KYC: Hidden Risks

Sometimes appearances are deceptive or the camouflage is so good that it is difficult to discover the reality. It may be that not all of your business partners are behaving as you suppose. A glance behind the façade can uncover unexpected risks – for your company and for you personally. You should therefore run a KYC check on your suppliers and customer onboarding and on an ongoing basis to reveal any concealed financial crimes and non-compliance.

Find out how to go about it in our due diligence checklist.

Definition: What is Know Your Customer (KYC)?

Know Your Customer (KYC) is the aspect of due diligence that deals with the identity verification of customers. KYC procedures involves checking personal and business details in order to exclude negative hits such as sanctions lists, watch lists and PEP lists and to identify ownership relationships, involvement in anti-money laundering and links between companies. To help tackle financial crime, money laundering, terrorist financing and other criminal activities, minimum standards for due diligence checks have been introduced. The legal basis for the due diligence that makes a KYC analysis necessary is the 3rd EU Money Laundering Directive. Failure to comply with the due diligence requirement can result in heavy fines, reputational damage or even a prison sentence and withdrawal of your business permit.

Know Your Customer (KYC) and Know Your Supplier (KYS) checks should therefore be a fixed component of your compliance management system (CMS). The nature and depth of the regulatory check depend on the expected level of risk. Transactions are also screened to identify possible unusual activities.

One of the aims of Know-Your-Business-Partner due diligence is therefore to reveal the origin and whereabouts of funds. Risky activities that render such checks necessary include:

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Money Laundering
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Fraud
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Tax evasion
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Terrorism financing

Customer Due Diligence

Customer Due Diligence or CDD is the technique of acquiring, assessing, or verifying a customer or potential customer's identity and background information through the customer's name, photograph, residential address, and so on. Customer Due Diligence is a critical component of achieving Know Your Customer (KYC) compliance. It is generally conducted by financial organizations to uncover any potential risks of doing business with a certain customer or firm by analyzing data from a range of sources, including government-published sanctions lists, company listings, third-party data sources, and so on. The list of data or information needed to be collected are:

  • The identity of the customers.
  • The activities the customer is engaged in.
  • The markets in which the customers operate and other entities in which they have a business.
  • The risk profile of the customer – how likely they are to engage in behaviors that put financial institutions at risk.

Financial organizations devotee time and energy to conducting customer due diligence to avoid money laundering, fraud, terrorist financing, and sanctions-busting. Depending upon the customer's risk profile, we, at LexisNexis, conduct different levels of customer risk due diligence.

Preventing Economic Crime

thumbprintA robust Know-Your-Customer program helps companies avoid becoming embroiled in economic crime and provide security. Money laundering, corruption and fraud are issues that can affect any company and financial institutions, either directly or indirectly. Businesses must therefore ensure that they put effective anti-money laundering (AML) and anti-bribery & corruption (ABC) measures in place.

Failure to do so can result in fines and prison sentences. Affected companies often suffer reputational damage. In serious cases, business permits may be withdrawn.

A KYC check is therefore no longer just something for companies in the financial sector: organizations in all sectors need to take them seriously.

Client due diligence must be particularly thorough if it involves people who have links with politicians or government bodies, because politically exposed persons (PEPs) are particularly vulnerable to corruption and bribery.

Small customers can be excluded from customer due diligence (also: client due diligence) if contract values are low and their business situation is not unusual.

With a professional KYC tool companies can make investment to uncover the necessary background information on companies and individuals. The access to valid databases via a single platform simplifies research and reveals the relevant information quickly.

Legal Principles

marbleThe legal basis for KYC checks is the 3rd EU Money Laundering Directive. This, combined with the UK Bribery Act, the UK Modern Slavery Act and the Financial Action Task Force (FATF), provides the framework for Know-Your-Customer activities.

Legal principles internationally

The international regulations are relevant event to companies that are not located in the affected countries but have business links with them.

Know-Your-Customer software helps you uncover criminal activity by companies and individuals. For example, it enables you to identify dummy companies that are being used by beneficial owners for money laundering or tax evasion.

Using a risk-based regulatory approach, you need to decide what resources to invest in a KYC check.

Do not rely on your partners’ good reputation but uncover risky activities: Know your customer!

Who should use Know Your Customers (KYC)

All companies require KYC process that have business relations with Financial Institutions, Banks, Companies handling sensitive data, International Vendors, Suppliers and of course Customers. It is important for companies to run KYC during onboarding and signing of contracts as well as ongoing basis or at the time of renewal of contract to avoid association with business partners involved in financial crimes, and non-compliance of rules and regulations.

Frequently Asked Questions

Answers to some popular questions

What is KYC ?

Know Your Customer (KYC) is the aspect of due diligence that deals with the precise identification and Verify customers. KYC procedures involves checking personal and business details in order to exclude negative hits such as sanctions lists, watch lists and PEP lists and to identify ownership relationships and links between companies.

Why is KYC important?

KYC is done to help tackle and Verify white-collar crime, economic crime, money laundering and other criminal activities like terrorist financing. KYC is helpful to provide Security to their customer from online crime. A robust Know-Your-Customer program helps companies avoid becoming embroiled in economic crime. Money laundering, corruption and fraud are issues that can affect any company, either directly or indirectly. Failure to do so can result in fines and prison sentences. Affected companies often suffer reputational damage. In serious cases, business permits may be withdrawn.

What are KYC requirements?

KYC (Know Your Customer) that required for your customers to continue business. This standard verification process requires customers to verify their Identity, credentials and Address and also that they have not been involved in any criminal activities or terrorist financing.

How is KYC done?

With a professional KYC tool companies can uncover the necessary background information on companies and individuals. The access to valid databases via a single platform simplifies research and reveals the relevant information quickly.

What are the components of KYC?

"KYC has 4 major components,

1. Customer acceptance policy, 
2. Customer identification procedures,
3. Monitoring of transactions and
4. Risk management."

What is the full name of KYC?

Know Your Customer (KYC) and Know Your Supplier (KYS) checks should therefore be a fixed component of your compliance management system (CMS).

What are the benefits of KYC?

Know-Your-Customer software helps you uncover criminal activity by companies and individuals. For example, it enables you to identify dummy companies that are being used by beneficial owners for money laundering or tax evasion.

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