KYC (Know Your Customer) policies are essential to any financial institution. Knowing who you are doing business with can prevent a bank from inadvertently facilitating money laundering. An inadequate or nonexistent Know Your Customer system can result in the firm, as well as individual employees, being subject to civil and/or criminal penalties.
“Customer” refers to any person or entity that opens or maintains an account, as well as beneficial owners, beneficiaries of transactions performed by intermediaries, and entities or persons connected with high-risk financial transactions.
US Patriot Act – Increasing the Need for KYC Compliance
While it has always been important for financial institutions to be aware of whom they are doing business with, the USA Patriot Act made such due diligence even more paramount. Passed in October 2001, it required all financial service providers to establish Anti-Money Laundering programs in order to catch potential cases of terrorism financing. Section 326 holds institutions accountable for their ongoing Know Your Customer screening and initial customer screening. Federal regulators require that financial institutions such as banks perform due diligence in verifying the identities of potential clients and keep detailed records of the process used. In the case that your institution does accidentally fund terrorists, proof of ongoing due diligence can potentially mitigate the degree of any civil or criminal charges levied against you.
Essential elements of any KYC solution:
- Customer Acceptance Policy –Must be clear, with explicit criteria. Perform due diligence with background checks to ensure that customer/entity is using their real name and not involved in terrorism or other illegal activities.
- Customer Identification Procedures—Must be clearly outlined for and performed at every stage of the banking relationship: establishing an account, carrying out a transaction, resolving doubts about the authenticity of previously obtained identification, etc. Identify and verify all customers’ identities and purposes (using reliable, independent data, information, and/or source documents) to the bank’s satisfaction.
- Monitoring of Transactions—Effective KYC procedures require continuous monitoring of your customer base and its normal behavior to reduce risk. High-risk accounts (classified based on country of origin, fund sources, etc.) or activities (such as complex or unusually large transactions and those with no visible lawful purposes) should undergo extra scrutiny. Banks can set thresholds for transaction amounts that warrant enhanced due diligence.
- Risk Management—All banks and other financial institutions should establish internal audit and compliance functions to ensure adherence with Know Your Customer guidelines; this includes establishing a company-wide training program regarding policies and procedures. Responsibility for these functions should be explicitly outlined and allocated within the bank--taking into account segregation of duties, and management oversight is essential. Accounts should be subject to risk categorization, and banks may create risk profiles with accompanying procedures for each category.
Following these steps will make it easier and more affordable for you to comply with Know Your Customer regulations, while significantly decreasing your organization’s risk of becoming accidentally involved in money laundering and illegal activity. Above all, a risk-based approach requires KYC software that will spot and notify financial institutions of any discrepancies or concerns regarding a potential customer.
WorldCompliance’s products are the missing piece of any KYC system.