture is a way to share risk for major investments or projects.

5. Joint Venture is a way to access skills and capabilities.

6. Joint Venture gives easy access to emerging markets.

7. A joint Venture can outperform wholly owned and controlled affiliates as two experiences are coming together.

3. How a Joint Venture can be brought about:

1. A Foreign investor buying an interest in a domestic company.

2. A domestic company acquiring an interest in an existing foreign firm.

3. Both the foreign and domestic companies jointly form a new enterprise.

In the UK, India, and in many Common Law countries a joint-venture must file with the appropriate authority the Memorandum of Association and Articles of Association.

A Certificate of Incorporation or the Articles of Incorporation is a document required to form a JV corporation in the U.S.

Companies are able to set up Joint Ventures in China through specialist company incorporation firms.

4. Some of the specialties of a Joint Venture:

1. A Joint Venture is officially separate from its Founders.

2. The joint venture usually comes up with its own name example, Maruti-Suzuki which is a separate legal entity, separate from Maruti and Suzuki.

3. Joint ventures have a separate liability from that of its founders.

5. CDD requirements of a Joint Venture:

1. Identify and verify the structure and ownership of the JV organization.

2. Identify and verify all legal and beneficial owners, directors, officers, and key employees, those critical to the JV.

3. Obtain Joint Venture agreements.

4. Identify JV's areas of operations.

5. Identify who the JV’s key customers are.

6. Obtain annual reports and financials of the JV.

7. Obtain and verify relevant corporate registration documents, and tax forms of the JV.

8. Signature Mandate.

7.35. Logistic Companies

1. Introduction:

Logistics is the process of planning, implementing and controlling the efficient, effective flow and storage of raw materials, in-process inventory, finished goods, services, and related information from point of origin to point of consumption, (including inbound, outbound, internal, and external movements), for the purpose of conforming to customer requirements.

There are various different types of logistics business as given below:

1) Courier Companies:

Courier Services are companies that transport and deliver documents, packages, and larger shipments of products. Couriers are distinguished from ordinary mail services by features such as speed, security, tracking, signature, specialization and individualization of express services, and swift delivery times, which are optional for most everyday mail services. As a premium service, couriers are usually more expensive than standard mail services, and their use is normally limited to packages where one or more of these features are considered important enough to warrant the cost.

2) Freight Forwarder:

A freight forwarder is a company that arranges importing and exporting of goods. A freight forwarding service utilizes established relationships with carriers, from air freighters and trucking companies, to rail freighters and ocean liners, in order to negotiate the best possible price to move shippers' goods along the most economical route by working out various bids and choosing the one that best balances speed, cost, and reliability. Freight forwarders handle the considerable logistics of shipping goods from one international destination to another, a task that would otherwise be a formidable burden for their client.

3) Third Party Logistics or (3PL):

A third-party logistics provider is a firm that provides services to its customers as a part of outsourced supply chain management functions.

Third party logistics providers typically specialize in integrated operation, warehousing and transportation services that can be scaled and customized to customers' needs based on market conditions, such as the demands and delivery service requirements for their products and materials. Often, these services go beyond logistics and include value-added services related to the production or procurement of goods, that is, services that integrate parts of the supply chain.

4) Cargo Services:

All articles, goods, materials, merchandise, or wares carried onboard an aircraft, ship, train, or truck, and for which an air waybill, or bill of lading, or other receipt is issued by the carrier. Cargo services include Air Cargo and Ship Cargo services.

2. CDD requirements for Logistic Companies:

CDD requirements will follow normal course of requirements of company or a corporate structure.

However, Additional CDD information to be obtained is as follows:

1. Logistics company applicable Licenses.

2. Tax Certification.

3. Enhanced Due Diligence Requirements:

1. Who are the Major clients of the logistics company?

2. What countries they have operations?

3. How many Branches they have and where?

7.36. Warehousing Services

1. Introduction:

A warehouse is a commercial building for storage of goods. Warehouses are used by manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They are usually large plain buildings in industrial areas of cities, towns and villages. They usually have loading docks to load and unload goods from trucks. Sometimes warehouses are designed for the loading and unloading of goods directly from railways, airports, or seaports. They often have cranes and forklifts for moving goods, which are usually placed on ISO standard pallets loaded into pallet racks. Warehouse companies manage designing and functioning for warehousing.

2. CDD requirements for Warehousing Companies:

CDD requirements will follow normal course of requirements of company or a corporate structure.

However, Additional CDD information to be obtained is as follows:

1. Service Tax registration Certificate.

7.37. Hedge Funds

1. Introduction:

a. Understanding the meaning of hedging:

In general terms, hedging is a way of protecting oneself against financial loss or other adverse circumstances. For example, purchase of insurance is a hedging strategy for protecting oneself. In terms of investment, hedging is often considered an advanced investing strategy to maximize investor returns and eliminate risk of financial losses.

b. What investors look for?

Throughout time investors have looked for ways to maximize profits while minimizing risk.

A hedge fund is such fund. It is an alternative investment fund that is designed to protect investment portfolios from market uncertainty. A hedge fund can basically invest in anything which can generate profits for their investors such as real estate, stocks, derivatives, and currencies. Hedge fund is constructed to take advantage of certain identifiable market opportunities. Hedge fund is structured as offshore corporation, Limited Partnership or Limited Liability Company. It can generate positive returns in both up and down markets. Only qualified or accredited investors can invest in hedge fund.

Qualified or accredited investors are mainly high net worth individuals, banks, insurance companies, endowments and pension funds. Hedge fund shares are generally offered as private placements to the above investors. For marketing purposes to the accredited investors, the hedge fund release private placement memorandum or simply PPM. The PPM will outline the terms of the hedge fund offerings, including the buy in amount, the funds distribution policy, management team, risk factors and more.

A hedge fund usually trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction and risk management techniques to improve performance, such as short selling, leverage and derivatives. A hedge fund is managed by the hedge fund manager usually financial company or Limited Liability Company that employs professional portfolio managers and analysts in order to establish hedge funds. Also, for hedge fund investment there are minimum thresholds defined by the Hedge fund Manager. Example, in US the minimum hedge fund investment is $500,000. Hedge fund is advantageous as they invest in non-correlated assets. Finally, Two and twenty is a fee arrangement that is standard in the hedge fund industry. The 2% management fee is paid to hedge fund managers regardless of the fund’s performance. The 20% performance fee is charged if the fund achieves a level of performance that exceeds a certain base threshold known as the hurdle rate. The hurdle rate could either be a preset percentage, or may be based on a benchmark such as the return on an equity or bond index.

Bridgewater Associates, Renaissance Technologies, AQR Capital, Citadel, Blackrock are some of the known hedge funds.

2. How hedge fund is set up in U.S.?

A hedge fund can be constructed as a U.S. domestic hedge fund or, as an offshore fund, or as a combined domestic and offshore fund.

Domestic hedge funds are typically structured as limited partnerships, with the investment manager of the fund usually a limited liability company serving as the general partner of the fund. Investors in the fund contribute capital to the partnership and become the limited partners.

Offshore hedge funds can be domiciled in foreign jurisdictions as per that jurisdiction laws such as the Cayman Islands, Bermuda, the British Virgin Islands, Dubai, Guernsey, Jersey, Gibraltar, Hong Kong, the Isle of Man, Switzerland, Luxembourg, Liechtenstein and Nevis, among others.

However, among offshore jurisdictions that are favored by investors, the Cayman Islands, Bermuda and the British Virgin Islands have historically been the most sought-after because of their strong regulatory structures. When a jurisdiction’s regulatory bodies, such as the Cayman Islands Monetary Authority or CIMA, The BVI Financial Services Commission or BVI FSC and the Bermuda Monetary Authority or B.M.A., maintain strict policies and guidelines, investors view this as a form of risk management and therefore demand that managers select those jurisdictions.

Further, combined domestic and offshore fund have two structures namely,

1. Master-Feeder Fund Structure: A master-feeder structure consists of a U.S. domestic feeder fund and offshore feeder fund feeding into the offshore master fund.

2. Parallel Fund or Side-by-Side Structure: A side-by-side structure has a offshore fund and domestic U.S. fund that parallel each other in trading and have the same investment manager but maintain separate investment portfolios.

3. How hedge fund is set up in United Kingdom?

Set up of Hedge fund in the United Kingdom is a more complex process than in the United States. Hedge funds in the UK are more highly regulated and transparent, overseen by the Alternative Investment Fund Managers Directive. Hedge Fund submits applications to the Financial Conduct Authority. Post approval, Hedge funds are monitored for up to one year for rules related to conduct of business, financial records and reporting, compliance, and complaints.

Fund marketing is governed by the Alternative Investment Fund Managers Directive.

4. Important strategies of a Hedge Fund:

Hedge fund strategies encompass a broad range of risk tolerance and investment philosophies within a wide array of investments, including debt and equity securities, commodities, currencies, derivatives, real estate, and other investment vehicles.

1. Long or short equity: This is a strategy where irrespective of market direction whether bullish or bearish, the hedge fund makes profit by assuming long and short simultaneous positions. To explain, let us take IT Sector. Let us say the fund manager assumes that Microsoft performs better than Google. In such a case, hedge fund might sell short say $2 million of Google and long $2 million of Microsoft. If the manager is correct, the fund should profit irrespective of in which direction the sector moves as long as Microsoft is performing better than Google.

2. Investing in Distressed Debt: Hedge fund invests in distressed debt by purchasing the bonds of such companies which are financially distressed. Distressed companies are companies which either have applied for bankruptcy or on the verge of bankruptcy. Hedge fund looks out at potentially any company which could be successfully restructured or rejuvenated to become sound profit-making companies again. If the once-distressed company emerges from bankruptcy as a viable firm, the hedge fund can sell the company's bonds for a considerably higher price.

3. Arbitrage: Arbitrage strategies of hedge fund seek to exploit observable price differences between closely related investments by simultaneously purchasing and selling investments. Example, hedge fund seeks to exploit pricing differences in fixed income securities. Most commonly, by taking various opposing positions in inefficiently priced bonds or their derivatives, with the expectation that prices will revert to their true value over time. Another example can be, Merger Arbitrage involving taking opposing positions in two merging companies to take advantage of the price inefficiencies that occur before and after a merger.

4. Quantitative Analysis Funds: Quantitative hedge fund strategies rely on quantitative analysis to make investment decisions. Such hedge fund strategies typically utilize technology-based algorithmic modeling to achieve desired investment objectives.

5. Global Macro: Global macro refers to the general investment strategy making investment decisions based on broad political and economic outlooks of various countries. Global macro funds are not confined to any specific investment vehicle or asset class. They can include investment in equity, debt, commodities, futures, currencies, real estate, and other assets in various countries.

6. Multi Strategy Funds: Multi-strategy funds have the discretion to use a variety of investment strategies to achieve positive returns regardless of overall market performance.

4. CDD requirements of a Hedge fund:

Hedge funds are mostly structured as Limited partnerships, where the general partner is usually the investment manager (also called Fund manager) and the investors are the limited partners of the funds. The fund managers are usually structured as LLC due to ease of doing business. Further, hedge funds can also be structured as offshore corporation and LLC’s (which are treated as a partnership for US tax purposes). A master-feeder structure is a device commonly used by hedge funds to pool taxable and tax-exempt capital raised from investors in the United States and overseas respectively, into as a master fund. Separate investment vehicles, otherwise known as feeders, are established for each group of investors.

The challenge in the hedge funds is to identify the owners or the majority shares held by the limited partners. The information is not available publicly as the shares are privately placed and such information is only available with the client. Hence, accurate drill downs especially for the nominee accounts must be done carefully. The KYC officer is required to find out the ultimate beneficial owners who are sometimes hidden behind the nominee structures or offshore trusts or even the foundation structures, by asking relevant questions to the client. The controlling parties are easy to identify as they will be the officers or portfolio managers in investment management firm (or the general partner). Let us further see what documents are required for hedge fund onboarding.

1. Investment Management Agreement or IMA between the Hedge fund and the Fund Manager.

2. Private Placement Memorandum of the Fund.

3. Tax Certificate.

4. Structured chart for ownership details.

5. Controlling Parties such as investment manager of the fund.

6. Complete drill down of Investment manager unless the investment manager is regulated for example, with SEC (IAPD) in US.

7. Asset under Management details of the fund.

8. Signature Mandate.

7.38. Endowment Funds

1. Introduction:

There are several organizations such as universities, Non-profit Organizations, Charities, Temples, Churches and Hospitals which regularly receive donations. The donations can sometimes be financial assets too. You may note that some donors will donate funds only for specific purposes. All the above organizations are mostly structured as foundations. Hence, in-short all the donations whether money or financial assets come into the foundation kitty. In order to be utilized properly, with the funds received as donations by the foundation, they create an investment fund called the Endowment Fund.

Mostly the endowment funds are structured to utilize the investment income for immediate operational purposes. The principal is not touched so immediately allowing the funds to grow.

Some of the known examples of Endowment funds are Harvard University Endowment fund, Yale University Endowment fund etc. In U.S. the Uniform Prudent Management of Institutional Funds Act or UPMIFA, governs endowment spending by charitable corporations and by some trusts. All states except for Pennsylvania have enacted some form of this law since it was approved in 2006.

2. Types of Endowments:

1. True Endowment: The true endowment terms are governed by the donor. In such endowments, the donor usually states that the gift is to be held permanently as an endowment, either for general purposes or for specific programs as identified in a written gift agreement.

2. Quasi endowment: Reserve funds, financial windfalls, or unrestricted gifts that the board elects to put into endowment are quasi-endowments. The difference between a true endowment and a quasi-endowment is that the principal of a quasi-endowment may be spent at some point.

3. Term endowment: An endowment created for a set period of years is known as a term endowment. After the term runs out, the principal may be spent for organizational purposes. 4. Unrestricted endowment. The funds of the unrestricted variety may be used in any way by the organization as per their requirement including principal.

3. Three components of Endowment Fund:

1. Investment policy: This policy lays out what types of investments a manager is permitted to make that is, whether it is aggressive, passive or otherwise.

2. Withdrawal policy: A policy guiding the fund managers adherence as when to withdraw the principal and interest from the fund for organizational purpose usage.

3. Usage Policy: This policy explains the purposes for which the fund may be used. Typically, the donor defines the usage guidelines of an endowment fund. The donors provide the funds with the desire to achieve a certain end.

4. Special Endowments applicable to universities:

You may note that in addition to a general university endowment fund, institutions may also maintain a number of restricted endowments that are intended to fund specific areas within the institution, including professorships, scholarships, and fellowships. Let us see each of these.

1. Endowed Professorships:

An endowed professorship or endowed chair is a position permanently paid for with the revenue from an endowment fund specifically set up for that purpose. Typically, the position is designated to be in a certain department. Endowed chair or professorship is the highest academic award that the University can bestow on a faculty member, and it lasts as long as the University exists. Thus, it is both an honour to the named holder of the appointment and also an enduring tribute to the donor who establishes it.

2. Endowed scholarships and fellowships:

An endowed scholarship is tuition and other cost assistance that is permanently paid for with the revenue of an endowment fund specifically set up for that purpose. It can be either merit based or need-based. Fellowships are similar, although they are most commonly associated with graduate students. In addition to helping with tuition, they may also include a stipend. Fellowships with a stipend may encourage students to work on a doctorate.

5. CDD requirements of Endowment Funds:

Endowments are organized as a trust, a private foundation, or a public Charity. The CDD requirements depend on the structure of the endowment funds. Meaning whether Endowment funds are in the form of say a corporate or a trust. But at minimum, the below documents are required.

1. Identification of Investment Manager: Investment Manager of endowments is responsible for sustainably grow the funds by say, investment of the endowments.

2. Policy Document: The endowment funds are usually governed by the Policy Document example, “terms of reference” is usually the policy document for University Endowments.

3. Identification of Sponsor: Sponsor is the one who has created the Endowment fund example, the university or a church.

4. Identification of Board of Directors or Trustees: Based on how endowment is structured, the management committee also called investment committee comprises of board of directors or Trustees who oversee the fund administration and take decisions for the endowment fund.

6. Enhanced Due Diligence for endowment fund:

1. Who are the major donors for the funds?

2. What is the investment objective of the funds?

3. How the funds will be utilized?

4. What is the life of the endowment (if applicable)?

7.39. SICAV

1. Introduction:

“SICAV” stands for société d'investissement à capital variable or Investment Company with Variable Capital. In other words, it is a fund incorporated as a company with assets consisting of shares, bonds or derivatives or a combination. In short, a SICAV is a public limited company whose shares are offered to the public, and whose sole purpose is to invest in securities. A SICAV’s share capital is always equal to the value of its net assets, hence the “variable capital” in its name. SICAV funds are similar to open-end mutual funds in the U.S. Shares in the fund are bought and sold based on the funds current net asset value. Since SICAV is a corporate structure, it has a board of directors. The shareholders are the investors of the SICAV Funds. Important point to note that a SICAV may be independent or set up as a subsidiary of a bank or insurance company.

A SICAV collects money from different investors and passes it on to a professional fund manager. The fund manager invests it in securities by buying, selling or swapping securities. The fund manager takes care of the fund portfolio’s day-to-day management and aim to obtain the best possible return for investors.

There are different types of SICAV’s which are:

1. Equity SICAV’s: Equity SICAV’s come with high-risk investments aiming for good long-term profitability.

2. Bond SICAV’s: Bond SICAV's are more secure and target average returns.

3. Diversified SICAV's: Diversified SICAV's invest in both equities and bonds to generate the highest possible capital gain

4. Money market SICAV’s: Money market SICAV’s also called cash SICAV’s are short-term investment with low risk and with low returns.

The decision on where the investor should put money will depend on objectives of the investors. A SICAV lists all of its characteristics in a prospectus that is provided to investors. Prospectus describes the fund’s objectives, investment strategy, risks and charges. Since, it is difficult trying to read and understand the whole prospectus; this is why SICAV’s produce KIID meaning “Key Investor Information Document”. A KIID is a document that is standard across the European Union in terms of form and content.

KIIDs outline the main characteristics of a fund. This information is intended to help investors understand the nature of the product on offer and the associated risks, and to make an informed investment decision. It is limited to two pages and contains the following information:

1. Description of the investment objectives and policy.

2. Fund risk and reward profile.

3. Related costs and fees.

4. Past performance.

Money invested in SICAV’s is liquid. Meaning, investors can buy and redeem their investments any time. They will be redeemed as per the Net asset value of the previous day.

2. Conditions of SICAV:

1. Limitation on Number of stockholders example, no fewer than 100.

2. Restrictions on investments.

3. Capital may vary between the minimum and maximum as established by the articles of association.

4. Minimum capital of SICAV example €2,400,000.

5. Regulated by the respective regulators in those countries. Example, Oversight and supervision is carried out by the Comisión Nacional del Mercado de Valores and the Dirección General del Tesoro y Política Financiera at spain.

3. CDD requirements of a SICAV:

1. Prospectus of the SICAV.

2. Registration Certificate of SICAV.

3. Regulation Proof.

4. Constitutional documents of SICAV (MOA or AOA).

5. Ownership details of the SICAV.

6. Identification of Fund manager.

7. Financial statement or annual report of SICAV.

8. Controllers such as directors or officers of the funds.

9. Assets under management of SICAV.

10. Investment management agreement between SICAV fund and the fund manager.

11. Identification of associated parties such as Auditors, Registrar and Transfer Agent.

12. Signature Mandate.

7.40. ICAV

1. Introduction:

Before we go into details of ICAV as a structure, let us see why Ireland hosts 5000+ UCITS and Alternative funds. Irish domiciled funds are deemed attractive of the efficiency with which they can be established (including a 24-hour approval process). The funds established in Ireland have legal certainty and flexibility. The funds established in Ireland have the depth of dedicated service providers catering to these products. Hence, today Ireland is one of the world’s leading centers for fund servicing.

2. A fund with special features:

Irish Collective Asset-management Vehicle or simply (ICAV) is a new type of “corporate fund” introduced by Ireland. ICAV provides investment managers and promoters with a corporate structure that is designed specifically for investment funds and which is not subject to rules or requirements designed for other forms of company. Like an investment company, an ICAV is a corporate entity that is governed by a board of directors and owned by shareholders. ICAVs are regulated funds and, therefore, have all of the benefits of a regulated structure.

The introduction of ICAV has omitted all of the general company law provisions which were deemed inappropriate in the fund context. ICAV brings flexibility to the single asset funds, which are relatively common in the context of property funds, and feeders in master-feeder structures. An umbrella ICAV or parent ICAV will be able to prepare separate accounts with respect to each sub-fund. Umbrella ICAVs are also permitted to cross invest between sub-funds so it is possible to have a single ICAV comprising the feeder and master in one legal entity. Not only that under the Umbrella structure, the multiple sub-funds can have segregated liability between them. The good thing about ICAV is that it is not required to be listed on a stock exchange. The ICAV will be able to be treated as a partnership for US tax purposes which is a primary attraction of this new product.

The Central Bank of Ireland is the relevant authority for registration purposes of an ICAV. There is no requirement to have subscriber shareholders. Each ICAV will feature the word ’ICAV’ as a suffix in its name. Once registered, Fund authorization is a separate process conducted through the fund authorization section of the Central Bank of Ireland. Fund authorization is an authorization to carry on ICAV business either as an Alternative investment fund or as a UCITS.

Also, ICAV can be established as standalone structure or as umbrella structure with a number of sub funds and share classes. It can be managed by an external management company or be a self-managed entity. The best thing about ICAVs is that the existing corporate fund structures will typically be able to convert to an ICAV rather than requiring the formation of a new structure. This applies to both Irish and non-Irish (offshore) entities and is a straightforward process.

3. Benefits of ICAV:

The investors in an ICAV benefit from limited liability protection (i.e., the liability of members of an ICAV is limited to the amount, if any, unpaid on the shares respectively held by them. There is no requirement for an ICAV to have aim of spreading investment risk. No Irish income tax at the fund level.

No Irish withholding tax / exit tax on all distributions to non-Irish investors and certain categories of Irish investors. No transfer taxes on the issue, redemption or transfer of shares. ICAV will be able to be treated as a partnership for US tax purposes which is a primary attraction of this new product.

4. CDD Requirements of ICAV.

1. The name of the constitutional document for the ICAV is “instrument of incorporation”.

2. Once registered a ‘registration order’ is issued for an ICAV rather than a “certificate of incorporation”. ICAV fund issues prospectus and key investor information document or (KIID) to investors.

3. As they are structured as companies, they file annual and periodic reports with regulators.

4. Investment Management agreement between the manager and the fund. Let us check on the CDD requirements of the ICAV.

5. Tax ID or Government ID of the fund.

6. A complete drill down of fund and fund manager.

7. Controllers of the funds: Available in the prospectus.

8. Assets under management.

9. Investment Objectives of a Fund.

10. Details of associated parties such as Registrars, Transfer agents or Auditors

11. Financial Statements or annual report.

12. Signature Mandate.

7.41. UCITS

1. Introduction:

Undertakings for Collective Investment in Transferable Securities, commonly referred to as UCITS, are collective investment schemes established and authorized under a European Union legal framework under which a UCITS established and authorized in one European Union Member State can be sold cross border into other European Union Member States without a requirement for an additional authorization. This so-called “European passport” is central to the UCITS product and enables fund promoters to create a single product for the entire European Union rather than having to establish an investment fund product on a jurisdiction-by-jurisdiction basis.

The other advantageous feature of UCITS funds is it can be registered in Europe and sold to investors worldwide. UCITS funds are safe and regulated investment vehicles and are popular in Europe and Asia. UCITS is a group of assets, a portfolio of securities and cash, which belong collectively to investors. UCITS may be set up as a single fund or as an umbrella fund that is comprised of several ring-fenced sub-funds, each with a different investment objective and policy. By investing in a UCITS, essentially, the investor buys units and becomes a unit holder. Thus, by placing the money in UCITS each investor assigns the right to the management team of UCITS to invest on investors behalf.

Investors have the option to withdraw their money from the UCITS by liquidating the units held. There are two major rating agencies for UCITS which are, the Morningstar and S&P. UCITS can be managed by a management company based locally or any other European Union Member State. The Asset managers can use bench mark indicators such as stock exchange index or interest rate of a stock market to manage funds. The Inception date refers to the date on which the fund was first launched. UCITS property is secured by a different financial institution called custodians which are mostly investment banks. “Assets under Management” is a term used by asset managers to state how much money they are managing on behalf of the investors. “Assets under Management” includes all different share classes and currencies and is always expressed in the base currency.

2. Structure of UCITS:

The UCITS can be structured as the following:

1. Investment Company or Variable Capital Company.

2. Irish Collective Asset-Management Vehicle (ICAV): The ICAV is a new corporate vehicle designed specifically for Irish investment funds, and provides a tailor-made corporate fund vehicle for both UCITS and Alternative Investment Funds.

3. Unit Trust: Unit Trust is a contractual fund structure constituted by a trust deed between a trustee and a management company (or manager). A Unit Trust is not a separate legal entity and therefore the trustee acts as legal owner of the fund’s assets on behalf of the investors. Since the Unit Trust does not have legal personality, it cannot enter into contracts. A separate management company is always required and managerial responsibility rests with the board of directors of the management company. This separate management company can also be used to manage other UCITS. The trust deed is the primary legal document which constitutes the trust and it sets out the various rights and obligations of the trustee, the management company and the unit holders.

4. Investment Limited Partnership: An investment limited partnership is a partnership of two or more persons having as its principal business the investment of its funds in property of all kinds and consisting of at least one general partner and at least one limited partnership. The limited partner is equivalent to the shareholder in a company while the general partner would be the equivalent of the Management Company in a unit trust. The main advantage of a limited partnership is that the partnership does not have an independent legal existence in the way that a company does. All of the assets and liabilities belong jointly to the individual partners in the proportions agreed in the partnership deed. Similarly the profits are owned by the partners. Each partner is entitled to use any tax reliefs and allowances the partnership is entitled to as agreed between each partner, subject to any tax rules governing the allocation of the reliefs and allowances.

5. Common Contractual Fund: A CCF is a contractual arrangement established under a deed, which provides that investors participate as co-owners of the assets of the fund. The ownership interests of investors are represented by ‘units’, which are issued and redeemed in a manner similar to a unit trust.

3. Who are the players of UCITS?

1. The Manager: Under the terms of the Trust Deed, the Manager has the responsibility for the management and administration of the Fund's affairs.

2. Investment Manager: A description of the Investment Manager will be included in the Supplements for each Sub-Fund. The Investment Manager is not entitled to invest in Units of any Sub-Fund.

3. Administrator: The Manager appoints the administrator, registrar and transfer agent of the Fund with responsibility for performing the day to day administration of the Fund, including the calculation of the Net Asset Value of Unit of each Fund.

4. Trustee: The Manager appoints the Trustee of the Fund, pursuant to the Trust Deed. The Trustee is entrusted with following main functions:

a) Ensuring that the sale, issue, repurchase, redemption and cancellation of Units are carried out in accordance with applicable law and the Trust Deed.

b) Ensuring that the value of the Units is calculated in accordance with applicable law and the Trust Deed.

c) Notify the Fund or the Manager where the Trustee considers that the valuation of the Units does not comply with the Central Bank UCITS Regulations or the Trust Deed.

d) Monitoring of the Fund’s cash and cash flows; and

e) Safe-keeping of the Fund’s assets.

5. Distributor: The manager appoints distributor of UCITS who buys and sells Funds with the Transfer Agent.

4. CDD requirements of the UCITS:

1. Registration Certificate or Certificate of incorporation.

2. Regulation Proof.

3. Government ID or Tax ID.

4. Ownership structure i.e., a complete drill down of fund and fund manager

5. Controllers of the funds such as directors or trustees as per the fund structure.

6. Assets under management.

7. Financials or annual reports.

8. Investment Objectives of the Fund.

9. Details of associated parties such as Administrators, auditors, Transfer agents etc.

10. Signature Mandate.

7.42. Collateralized Loan Obligations

1. Introduction:

Collateralized loan obligation is a special-purpose vehicle, set up to hold and manage pools of

leveraged loans. To explain, a leveraged loan is a type of loan, that is extended by banks to

companies that already have considerable amounts of debt, or poor credit history. Just to note,

Companies which have considerable amounts of debts are not always loss-making companies.

But these companies have taken loans beyond saturation. Also, companies with poor credit

history will pay their installments; but not on time.

2. Securitization:

CLO is the process of securitization of loans. Let’s see how this happen:

A CLO syndicates leveraged loans of various banks for securitization. Those group of Banks which

hold several leveraged corporate loans as assets in their portfolio are happy to sell off or transfer

their asset portfolios to the CLO (which is legally in the form of an SPV), so that they can free up

capital to be used elsewhere. The CLO Manager (also called the asset manager or the portfolio

manager or the fund manager) carefully build tranches of these procured loans. There are two

tranches in a CLO structure the debt tranche and the equity tranche. The CLO manager then

approaches the Credit rating agency to get credit rating for each of these tranches. The tranches

are then sold off to various institutional investors. The investors who invest in debt tranche (in

the form of notes or bonds) receive scheduled debt payments (/Coupons) from the underlying

loans for the investments made. The main institutional investors who invest in CLO are pension

funds, Insurance companies, endowments and foundations. Some of the HNI clients also are

investors of the CLO through their foundations or family offices. Let us learn the tranches in detail

as given below:

3. Tranches of CLO:

There are two tranches containing in the CLO. They are Debt Tranches and an Equity Tranche.

The debt tranches are kind of notes or bonds and the equity tranche is ownership in the CLO. The

Tranches could something looks like this:

1. Triple A rated Tranche, also called highest grade credit or safest of the assets. Hence, they

are paid the lowest interest rate. However, for cash flow distributions, they are the first

to receive the payments followed by other tranches below.

2. Double A rated Tranche, also called high grade credit with much safer assets and still low

interest rate paid but greater than a triple A rated tranche.

3. Single A rated Tranche, also called good grade credit with safe assets and medium interest

rate paid.

4. Triple B rated Tranche also called speculative grade credit with not so safe assets with

high interest rate paid.

5. Double B rated Tranche also called very speculative grade credit with assets having some

default with higher interest rate paid.

And at the bottom of the tranche is.

An equity tranche also called a tranche of substantial risks of default or highest defaulting assets

with highest interest rate paid among other tranches. The equity tranche is mostly held by the

originator (the CLO itself) or the sponsors.

The equity tranche represents a claim on all excess cash flows once the obligations for each debt

tranche have been met.

The tranches are created as per the risk appetite of the investors. For example, companies of

scale, such as pension funds, insurance companies, endowments and foundations quickly

purchase senior level debt tranches (such as AAA, AA) to ensure low risk and steady cash flow.

Whereas players such as, Mutual funds and ETFs normally purchase junior-level debt tranches

(BBB, BB) with higher risk and higher interest payments than that of senior level debt tranches.

4. Salient Features of CLO's:

CLO are very attractive because they have higher risk return. For example, a high yield corporate

bond if gives 3 percent returns per annum, the CLO double B tranche will give 5 percent returns

on investment.

The equity tranche can range a rate of return from say 12-20 percent which no other asset classes

may provide. But if the CLO structure fails, the equity tranche is taking up that loss. CLO pay’s

coupons or interest to the investors for their investment based on the basis of LIBOR rate (+ some

basis points).

a. Role of a Trustee in a CLO:

The role of a trustee will be to oversee disbursements to the investors that are due under the

terms of the securities issued. The trustee regularly reviews the reports and information

provided by the servicer (whose loans are securitized) to ascertain whether the assets securitized

will produce a cash flow necessary to meet the trust’s obligations to the investors. The trustee

also will be responsible for managing and investing any funds that come into its hands as trustee.

The trustee will see that tax forms required pursuant to administration of the trust are filed.

b. Role of Book Keepers in a CLO:

CLO have book keepers who are called administrators. The administrator is an affiliate of the

trustee who acts as the CLO bookkeeper, generating and posting periodic reports for investors

and rating agencies. These monthly and quarterly reports detail a CLO portfolio composition and

characteristics, purchases and sales, balances and reconciliation of accounts, informing investors

of required portfolio compliance, and distributions due to investors on a payment date.

c. Role of Custodian in a CLO:

The custodian is responsible for the safeguard of the securities issued by the CLO.

d. Role of CLO Manager in a CLO:

The CLO manager is responsible for bundling of purchased loans into tranches.

e. Investment Bank:

Also called arranger, the Investment bank is responsible for packaging and distribution (or sales)

of the securities issued by the CLO.

f. The Credit Rating Agencies:

Credit rating agencies assign rating to the tranches as per the loan’s probability of default, and

ability to pay principal and interest timely to the CLO investors.

5. Why some experts call the CLO unsafe?

a) CLO are just financial engineering that hide most of the risk that banks are taking. They

call them CLOWNs meaning collateralized loan obligations worth nothing. Investors can

find themselves with defaulted bonds.

b) Once a CLO is successfully issued, banks get encouraged to issue more CLO and will spread to other banks too.

c) Over exposure is the biggest problem of the CLO.

d) A credit event can have a devastating effect on the CLO business.

6. CDD requirements of a CLO:

1. Certificate of incorporation of CLO Fund (the SPV).

2. Board of directors of CLO Fund (the SPV).

3. Prospectus or the Offering Memorandum or Private Placement Memorandum.

4. Identification of Placement Agent (A commercial or investment bank hired by the CLO or

asset manager).

5. Identification and verification of the CLO Manager.

6. Identification and verification of Trustees.

7. Major institutional investors in the CLO who are the beneficial owners.

8. Identification of Sponsor.

9. Assets under Management of the CLO.

10. Identification of the associated parties such as custodian or administrator related to the


11. Investment management agreement between CLO manager and the CLO Fund.

12. Signature Mandate.

7.43. Closely Held Corporations

1. Introduction:

States, Closely Held Corporation is a private corporation with the following condition.

1. Has more than 50 percent of the value of its outstanding stock owned directly or indirectly by five or fewer individuals at any time during the last half of the tax year. And,

2. Is not a personal service corporation.

In general, a Closely Held Corporation is often a family-run corporation. The shareholder agreement describes how decisions are made, and the agreement places restrictions on the sale of stock. In a Closely held corporation, all management decisions are made by the shareholders. Hence, in a closely held corporation the shareholders are also the people who serve as the corporation's board of directors.

In USA the IRS distinguishes between active participation and passive activities. If a shareholder just has stock in the business and doesn't serve on the board or work in management that would be considered the passive activity. Stock associated with these companies are usually not traded publicly (or infrequently traded); rather the stocks are issued to a small group of family members who operate the business as a privately held S-Corporation. The shares of a closely held company are known as closely held shares also called “majority” or “controlling” stockholders. However, to qualify as a publicly traded company with closely held status, a minimum number of shares must also be held by persons outside the business, such as members of the public at large.

Since the majority shareholders rarely release any of their shares, this makes it difficult for an outside entity or corporation to attempt a hostile takeover, as only a minority stake is regularly traded. This can provide a sense of stability because all decisions made on the behalf of the business are solely for the interest of the business itself. However, this can also be a big issue with closely held corporations for investors. One cannot accurately determine the value of each share, because the shares aren't sold on the open market so frequently. The closely held corporation is set up the same way as a normal company or corporation.

7.44. Cooperatives

1. Introduction:

A Cooperative or simply called co-op is a popular concept in United Kingdom. A Cooperative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned enterprise. In simple terms, a co-operative is a business that is jointly owned and democratically controlled by its members. Co-operatives are trading enterprises, providing goods and services and generating profits. These profits are under the control of the members, who decide democratically how the profits should be used. Co-operatives use their profits for investing in the business, in social purposes, in the education of members, in the sustainable development of the community or the environment, or for the welfare of the wider community.

2. Various types of Cooperatives:

1. Consumer co-operatives: A consumer co-operative is a retail business which is owned by the consumers themselves. Their basic objective is to eliminate middlemen. The consumers join together and manage the business and the profit thus earned is retained among themselves in the proportion of their contribution.

2. Worker co-operatives: A workers cooperative is owned by the workers and they participate in its financial success on the basis of their labor contribution to the cooperative.

3. Community co-operatives: Community co-operatives are businesses which trade primarily for the benefit of their community. Controlled by the community themselves, they have open and voluntary membership and, crucially, they encourage people to get involved either by becoming a member, or by volunteering time r getting involved in another way.

4. Co-operative consortia: Co-operatives formed by a number of independent businesses, organizations or individuals, and owned and controlled by them. The members enhance their trade or reduce costs by working together on key activities such as leasing premises, buying equipment or marketing the members’ products and services.

5. Multi-stakeholder co-operatives: Enterprises that are owned and controlled by members drawn from a variety of areas. Membership might include employees of the co-operative, users of the co-operative, local residents, partnership organizations or relevant professionals.

6. Secondary co-operatives: Secondary co-operatives which is a co-operative formed by two or more primary co-operatives to provide sectoral services to its members.

3. How co-operatives incorporate as?

1. Industrial and provident society or IPS: It is generally accepted that the IPS route is the stronger form for a co-operative. It contains statutory protection of the co-operative principles, for example, one member one vote, and is designed to enhance democracy and protect the rights of the members. IPSs are registered with the Financial Services Authority or FSA. At UK, the FSA scrutinizes the governing document or Rules of an IPS application to register as an IPS. IPSs are permitted to issue shares to the public. Hence, if a co-operative particularly a community co-operative that wishes to raise funds from the public, then the IPS legal form is probably the most appropriate one to choose.

2. Private company limited by guarantee or shares: The limited company legal form is the most well-known and can be easily created. However, Private companies limited by shares are prohibited from offering shares to the public, so if the proposed cooperative wishes to raise funds from the public this legal form should be avoided.

3. Community Interest Company or CIC limited by guarantee or shares: The CIC is a relatively new legal form. It is a limited company but with special features and is available for use by organizations that wish to conduct their business for community benefit. One of its key features is an asset lock, whereby assets of a CIC are protected and cannot be distributed for private benefit. The asset lock may be useful for co-operatives wishing to apply for funding or promote themselves as not-for-private profit.

4. Areas of Cooperatives’ activity:

1. Retailing and community services: The co-operative movement began in the retail sector, with people pooling their earnings in order to buy unadulterated food wholesale.

2. Food co-operatives: Food co-operatives large co-operative consortia set up to enable members to share machinery or production costs. Also, there are many small-scale farmers and market gardens that co-operate with one another or who operate as worker co-operatives.

3. Care Co-operatives: Care Co-operative structures have a strong presence in social care. There are numerous childcare cooperatives and consortia providing homecare services to the elderly.

4. Energy Co-operatives: Energy Co-operatives are formed to create collective opportunities in sustainable energy production and supply.

5. Arts and crafts: There are a long tradition of independent artists and crafts-people coming together to form co-operative consortia to sell products, often pooling resources to lease or buy premises or to market their goods.

6. Printing, design and communications: Worker co-operatives for those working in printing, design and communications.

5. CDD requirements of Cooperatives:

1. Registration certificate or certificate of incorporation.

2. Senior Managers and officers of the cooperative.

3. Tax Certificate.

4. Nature and purpose of the cooperative.

5. Annual Report or Financial Statements of the cooperative.

6. Constitutional documents as per the structure of the cooperative.

7. Shareholder details of the cooperative along with identification and verification of major shareholders.

8. Signature Mandate.

7.45. Credit Unions and Building Societies

1. Introduction:

Banks and credit unions are both financial institutions. Credit Unions similar to banks offer services such as checking accounts, savings accounts and loans. The main difference between a bank and a credit union is that a bank has customers. But credit unions have members who own the institution. Meaning, Credit Unions are owned and run by its members, for the benefit of its members. Credit Unions are governed by a "one member, one vote" philosophy. In order to access the products and services offered by the credit union, a member must purchase an initial capital share of the credit union.

Credit unions like banks in most jurisdictions are also legally required to maintain a reserve requirement of assets to liabilities. If a credit union is unable to maintain positive cash flow and or is forced to declare insolvency, its assets are distributed to creditors (including depositors) in order of seniority according to bankruptcy laws. Like banks, Credit Unions also have capital, liquidity, risk management, record-keeping, and reporting obligations to regulators.

Credit unions sizes may vary from few handful members to hundreds. Credit Unions are "not-for-profit" because their purpose is to serve their members rather than to maximize profits. In many jurisdictions, credit unions rely on credit union centrals for a variety of services. A credit union central is best defined as a trade association for credit unions. A credit union central is owned by its member credit unions and helps to serve many of their shared financial or operational needs or back-office processes like check clearing and electronic funds transfer.

Further, Credit Unions are popular in countries such as US, Canada, Brazil and India. Since now we understood the concept of Credit Unions, lets understand the advantages of Credit Unions.

2. The advantages of Credit Union are:

1. The member of a credit union is just not a customer but is a part-owner hence, receives top-notch services.

2. The members of a credit union pay lower fees.

3. Credit unions are owned and run by likeminded members of a common community or workplace or religion etc. Meaning, usually, Credit union services are designed to benefit the local community and those who live there.

4. A credit union will get its members a lower rate on loans and typically enable its members to earn more on deposits than traditional banks.

5. Credit Unions generally will have low subprime members or no subprime members. 6. Credit unions are exempt from paying corporate income tax on their earnings. Going forward, the legal structure of a credit union is of cooperative model where members are owners.

3. Salient Features of the Credit Unions:

1. The credit unions are regulated entities. For example, in US, the federally chartered credit unions are regulated by the National Credit Union Administration, while state-chartered credit unions are regulated at the state level. To add on National Credit Union Administration or NCUA, it is an agency of the United States federal government. The federal government created the NCUA to monitor federal credit unions across the country. You should also know that the NCUA runs the National Credit Union Share Insurance Fund or NCUSIF. The NCUSIF uses tax dollars to insure the deposits at all federal credit unions. Most NCUSIF insured institutions are federal and state-chartered credit unions and savings banks. Accounts insured under NCUA insured institutions are savings, checking, money markets, share certificates or CD's, Individual Retirement Accounts and Revocable Trust Accounts.

2. Credit unions are dual-regulated in UK, which means that they are regulated by the Financial Conduct Authority and by the Prudential Regulation Authority.

3. There are two credit unions in Canada namely the Caisse and Populaires that carry out business across Canada and are federally regulated.

4. World Council is the leading international trade association and development agency for credit unions and cooperative financial institutions. World Council promotes the self-sustainable development of credit unions and other financial cooperatives around the world to empower people through access to high quality and affordable financial services. World Council advocates on behalf of the global credit union system before international organizations, and works with national governments to improve legislation and regulation. Its technical assistance programs introduce new tools and technologies to strengthen credit unions' financial performance and increase their outreach. World Council is funded by member dues, government agency and foundation grants and annual gifts to its foundation. World Council of Credit Unions and its subsidiaries are headquartered in Madison, Wisconsin, U.S. World Council also has a permanent office in Washington, D.C., and program offices worldwide.

5. Credit Unions can form its own subsidiaries for providing financial services. These subsidiaries require at least one credit union owner and are usually in the form of LP or LLC or Corporate. For Example, in USA a credit union service organization or simply CUSO is generally a for-profit subsidiary of one or more credit unions formed for this purpose.

6. CO-OP Financial Services is the largest credit-union-owned interbank network in the United States which provides an ATM network and shared branching services to credit unions.

7. FDIC in US maintains the details of federally chartered Credit Union details in their website.

4. Building Societies:

Building societies are mostly found in UK which resemble Savings and Loan Associations in the US in terms of they are also cooperative groups completely owned by their members, each of whom has a vote. Building societies can also be found in other countries, such as Australia, Ireland, and Jamaica. In the United Kingdom, building societies actively compete with banks for most consumer banking services, especially mortgage lending and savings accounts.

5. CDD requirements of a credit union or building society:

1. Regulation Proof.

2. Identification and verification of Board of Directors.

3. Charter of a Credit Union.

4. Bye-laws or Rules and Regulations of Credit Union.

5. Annual Report or financial statements as relevant.

6. Tax Forms.

7. Signature Mandate.

7.46. Dealers in Precious Metals

1. Introduction:

A dealer in precious metals and stones means an entity that buys or sells precious metals, precious stones or jewelry, in the course of its business activities.

2. Definitions:

1. Jewel: Jewel means an organic substance with gem quality market-recognized beauty, rarity, and value, and includes pearl, amber, and coral.

2. Precious Metal: Precious metal means Gold, iridium, osmium, platinum, rhodium, ruthenium, or silver, having a level of purity of 500 or more parts per thousand; and an alloy containing 500 or more parts per thousand, in the aggregate.

3. Precious Stone: Precious stone means a substance with gem quality market-recognized beauty, rarity, and value, and includes diamond, corundum (including rubies and sapphires), beryl (including emeralds and aquamarines), chrysoberyl, spinel, topaz, zircon, tourmaline, garnet, crystalline and cryptocrystalline quartz, olivine peridot, tanzanite, jadeite jade, nephrite jade, spodumene, feldspar, turquoise, lapis lazuli, and opal.

3. AML Design:

Each dealer shall develop and implement a written anti-money laundering program reasonably designed to prevent the dealer from being used to facilitate money laundering and the financing of terrorist activities through the purchase and sale of Jewels and Precious goods. The program must be approved by senior management. Each dealer should incorporate policies, procedures, and internal controls based upon the dealer's assessment of the money laundering and terrorist financing risks associated with its line(s) of business.

4. CDD Requirements of Dealers in Precious Metals:

The dealers usually are structured as company or a corporation. Hence, due diligence requirements of a company or corporate are applicable.

5. Enhanced Due Diligence:

1. The types of products the dealer buys and sells, as well as the nature of the dealer's customers, suppliers, distribution channels, and geographic locations;

2. The extent to which the dealer engages in transactions other than with established customers or sources of supply, or other dealers and their names and information.

3. Whether the dealer engages in transactions for embargo or restricted countries.

4. Whether a dealer has incorporated policies, procedures, and internal controls which avoid facilitating money laundering or terrorist financing.

5. Complete and accurate information on its business affiliations.

6. AML Program.

7.47. Joint Stock Companies

1. Introduction:

Joint-stock companies were initially formed in Europe as early as in the 13th century. They appear to have multiplied beginning in the 16th century. You may also note that European exploration of the Americas was largely financed by joint-stock companies. A Joint-stock company is organized for undertakings requiring large amounts of capital. Money is raised by selling shares to investors, who become owners in the venture. The owners of a joint-stock company expect to share in its profits.

The shares of a joint-stock company are transferable. If the joint-stock company is public, its shares are traded on registered stock exchanges. Shares of private joint-stock company stock are transferable between parties, but the transfer process is often limited by agreement, for example to family members. Incorporating a joint stock company gives its owners limited liabilities limited to their amount of capital invested. However, some jurisdictions still provide the possibility of registering joint-stock companies without limited liability. In the United Kingdom and in other countries that have adopted its model of company law, they are known as unlimited companies. There is no concept of Joint Stock Company in USA. Companies at USA established as a corporation or Corp in the United States is fully equivalent to a "joint-stock company" in other countries.

2. CDD Requirements of a Joint Stock Company are:

1. Certificate of incorporation.

2. Memorandum of association.

3. Articles of Association.

4. Financial Statement or Annual Report.

5. Government Id or Tax ID.

6. Signature Mandate.

7.48. Limited Liability Company

1. Introduction:

Before we proceed into details, we need to understand two definitions.

a. Pass-through tax treatment: Pass-through tax treatment means that the taxes of a business are literally "passed through" to the tax returns of the individuals who own the business.

b. Limited Liability: Limited liability means the business owners' liability for debts is restricted to the amount they put into the business. In other words, owners' private assets are not at risk if the company fails.

2. Why Limited liability came into picture?

In 1977, The state of Wyoming in United States first passed legislation allowing a new type of a company called a Limited Liability Company. Because, In United States corporations were eligible for the liability protection but not pass-through tax treatment. Partnerships were permitted pass-through tax treatment but lacked limited liability. There was not a single structure which had limited liability and pass-through tax treatment together. Hence, Limited Liability Company was created. It is a hybrid entity in which both pass-through tax treatment and limited liability co-exist, legally. However, Banks and Insurance Companies cannot form Limited liability Companies.

3. Salient Features of LLC:

1. Limited liability companies must obtain a taxpayer identification number, also called an employer identification number or EIN. EIN is the business equivalent of a Social Security number. The EIN is a requirement to open a bank account. This is done by filing IRS Form SS-4.

2. It is easy to register a Limited liability Company in United States. The requirements for formation of Limited Liability Company may vary from state to state. However, commonly in all states, the owners or members must file the articles of organization with the state to start a Limited Liability Company. These articles establish the rights, powers, duties, liabilities, and other obligations of each member of the Limited Liability Company. Other information included on the articles of organization are:

a) The name and addresses of the Limited Liability Company members.

b) The name of the Limited liability Company’s registered agent.

c) Statement of purpose.

3. The Limited Liability Company’s “Operating Agreement” sets forth the terms governing the limited liability company, its interests, activities, management and provisions governing the rights and obligations of its members. Since the Operating Agreement is a contract, it must be agreed by all participating parties in the Limited Liability Company. Once implemented, the Operating Agreement remains in force until amended or changed by the unanimous consent of the Limited Liability Company members.

4. For registration purpose, however, operating agreement is not mandatory. It can be documented post formation of a Limited Liability Company. Almost any organization can be a member of a Limited Liability Company, including corporations, S corporations, other Limited Liability Companies, trusts, pension plans etc. Sometimes a holding company is formed, which owns the Limited Liability Company.

5. If the Limited Liability Company is a Professional Limited Liability Company, the members usually must be identified and their professional licenses must be examined and approved when the company is formed.

6. In most states, the Limited Liability Company must file an annual report every year.

7. If members want to do amendments such as change of ownership, change of address, change of registered agent and etcetera an amended articles of organization have to be recorded with the secretary of state by filing official paperwork.

8. The Limited Liability Company is dissolved if it fails to submit annual report. When a Limited liability company dissolves, its assets must be distributed according to state law, usually in the following order:

a) To creditors, including members who are creditors;

b) To members and former members to satisfy liabilities;

c) To members in proportion to their capital accounts.

9. A Limited Liability Company can be member managed or the members can hire an external manager for operating the Limited Liability Company. If the members decide to manage the Limited Liability Company themselves, they can set up the management any way they like.

10. There is no formal board of directors’ structure required. However, Limited Liability Company members must meet at least annually to keep records of the decisions they make at their meetings.

11. For U.S. federal income tax purposes, Limited Liability Company is treated by default as a pass-through entity. Meaning, Pass-through entities don't pay income taxes at the company level. Instead, company income is allocated among the owners, and income taxes are only levied at the individual owners' level.

12. If there is only one member in the company, the Limited Liability Company is treated as a "disregarded entity" for tax purposes and an individual owner would report the Limited Liability company's income or loss in his or her individual tax return.

4. Types of Limited Liability Companies:

1. Domestic or Foreign Limited Liability Company:

A domestic Limited Liability Company is one which has formed in let’s say in state of California and registers with state of California. On the other hand, a Foreign Limited Liability Company is one let’s say formed in state of California and registers with state of Delaware. Most of the Limited Liability Companies prefer to be a Delaware Limited Liability Company due to the below reasons:

1. Delaware Limited Liability Companies possess increased asset protection against creditors.

2. Very little information is required to form a Limited Liability Company in Delaware, and start up involves only a small filing fee.

3. The cost to maintain a Delaware Limited Liability Company is simple and inexpensive.

4. Once a year, a simple form and an annual Franchise Tax Fee must be filed with the Delaware Secretary of State, and a Registered Agent Fee must be paid annually.

5. You may note that all Delaware Limited Liability Companies are required by law to have a Registered Agent to accept service of process.

6. Delaware Limited Liability Companies are not required to disclose any information about the owners of the Limited Liability Companies.

2. Member-managed or Manager Managed:

If the Limited Liability Company is being formed by one person or a small number of people who will operate as equal partners, they usually manage the Limited Liability Company themselves and called member managed Limited Liability Companies. All members participate in the decision-making process of the Limited Liability Company and each member has a vote in business decisions. However, there are certain Limited Liability Companies where members are not active in the business except to put up money. Such Limited Liability Companies hire a manager to run the Limited Liability Company. Such Limited Liability Companies give the authority of the members to a manager which can be a corporate or another Limited Liability Company.

3. Single-Member or Multiple-Member:

Small businesses in the U.S. open single-member limited liability company. A single-member limited liability company has one owner. If a single-member limited liability company does not elect to be treated as a corporation, the limited liability company is treated as a "disregarded entity," which means that the IRS ignores the business for tax purposes and instead collects taxes through the business owner's personal income tax filing. A multi member limited liability company can have several owners or members. Multi-member limited liability companies are taxed as partnerships and do not file or pay taxes as the limited liability company. Instead, the profits and losses are the responsibility of each member; they will pay taxes on their share of the profits and losses by filling out Schedule E of Form 1040 and attaching it to their personal tax return.

4. Professional Limited Liability Company:

Professional Limited Liability Company is formed by professionals such as attorneys, physicians, certified public accountants, veterinarians, architects, life insurance agents etc. The major difference between the Regular and professional limited liability company is. Only persons licensed to practice the profession may be members of a professional Limited Liability Company. They submit their copy of license with state while registering for a Professional limited liability company.

5. CDD requirements required for an LLC:

1. Articles of incorporation.

2. Operating agreement.

3. Tax Identification Number.

4. Identification and verification of Members.

5. Identification and verification of Managers (if Manager Managed LLC).

6. Professional License or proof of profession in case of Professional LLC.

7. Ownership details of the LLC.

8. Financials of the LLC.

9. Associated parties such as auditors.

10. Signature Mandate.

7.49. Mutual Savings Bank

1. Introduction:

Mutual Savings bank is more of a U.S. concept migrated from Scotland. The concept of mutual savings bank was started when Reverend Henry Duncan established the first mutual savings bank in 1810 in Scotland.

His ideas spread rapidly at United States with the founding in 1816 of two savings banks

1. The Provident Institution for Savings at Boston.

2. The Philadelphia Saving Fund Society in Philadelphia.

Both of which are now among largest savings banks at U.S.

Similar to S&L mutual savings banks was specially designed for low-income individuals to allow customers maintain accounts with low balances while earning interest. It is a perfect thrift institution as the meaning of thrift is to save money. Mutual savings bank can be more compared to a community banking as the members own the business. While, mutual savings banks are mostly state-chartered, state-supervised some are also subject to federal regulations as they choose to do so.

2. Salient Features of Mutual Savings Bank:

1. They are non-stock institutions owned entirely by their depositors.

2. Earnings are distributed quarterly or semiannually to savers in the form of dividends.

3. Depositors of a mutual savings bank have no voice in management.

4. Policy rests in the hands of board of trustees whose original members were selected by those who organized the bank.

5. Trustees are usually elected for life and generally serve without either salaries or fees. Day-to-day operations like those in any other corporation are directed by officers or board of directors chosen by the trustees.

6. The main business of mutual savings banks is collecting and channeling savings deposits of small investors into mortgages, Government bonds, stocks, and other securities.

7. Most states permit mutual savings banks to invest only in an approved list of securities prepared by the state legislature or the state agency supervising the banks. Ordinarily, this permits the purchase of securities such as U. S. Government obligations, certain municipal bonds, some Canadian bonds, obligations of the World Bank, good grade secured railroad and utility bonds, high quality industrial bonds, and “blue-chip” preferred and common stock.

8. In general, they do not accept demand deposits (or business current account) and hence cannot conduct many ordinary commercial banking operations. They do, however, offer safe deposit facilities, sell travelers’ checks, and collect funds for their customers.

9. Mostly the savings bank maintains school accounts, vacation and Christmas club deposits.

10. Mutual savings banks are primarily mortgage lenders. Their heavy investments in mortgages and other high-yielding assets make them a profitable institution. However, their loan activities are restricted.

11. Most of the mutual savings bank’s deposits are covered by the Federal Deposit Insurance Corporation or FDIC.

12. Mutual savings banks are directly supervised and examined by the state banking departments or their equivalents in the states in which they are incorporated. However certain savings bank belongs to the Federal Deposit Insurance Corporation. A very few banks have also joined the Federal Reserve, and others are members of the Federal Home Loan System subject to further regulation from these organizations.

3. CDD requirements of Mutual Savings Bank:

1. Charter or license issued by a State or Federal government.

2. Identification and verification of members or depositors of the bank.

3. Financial Statements or annual report.

4. Identification and verification of controlling parties such as board of directors.

5. Associated parties such as Auditors.

6. Signature Mandate.

7.50. Mutuals

1. Introduction:

Mutuals or Mutual organizations have been around for centuries. Mutuals are often are specialized organizations. They are formed by and for a group or community who often have common needs. Example is Savings & loan associations. Simply, Mutuals are businesses owned by its customers who are the stockholders or owners of the Mutuals. Example, many insurance companies are structured as Mutuals, meaning that policyholders receive dividends or receive a discount in premiums. Many banking trusts and community banks in the U.S., as well as credit unions in Canada, also are structured as Mutuals. Mutuals are also able to minimize the principal–agent problems.

However, recently, many Mutuals have gone through demutualization meaning, they have converted themselves to a joint stock corporation. As part of this process, stockholders or policy holders get a one-time stock in the newly-created joint-stock corporation. Mutuals are not traded on stock exchanges, therefore their investment strategy avoids the pressure of having to reach short-term profit targets and can operate as best suited to its members with the goal of long-term benefits. As a result, they invest in safer, low-yield assets such as government bonds or long-term mutual funds. However, because they are not publicly traded, it can be more difficult for stockholders or policy-holders to determine the below:

a. How financially is a mutual solvent?

b. How Mutuals calculates dividends for to its members.

Each year Mutuals hold Annual General Meetings where members are encouraged to give feedback through surveys, focus groups or events and help shape the future of the organization. Mutuals in their ethos embed helping others to help themselves. In a developing country, some mutual organizations appear as voluntary associations for gathering and pooling money to fund marriages, or a business start-up their members. Mutuals are run purely in the interest of their members. The members have a vote and a say in the running of the society. They are actively encouraged to attend and speak at general body meetings and contribute towards major decisions. The money earned in the business is re-invested to provide improved products and services to meet the member’s financial needs. In most of the country’s Mutuals are in the form of societies or associations and some countries private corporations. The CDD requirements are required to be collected as per the structure of the Mutuals.

7.51. OEIC

1. Introduction:

OEIC Stands for Open Ended Investment Company. An open-ended investment company is investment fund in the United Kingdom. You may call these funds as mutual funds but, specific to United Kingdom. OEICs are regulated by Financial Conduct Authority or “FCA” in the United Kingdom. OEICs are governed by a separate corporate code set out in the Open-Ended Investment Companies Regulations, 2001 in the UK. OEICs must be authorized by the FCA in order to be promoted in the UK. OEICs are usually set up as umbrella structures with a number of sub-funds comprising various share classes and switching from one share class to another is usually permitted. Sub-funds do not have separate legal personality, but are separately managed, charged and account ed for, and assessed for tax. The assets and liabilities of one sub-fund are segregated from those of other sub-funds. Further, The OEIC must appoint an Authorized Corporate Director or ACD who is responsible for the operations of the OEIC. The ACD may be a UK-incorporated entity authorized and regulated by the FCA or established and regulated elsewhere in the European Economic Area. The ACD has ultimate regulatory responsibility for a fund and is accountable to the FCA. The director acts as an independent steward protecting the interests of investors in a fund. The director oversees the investment manager to ensure the fund is run in accordance with its stated objectives and with FCA rules and principles. An OEIC is exempt from UK tax on its capital gains, but does pay 20% tax on its income. The OEIC shares list on the London Stock Exchange. The price of the shares are based largely on the underlying assets of the fund.

2. OEIC Structure:

1. The investor purchases shares in an OEIC fund.

2. The fund manager of the OEIC puts various investors pooled funds to invest in the fund’s underlying assets. Every fund invests in a different mix of investments. Some only buy shares in British companies, while others invest in bonds or in shares of foreign companies, or other types of investments.

3. The Registrar help OEIC fund companies with record maintenance.

4. The Depository, an institution which holds the OEIC shares in electronic form.

5. The Auditor will audit the way the fund is being managed and, whether the record keeping is proper and up to date or not.

6. The Authorized Corporate Director of an OEIC is responsible for regulatory filings and proper functioning of OEIC funds.

3. Charges of an OEIC:

It can vary between funds or even between different share classes of the same fund. Here are some of the different fees and charges investor might pay:

1. Initial charge: The charge for buying new shares or units varies but expects the typical initial charge to be around 2%. For example, if you have £100 to invest and the initial charge is 2%, you’ll get shares worth £98.

2. Bid-offer spread: Many OEIC funds have both ‘bid’ and ‘offer’ prices for their units. The price investor gets if investor is selling is slightly lower than the price investor pay if investor is buying. Some OEIC funds only quote a single price.

3. On-going charges figure or simply OCF: The OCF figure gives an indication of the cost of investing in a manager’s fund. The OCF includes most of the fees and charges incurred by the fund including the annual management charge, registration fee, custody fees and any distribution costs. It excludes One-Off Charges (e.g., entry, exit or switching charges), Incidental Costs (e.g. Performance fees) and Portfolio Transaction Costs (the costs of buying or selling assets for the fund). The OCF figure provides a standard way of measuring the annual cost of investing in a fund and is based on the previous year’s financial expenses.

4. Annual Management Charge (AMC): An annual charge for the manager’s services. It can be up to 1.5% or more of the value of investors’ shares.

5. Exit or Redemption charges: The charge for selling shares or units, charged as a percentage of the total value of the sale. Many OEICs do not charge exit fees.

6. Moving between funds: Investor may pay a fee when moving between funds.

4. How the investor can buy OEIC?

1. Through an agent with ties to the manager

2. Directly from the fund management company

3. Through an online share dealing service or stockbroker.

5. OEIC specifics:

1. The constitutional document of OEIC is called instrument of incorporation.

2. The OEIC fund issues prospectus and key investor information document or (KIID) to investors.

3. As they are structured as companies, they file annual and periodic reports with the FCA.

4. Value Assessment Document or VAD has been introduced by the Financial Conduct Authority (“FCA”), the new rules designed to ensure all asset managers are acting in their investors’ best interest and, as a result, delivering value.

5. Investment Management Agreement, an agreement between OEIC and the Fund Manager.

6. Regulation proof that is, OEIC’s regulated by the Financial Conduct Authority.

7. Some Funds have Supplementary information documents and Owner’s manual.

6. CDD requirements of the OEIC:

1. Instrument of incorporation.

2. Regulation Proof.

3. Tax ID of the fund

4. Identification and verification of Authorized Corporate Director and Fund manager.

5. Controllers of the funds.

6. Assets under management.

7. Associated Parties such as Registrar or Auditor.

8. Prospectus.

9. KIID.

10. Investment Management agreement between and OEIC and the Fund manager.

11. Financial Statements.

12. Signature Mandate.

7.52. Offshore Banking Unit

1. Introduction:

The offshore banking units are located offshore either as branch or as a separate legal entity in that country. Offshore banking units are found in specific jurisdictions such as tax heavens or Free Trade zones. Offshore banking units are found throughout Europe as well as in the Middle East, Asia and the Caribbean. Most of the US Offshore Banking units are concentrated in the Bahamas, The Cayman Islands, Panama, Hong Kong and Singapore.

Further, in India the Offshore banking units can be established in special economic zones. Offshore banking units are given permissions with restrictions. One of the scenarios can be that, the offshore banking unit cannot service to the local residents.

For example, an Indian offshore banking unit in Singapore cannot service Singaporean residents however; they can source deposits from Indian Customers staying at Singapore. They are also allowed to give loans and make deposits by foreign entities and individuals.

2. Advantages of offshore banking units:

1. The regulations applicable to a normal bank branches are not applicable to the offshore banking units.

2. Offshore banking units are not subject to the local restrictions on foreign exchange.

3. In Countries like India and Australia, the offshore banking units receive tax concessions to attract foreign banks to open offshore banking units.

4. Offshore banking units can capitalize on international businesses where they are located.

5. Offshore banking units can give better services for businesses related to trade such as letter of credit or bank guarantees.

6. Offshore banking units can give better interest rates than local banks in that jurisdiction for both loans and deposits.

7. Offshore banking units are exempt from interest in withholding taxes in relation to certain offshore borrowings.

3. Products that can be offered by the offshore banking units:

1. Foreign Exchange.

2. Commodities.

3. Credit.

4. Derivatives.

5. Structure Products.

6. Trade Finance.

7. Guarantees or Letter of Credit.

8. Deposits Loans and Syndicated Loans.

9. Custody Services.

10. Remittances (Inward and outward).

4. CDD requirements of an Offshore banking unit:

1. Offshore Banking Unit License.

2. Constitutional documents of the parent bank if a branch. Constitutional documents of the Offshore Banking Unit if it is a separate legal entity.

3. Tax document or government ID.

4. Complete drill down of the parent bank ownership.

5. Identification and verification details of Controlling persons of the OBU.

6. Financials of the Offshore Banking Unit.

7. Associated parties of the OBU such as Auditors.

8. Signature Mandate.

7.53. Pension Funds

1. Introduction:

Pension funds are set up by employers, unions, or other organizations to provide retirement benefits for their employees or members. The funds for retirement benefits are pooled into pension fund. A pension fund is also known as a superannuation fund. Pension funds are the largest investors both in private placements and capital markets. Pension funds can be structured either as corporates controlled by board of directors who are usually different from those who controls the sponsor or Trusts controlled by Trustees of the pension funds. The Federal Old-age and Survivors Insurance Trust Fund is the world's largest public pension fund.

2. Meaning of Pension Plan:

A pension plan is a retirement plan where an employer adds money into a fund that may include contributions by the employee. The pool of funds is invested on the employee's behalf, and the earnings on the investments generate income to the employee upon retirement. The employees’ pension payments are determined by the length of the employees working years and the annual income they earned on the job leading up to retirement. Employers or companies that provide pension plans are referred to as plan sponsors.

3. Types of Pension Plans:

There are 2 main types of pension plans: defined benefit and defined contribution.

1. Defined-Benefit Plan:

A defined-benefit plan is an employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of employment and salary history. Defined-benefit plans provide eligible employees guaranteed income for life when they retire. A defined benefit plan promises a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount. The company takes responsibility for the investment and for its distribution to the retired employee.

This type of plan is called "defined benefit" because employees and employers know the formula for calculating retirement benefits ahead of time, and they use it to define and set the benefit paid out. In case of a funding shortfall to the employees, employers are legally obligated to make up the difference. In U.S. the benefits in defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation.

2. Defined Contribution Plan:

A defined contribution plan, on the other hand, does not promise a specific amount, of benefits at retirement. In these plans, the employee or the employer (or both) contribute to the employee's individual account under the plan, sometimes at a set rate, such as 5 percent of earnings annually. These contributions generally are invested on the employee's behalf.

The employee will ultimately receive the balance in their account, which is based on contributions plus or minus investment gains or losses. The value of the account will fluctuate due to the changes in the value of the investments. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans.

Let us now understand each of the defined contribution plans in detail.

1. 401(k) Plans: A 401(k) plan is primarily funded through employee contributions via pre-tax pay check deductions. But several employers offer matching contributions with their 401(k) plans. It is named after a section of the U.S. Internal Revenue Code. Contributed money can be placed into various investments, typically mutual funds, depending on the options m