Identification and Verification

Identification and Verification

Understanding „Identification and Verification“ is crucial for complying with the 4th and 5th Anti-Money Laundering Directives (AMLD) of the EU and the German Money Laundering Act (GwG). This guide delves into the specifics, focusing on different entities involved in financial activities.

Dual Nature of „Identification“ in Compliance Practices

In the realm of compliance and due diligence, the term „identification“ often encapsulates a dual process. Many obliged entities use it to refer collectively to two distinct yet interconnected stages: „establishing identity by collecting information“ and „verifying identity.“

Establishing Identity by Collecting Information

  • This initial phase involves gathering essential data about an individual or entity. For individuals, it typically includes personal details like name, date of birth, and address. For entities, it extends to information about their legal status, ownership structure, and key management personnel.
  • This stage sets the groundwork by assembling a profile that represents the person or entity in question.

Verifying Identity

  • Verification is the follow-up process where the collected information is cross-checked against reliable, independent sources or documents. This could be through official identity documents for individuals or legal registration documents for entities.
  • The aim is to ensure the accuracy and authenticity of the information gathered in the first stage, confirming that the subjects are indeed who they claim to be.

In summary, while these processes are distinct in function, they are often merged under the umbrella term „identification“ in many compliance contexts. This reflects the intertwined nature of these steps in establishing and confirming the identity of parties in financial transactions and business relationships.

Interchangeable Use of „Customer“ and „Contracting Party“ in Compliance Terminology

In the compliance and regulatory sectors, particularly within the framework of Anti-Money Laundering (AML) and Know Your Customer (KYC) practices, the terms „Customer“ and „Contracting Party“ are frequently used interchangeably by obliged entities. This synonymous usage highlights a practical aspect of compliance processes:

Customer as a Broad Concept

  • The term „Customer“ is generally understood as an inclusive label that represents any individual or entity engaging in a financial transaction or establishing a business relationship with an obliged entity. It is a more familiar and easily understandable term in everyday business language.

Contracting Party – A Specific Reference

  • „Contracting Party,“ on the other hand, refers specifically to any person or entity that enters into a contractual relationship with a financial institution or service provider. This term is often used in legal and formal documents to denote the precise nature of the relationship.

Rationale for Synonymous Usage

  • The overlapping use of these terms arises from the fact that, in most instances, a „Customer“ is effectively entering into a contractual agreement with the service provider, thereby becoming a „Contracting Party.“ Whether it’s opening a bank account, executing a transaction, or any other financial service, the customer is engaging in a contractually binding activity.

In conclusion, while „Customer“ and „Contracting Party“ might have nuanced definitions in a strict legal context, in the practical sphere of financial compliance, they are used interchangeably. This reflects the nature of the business relationship in the financial industry, where engaging with a customer inherently means entering into some form of contractual agreement.


Identification is the first step in due diligence and anti-money laundering processes. It involves collecting sufficient information to establish the identity of clients and other involved parties.

Contracting Party

  • A contracting party is any individual or entity entering into a business relationship or transaction.
  • Identification includes collecting basic information like names, addresses, and other pertinent details.
  • For legal entities, this extends to understanding their structure and ownership.

Persons Acting on Behalf of the Contracting Party

  • These are individuals who represent the contracting party in transactions.
  • Their identification is crucial to ensure they are authorized to act on behalf of the contracting party.

Beneficial Owner

  • Identifying the beneficial owner, who ultimately owns or controls the contracting party, especially in cases where the contracting party is a legal entity, is a key aspect of anti-money laundering measures.
  • The identification process involves understanding their role and the nature of their control or ownership.


Verification is the process of confirming that the information collected during identification is accurate and true.

Natural Persons

  • Verification for natural persons typically involves reviewing official documents like passports, ID cards, or electronic identification methods.
  • This process ensures the person’s identity matches the collected information.

Legal Persons/Partnerships

  • For legal entities and partnerships, verification involves scrutinizing documents like commercial register extracts, formation documents, or equivalent substantiating documents.
  • This step is vital to confirm the legal existence and structure of the entity.

4th AMLD

The 4th AMLD focuses on Customer Due Diligence (CDD), particularly on identifying and verifying customers and beneficial owners. Here’s a summary of these provisions:

Customer Identification and Verification

  • Obliged entities must identify their customers and verify their identities using documents, data, or information from reliable and independent sources.

Beneficial Owner Identification and Verification

  • Entities are required to identify the beneficial owners of customers (like legal persons, trusts, companies, foundations, etc.) and take reasonable measures to verify their identities. This includes understanding the ownership and control structure of the customer.

Verification of Representatives

  • When carrying out the measures in points (a) and (b), entities must also ensure that any person acting on behalf of the customer is authorized to do so, and they must identify and verify the identity of that person.

Application of CDD Requirements

  • Member States must ensure that obliged entities apply the CDD requirements. The extent of these measures can be adjusted based on a risk-sensitive basis.

Timing of Verification

  • Identity verification of the customer and beneficial owner should occur before establishing a business relationship or conducting a transaction.

Derogation for Business Continuity

  • Member States may allow delayed verification during the establishment of a business relationship if it’s necessary to avoid interrupting normal business and the risk of money laundering or terrorist financing is low. However, the verification must be completed as soon as practicable.

Derogation for Account Opening

  • Opening an account with a credit or financial institution is permissible before completing CDD, provided there are safeguards to prevent transactions until full compliance with CDD requirements.

Non-Compliance Consequences

  • If an entity cannot comply with CDD requirements, it must not proceed with the transaction or business relationship, must terminate the relationship, and consider reporting the customer as suspicious to the Financial Intelligence Unit (FIU). This doesn’t apply to certain professionals (like notaries, legal professionals, auditors, accountants, and tax advisors) in the context of ascertaining legal positions or representing clients in judicial proceedings.

Ongoing CDD

  • Obliged entities must apply CDD measures not only to new customers but also periodically to existing customers, especially when their circumstances change, on a risk-sensitive basis.

5th AMLD

The 5th Anti-Money Laundering Directive (Directive (EU) 2018/843) amends the 4th AMLD, particularly focusing on enhancing the processes of identifying and verifying customers and beneficial owners. Here’s a summary of these amendments:

Enhanced Customer Identification and Verification

  • The process of identifying and verifying the customer’s identity is expanded to include electronic means. This involves using electronic identification and trust services as outlined in Regulation (EU) No 910/2014, or other secure remote or electronic identification processes that are regulated, recognized, approved, or accepted by national authorities.
  • This amendment recognizes the growing role of digital technologies in identification processes.

Verification of Senior Managing Officials

  • When a beneficial owner is identified as a senior managing official (as per Article 3(6)(a)(ii)), obliged entities must take reasonable measures to verify the identity of the natural person holding this position.
  • Records of the actions taken and any difficulties encountered during the verification process must be maintained.

Proof of Registration for New Business Relationships

  • When entering into new business relationships with corporate entities, trusts, or similar legal arrangements that are subject to the registration of beneficial ownership information (as per Articles 30 or 31), obliged entities must collect proof of registration or an excerpt from the register.
  • This addition aims to ensure transparency in the ownership of corporate and legal entities.

Ongoing Customer Due Diligence

  • Obliged entities are required to apply customer due diligence measures not only to new customers but also periodically to existing customers. This should be done on a risk-sensitive basis, when customer circumstances change, or when there is a legal duty to review information related to the beneficial owners during the calendar year.
  • This includes obligations under Council Directive 2011/16/EU related to administrative cooperation in the field of taxation.
  • This change emphasizes the importance of continuous monitoring and updating of customer information.

German GwG

The German Money Laundering Act (Geldwäschegesetz, GwG) outlines comprehensive customer due diligence requirements, focusing on identifying and verifying individuals and entities involved in financial transactions. Here’s a summary of the relevant sections:

General Due Diligence Requirements

  • Identifying Contracting Parties and Their Representatives: Obliged entities must identify the contracting party and, where applicable, any person acting on their behalf. This includes verifying the representative’s authority.
  • Identifying Beneficial Owners: If the contracting party acts on behalf of a beneficial owner, the entity must identify the beneficial owner. For non-natural persons (like companies), this includes understanding the ownership and control structure.

Circumstances for Due Diligence

  • Establishing Business Relationships: Due diligence is required when establishing a business relationship.
  • Transactions Outside Business Relationships: Due diligence applies to transactions outside existing relationships, especially for fund transfers exceeding €1,000 and other transactions over €15,000.
  • Suspicion of Money Laundering or Terrorist Financing: It’s mandatory regardless of any exemptions if there’s suspicion of money laundering or terrorist financing.
  • Doubts About Previously Collected Information: If there’s doubt about the accuracy of previously collected information on the identity of involved parties.

Due Diligence for New and Existing Customers

  • New Customers: Obliged entities must perform due diligence for all new customers.
  • Existing Business Relationships: For existing relationships, due diligence should be done on a risk-sensitive basis, particularly when customer circumstances change, or as required by legal duties related to beneficial ownership information.


  • Timing of Identification: Identification should occur before establishing a business relationship or executing a transaction, but can be done shortly after if necessary to maintain business continuity and if the risk is low.
  • Real Estate Transactions: Specific provisions apply to real estate transactions.
  • Repeated Identification: If previously obtained information is doubted, a new identification is required.
  • Information Collection: Specific personal information must be collected for natural persons and legal entities, with additional requirements for beneficial owners.

Identity Verification

  • Verification Methods for Natural Persons: Identity verification of natural persons can be done using official documents, electronic proof of identity, qualified electronic signatures, or notified electronic identification schemes.
  • Verification Methods for Legal Entities: For legal entities, verification involves extracts from official registers, formation documents, or direct inspection by the obliged entity.

Identity Verification Procedures

  • Verification Procedures: Identity must be verified either by examining the presented document physically or through an equivalent procedure ensuring similar security levels.
  • Regulatory Powers: The Federal Ministry of Finance, in consultation with other relevant authorities, can specify additional requirements or define suitable verification procedures.

Non-fulfillment of Due Diligence Requirements

  • If an obliged entity cannot fulfill the general due diligence requirements as outlined in subsection (1) points 1 to 4, it must not establish or continue the business relationship and cannot execute any transactions. This implies that if the entity is unable to identify and verify the customer, beneficial owner, or the nature of the business relationship satisfactorily, it is prohibited from proceeding with the business.

Termination of Existing Business Relationships

  • In cases where a business relationship already exists, the obliged entity is required to terminate or otherwise end it. This action is mandatory regardless of any other statutory provisions or contractual terms that might exist. This clause underscores the importance of ongoing due diligence and the necessity of ending relationships if due diligence requirements cannot be continuously met.

BaFin-Interpretation and Application Guidance on the German GwG

The BaFin Interpretation and Application Guidance on the German GwG provides a detailed framework for the Identification and Verification of Contracting Party, Persons acting on behalf of the Contracting Party and Beneficial Owners in Germany, as outlined in the GwG. The key aspects of this framework can be summarized as follows:

General Customer-Related Due Diligence Obligations

  • Identification of Contracting Parties: Includes authorized representatives for legal entities.
  • Identification of Persons Acting on Behalf: Check their authorization.
  • Beneficial Owner Clarification: For non-natural persons, understand ownership and control structure.

Identification Process

  • Contracting Party: Any natural/legal person involved in a business relationship or transaction.
  • Person Acting on Behalf: Includes legal representatives and messengers.
  • Identification Requirements: Collection and verification of information using specific documents.
  • Exemption from Identification: If previously identified and no changes suspected.

Verification of Identity

  • Natural Persons: Collect and verify personal details (name, birthplace, date of birth, nationality, address).
  • Legal Persons/Partnerships: Collect information such as name, legal form, register number, office address, and representatives.
  • Verification Methods: Include official documents, electronic proof of identity, qualified electronic signatures, and other approved methods.
  • Authorisation Check: For persons acting on behalf of the contracting party.
  • Simplified Identification: Possible under specific circumstances.

Clarification and Identification of Beneficial Owners

  • Obligation to Clarify and Identify: Determine if a beneficial owner exists, then identify them.
  • Definition and Specific Cases: Per Section 3 of the GwG, including legal persons, partnerships, foundations, and legal structures.
  • Multi-tier Structures: Analyze complex ownership and control structures.
  • Notional Beneficial Owners: In cases where no natural person can be identified.
  • Ownership and Control Structure Clarification: For non-natural person contracting parties.
  • Documentation and Record-Keeping: Document all measures taken for clarification and identification.

Special Considerations

  • Risk-based Approach: Adjust the intensity of due diligence based on the perceived risk.
  • Group-Wide Implementation: Importance in cases of international business relationships.
  • Silent Partnerships: Relevance in the context of beneficial ownership clarification.

The text underscores the importance of a thorough and detailed process for identifying and verifying the identities of contracting parties and beneficial owners, as well as understanding the ownership and control structures of entities involved in business relationships. It highlights the necessity for ongoing monitoring and updating of customer information, and the requirement for documentation and adherence to specific legal and regulatory provisions.