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Know your customer Bank´ policies

 

Know your customer (KYC) refers to relevant information from their clients for the purpose of doing business with them. The term is also used to refer to the bank regulation which governs these activities. Know Your Customer processes are also employed by companies of all sizes for the purpose of ensuring their proposed agents', consultants' or distributors' anti-bribery compliance. Banks, insurers and export credit agencies are increasingly demanding that customers provide detailed anti-corruption due diligence information, to verify their probity and integrity.

Know your customer policies are becoming increasingly important globally to prevent identity theft, financial fraud, money laundering and terrorist financing.

Standards

The objective of KYC guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering activities. Related procedures also enable banks to know or understand their customers, and their financial dealings better. This helps them manage their risks prudently. Banks usually frame their KYC policies incorporating the following four key elements:
Customer Acceptance Policy;
Customer Identification Procedures;
Monitoring of Transactions; and
Risk management.
 

 


For the purposes of a KYC policy, a Customer may be defined as :
a person or entity that maintains an account and/or has a business relationship with the bank;
one on whose behalf the account is maintained (i.e. the beneficial owner);
beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and
any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction.

Typical KYC controls

KYC controls typically include the following;
Collection and analysis of basic identity information (referred to in US regulations and practice a "Customer Identification Program" or CIP)
Name matching against lists of known parties (such as "politically exposed person" or PEP)
Determination of the customer's risk in terms of propensity to commit money laundering, terrorist finance, or identity theft
Creation of an expectation of a customer's transactional behavior
Monitoring of a customer's transactions against their expected behaviour and recorded profile as well as that of the customer's peers
 

 


Enhanced due diligence

While Enhanced due diligence (EDD) has not been internationally defined, the USA PATRIOT Act dictates that institutions "shall establish appropriate, specific, and, where necessary, enhanced, due diligence policies, procedures, and controls that are reasonably designed to detect and report instances of money laundering through those accounts." US regulations require that EDD measures are applied to account types such as Private banking, Correspondent account, and Offshore banking institutions.

Because regulatory definitions are neither globally consistent nor prescriptive, financial institutions are at risk of being held to differing standards dependent upon their jurisdiction and regulatory environment. An article published by Peter Warrack in the July 2006 edition of ACAMS Today (Association of Certified Anti-Money Laundering Specialists) suggests the following:

A rigorous and robust process of investigation over and above (KYC) procedures, that seeks with reasonable assurance to verify and validate the customer’s identity; understand and test the customer’s profile, business and account activity; identify relevant adverse information and risk; assess the potential for money laundering and / or terrorist financing to support actionable decisions to mitigate against financial, regulatory and reputational risk and ensure regulatory compliance.


Characteristics of EDD

Rigorous and robust


Generally this means consistent, thorough and accurate. The process must be documented and available for inspection by regulators. The process must be SMART (Specific, Measurable, Achievable, Relevant and Timebound), scalable and proportionate to the risk and resources.

Over and above KYC procedures

EDD files rely upon initial client screening. EDD processes should use a tiered approach dependent upon the risk. Crucial to the integrity of any EDD process is the reliability of information and information sources, the type and quality of information sources used, properly trained analysts who know where to look for information, how to look and how to corroborate, interpret and decide the results. Commercial intelligence companies such as Dow Jones, World Compliance, Red Flag Group, Steele Foundation, and C6 Intelligence Information Systems Ltd. ("C6 Database"), aggregate this information and compile it daily into a comprehensive database. Many of these commercial intelligence companies are serviced by in-country providers with researchers on the ground who can obtain information that is not otherwise easily accessible. Companies such as KYC Israel, and SGS Nigeria are examples of in-country due diligence investigation companies.

Reasonable assurance

What is reasonable depends upon factors including jurisdiction, risk, resources, and technology state of the art. For sanction matches it depends upon information provided by regulators. In all cases the suggested standard is to the civil standard of proof i.e. on the balance of probability.

Relevant adverse information

Information obtained from any source, including the Internet, free and subscription databases and the media, which is directly or indirectly indicative of involvement in money laundering, terrorist financing or predicate offences.

Examples include fraud and other dishonesty, drug trafficking, smuggling or other proscribed offences, references to money laundering, or conducting business, residing in or frequenting countries deemed by the Financial Action Task Force and/or (institution) as being countries under sanction or countries with which (institution) does not do business; to official sanctions or watch lists; and to investigations, convictions or disciplinary findings by authorized regulatory bodies.
 

 

 

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