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What do market participants and new entrants need to know about KYC procedures? When are they a requirement?
By
Eszter Pontenagel
A KYC procedure, or Know-Your-Customer, refers to the process financial institutions go through to verify the identity and the ultimate beneficial owners (UBOs) of a market entrant, as well as define the risk the financial and legal profile of the entrant poses.
KYC procedures are internationally regulated and designed to prevent counterparties from intentionally or unintentionally participating in criminal financial activities. Thus, KYC procedures intend to safeguard the worldwide financial and energy systems.
In our experience, KYC procedures take on many names, depending on the entity requiring it, but in their core, they serve the same purpose.
A KYC procedure is usually required by all counterparties that a market participant needs to work with to open an account or achieve market access. This can be Transmission System Operators (TSOs), Independent System Operators (ISOs), National Regulatory Authorities (NRAs), bank guarantee providers, settlement and clearing banks, etc.
Some of the most complex KYC procedures we have seen, are when entering licensed energy markets like Poland, France, and Hungary. In these markets, several KYC procedures need to be completed during the market application process toward different counterparties. Furthermore, the counterparties here are likely to request additional supporting documents, apart from the ones originally published, such as financial reports, business plans, and compliance records.
As Denmark is a non-licensing market, in the simplest case, where a market participant already has a bank guarantee provider, settlement, and clearing bank, which are all accepted by Danish authorities, a market entry application can be accepted with only one KYC procedure.
You can read more about non-licensing markets in the section about barriers when your ‘BRP’ license is not recognized in other countries, here.
In its broadest terms, a KYC procedure consists of a predefined form, which a market entrant must fill out and sign, and a bundle of supporting documents, which the counterparty requests.
The main purpose of the KYC form is for the counterparty to understand the legal structure and the identity of key individuals (UBOs) in the applying company. This can include any basic information, such as names, addresses and identification numbers, and registration documents for companies.
Based on the KYC form and all the supporting documents a market entrant has submitted, the counterparty performs a due diligence check to assess the risk the entrant and their financial activities pose.
When an entrant is identified as a “risk party”, they can be subjected to an enhanced due diligence check, which can include requests for additional supporting documentation, as well as more strict ongoing monitoring after the market entrant is live on the market.
Regardless of their assigned risk status, all market participants are subject to ongoing monitoring after they are live on the market. Ongoing monitoring aims to ensure that the market participant’s information is up-to-date in the institutions’ archives. This can either be via preset requirements that certain documents need to be resubmitted regularly (yearly, for example) or ad-hoc requests for supporting documentation.
The document which is almost always requested is the applying company’s ownership structure, which identifies all UBOs. Additionally, supporting documents for each UBO are usually required. This can be copies of identity documents, criminal records, etc.
Most commonly, the supporting documents requested in an enhanced due diligence check (assuming they were not included in the original KYC submission) are company excerpts, criminal records, and financial records.
AML (Anti-money-laundering), ABAC (Anti-bribery & Anti-corruption policy) and CTF (Counter-terrorist financing policy) statements are an international legal requirement for KYC procedures worldwide.
KYC forms can be filled out on an integrated platform online or digitally (in a Word or PDF document), depending on the counterparty’s setup. Afterward, a print-out of the form is usually signed according to requirements and submitted with the supporting documents in either hard or soft copy.
Whether these submissions need to be legally translated, notarized or apostilled is up to each individual counterparty. Additionally, the signature type is defined by the counterparty and most commonly posted on their official website.
We at Time2Market follow the posted requirements by each counterparty, as well as the information we have gathered from previous applications with the same counterparty. Furthermore, we take on as much of the administrative burden of these procedures as possible, allowing you to focus on your operational activities.
We deliver. You excel.
Disclaimer: Time2Market ApS is not responsible for the completeness, accuracy, and actuality of the information provided. This article is intended for informational purposes only and should not be considered business or legal advice.
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