Buyer Be Prepared: What Is Expected for KYC

By Sarah Allan of Penningtons Manches Cooper

When it comes to buying or selling a yacht “Know Your Client” (KYC) and due diligence obligations are an essential part of any transaction. It is worth knowing what yacht brokers, banks and professional service providers will require to satisfy their own legal obligations and ensure that the purchase of your long dreamed of yacht can go ahead timeously.

The reality is the yachting industry is not alone as a target for financial crime, and we must all be alert to the telltale signs. Anyone acting in a regulated sector will know that a failure to have the correct policies, controls and procedures will have significant implications for them in the event of breach with potential fines or criminal liability.

Yacht transactions invariably involve the transfer of substantial sums from the buyer to the seller, and frequently with the central agent broker acting as a stakeholder holding on to the deposit. Therefore, the yacht brokers must exercise due diligence before they can receive or pay such sums, and specific terms are now incorporated into all purchase agreements.

Not only is it a matter of ensuring regulatory compliance but all parties will wish to ensure that funds are not detained in the banking system with consequent problems. Even worse, that a transaction could be fraudulently intercepted.

The importance of these processes cannot be underestimated. To appoint a lawyer, obtain insurance, open a bank account or transact these obligations must be complied with.

Know Your Client (KYC) & Source of Wealth

The principal purpose of KYC checks is to prevent money laundering, being the means by which criminals seek to legitimise criminal proceeds by distancing such proceeds from their source. KYC requires regulated institutions to collect adequate information about their clients and customers to assess their risk level, prevent fraud, and comply with regulatory requirements. Failure to run the checks, even on a legitimate individual, is a breach of the law. Equally as a buyer or seller you will probably want to know who you are transacting with, not least because you will want to know the seller owns the yacht and the buyer can indeed pay.

The level of KYC will depend on both the type of entity, whether individual or company and risk factors, such as the nationality of a person and whether they are by definition a PEP (Politically Exposed Person). In practical terms that could simply mean they have a prominent public function such as a politician.

For an individual their identity, nationality and residence must be proven. For limited companies and LLP’s the existence of the entity must be established and significantly the ultimate beneficial owner and their identity. If the company is part of a wider structure or trust, a structure chart will also be required linking the prospective owning entity to the ultimate beneficial owner. The documentation should be certified by an adequately regulated person, which depending on the jurisdiction might be an accountant, lawyer or notary public. That is unless, by example, some firms of solicitors use a third-party company that carries out automated ID verification and source of funds checks.

The process goes further than the proof of the entities and wider due diligence must be undertaken about the individuals’ circumstances. To comply with Anti-Money Laundering regulations banks and professional services providers must ask for evidence of the source of wealth. That is to explain the economic, business or commercial activities that generated the funds in question – for instance via savings, the sale of an asset or investment windfall.

Sanctions checks must also be undertaken and a failure to do so can also result in funds being intercepted. Depending on the jurisdiction and currency of the transactions sometimes multiple checks are undertaken to comply with, by example, UK, EU and US sanctions regimes.

Practical Considerations in Yacht Transactions

The time allowed under a purchase agreement (MoA) to complete the sale formalities is typically quite short, requiring the deposit to be paid quickly with KYC compliance completed and a short window for delivery once a yacht has been accepted post survey.

The reality is that buyers can often find themselves under pressure to complete the formalities within time where they do not have their KYC paperwork in order from the get-go.

The implications go beyond compliance with the timely payment obligations of the deposit and the balance of the purchase price. If a buyer decides it would be better to own the yacht in a company structure, then they will need to open a company bank account. In certain jurisdictions setting up a new bank account can take months rather than weeks. Our experience is that it puts the buyer very much on the back foot if they do not have such matters in hand as far as possible before signing a purchase agreement.

The due diligence obligation is also a continuing obligation. It can cause problems where the percentage shareholdings in the company or the entity purchasing or selling are changed without giving notice to all concerned or where the appropriate paperwork is incomplete.

Prior to the transfer of any funds, and at completion it is also essential that bank account details have been properly verified. This is not just to guard against cybercrime, but the bank account details must be those of the individual or company buying the yacht and not some other entity.

Whilst the questions may seem like an unnecessary invasion of privacy and a burdensome task there is simply no avoiding it. Whilst yachting may be a leisure activity that we are passionate about, businesses are still commercial entities bound by the laws that ultimately protect the industry, its reputation and the clients. If these questions are not asked then this should raise more alarm bells, and all business are equally bound by stringent data protection rules that protect the client and customer alike.

Following these important rules ensures that transactions go through without a glitch and significantly without breaches by either party that could result in a forfeit deposit or even more serious losses or liabilities for all concerned.

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