Wholesale Clients And KYC

Posted On: 8 October, 2019 Xiaoshu Liu

It is not uncommon to hear people say something along the line of “we only have wholesale clients. We don’t have to worry about AML stuff.” This article aims to bust this myth and explain how reporting entities that deal with wholesale clients arguably need to be more vigilant in carrying out their Know Your Customer (‘KYC’) procedures.  

Source of the Confusion

The confusion appears to have come from the different treatment of wholesale and retail clients under the Corporations Act 2001(Cth) (the ‘Corporations Act’) and the Australian Financial Services Licence (‘AFSL’) regime. AFSL holders that only deal with wholesale clients do not have to worry about Financial Services Guides, Product Disclosure Statements, or Australian Financial Complaints Authority (‘AFCA’) complaints.

However, no wholesale vs retail client distinction exists in the Anti-Money Laundering and Counter-Terrorism Financing (‘AML/CTF’) framework.

The Rules

KYC requirements are largely dealt with in Chapter 4 of the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 No. 1 (Cth) (the ‘AML/CTF Rules’, the ‘Rules’).

The Chapter imposes risk-based KYC obligations on reporting entities, concerning the different types of customers, such as individuals, corporations, trustees, partnerships, associations etc.

Part 4.1 provides several factors that need to be taken into consideration when risk assessing customers, including customer type, designated service, source of funds and wealth, delivery channel, jurisdiction, control structure of non-individual customers, and the nature and purpose of customer transactions.

It is noted that simplified verification procedures, and in a sense ‘reduced’ KYC rules, are available under certain circumstances, such as when a customer is a domestic listed public company, a registered managed investment scheme, or a government superannuation fund established by legislation. The reason is that these organisations are already subject to stringent regulation, and are often reporting entities with their own AML/CTF obligations.  

Wholesale Clients and KYC

‘Wholesale’ is not a customer type and certainly not a ground for regulatory concessions based on any of the risk factors listed above. Quite on the contrary, reporting entities that deal with wholesale clients may very well have increased ML/TF risks on their hands, and therefore need to be more careful when doing their KYC work.

  • Wholesale clients typically transact in much larger sums. Reporting entities need to have a better understanding of the source of the clients’ funds/wealth, and the purposes of the client transactions, to be reasonably certain that the funds are from a legitimate source, and the client transactions are making economic sense.
  • Wholesale clients very often take the form of non-individual entities, such as corporations and trustees, making it easier to hide the real persons behind the ‘curtain’. Identifying (and reasonably verifying) beneficial owners in these cases is crucial in helping reporting entities to understand who they are truly dealing with.

In summary, ‘wholesale clients only’ itself is not an excuse for having lax AML/CTF systems and controls. Reporting entities need to have KYC processes in place that match with their risk assessment of their customers.

Please get in touch if you have any questions, comments or if you need assistance.

Note: Xiaoshu is not a legal practitioner. This article has been provided for general purposes only and cannot be construed as legal advice.