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#Customer Due Diligence

Why KYC is like building a house

International Compliance Association

CDD , KYC

Whilst the CDD process can be considered as a process with inputs and outputs I would like to put forward another way to think about this subject area.

As my students know, I love a good analogy and the parallels I would like to draw with CDD is the building of a house.

 

Laying the foundations

You would not build a house without first laying solid foundations.  If the foundations are not solid, anything build on them will collapse in time.

You cannot properly know your customer if you have not identified the correct legal entity or person and verified that identity information.  This is the foundation up on which you will build your customer file.

 

Building the structure

After the foundations for the house you need to build the walls and put on a roof.  This provides an outline of the home it will be one day.

You cannot know your customer unless you build up an outline, or profile, of them.  E.g. establish the type of legal entity, the nature of their business, where they are located etc.

 

Fixtures and fittings

These are the semi-permanent, big ticket items in your house – the kitchen and the bathroom.  They might change in the future but at the time of building you will design these accordingly to how you intend to live in the house.  You will need to understand how you use the kitchen and house will influence your lifestyle – is the kitchen simply for cooking or is it the hub of the home?  Do you eat to survive or eat for enjoyment?  How much time will you spend in this room?  Are you going to rely on savings to fit out the kitchen or take out a loan?

The beneficial owners and controllers of you client are your fixtures and fittings.  They might change but are likely to be in place for long periods of time.  You need to understand the control structure and how these beneficial owners and controllers influence the activities of the prospective client.  You need to know how their wealth was generated and any risks posed to your organisation.

 

Decoration

The finer details.  Making sure colours don’t clash, and buying the right furniture.  Ensuring appropriate flooring for different living areas.  Comparing products online to ensure you get what you want and need.  Compiling a snagging list – cracks appear as the building settle – are they surface or structural?

From a CDD perspective you could consider the finer details to be adverse media checks, checking that products and services are appropriate, comparing predicted activity levels with peers groups and so on…

 

Meeting the neighbours

Checking out the neighbours is an important of deciding next steps for the property you are building?  Are the neighbours decent citizens who will add to your enjoyment of the property or could they make your life miserable?  Are there any warning signs like rubbish left outside or loud music?

This is akin to considering the affiliations of the prospective client.  Do their affiliations raise their standing and reputation in their industry or are their warning signs (e.g. allegations or corruption or enforcement actions)?

 

 

You will then take a decision of whether the house fulfils your needs and you will live in it, or whether you rent it out.  You will ‘rate’ the house against your lifestyle requirements.  You may rent is temporarily and move in at a later date.

In the same way we undertake a rating of our customers in terms of how acceptable the relationship is.

The end result of our building project is a completed building (our structured KYC file); shelter and security (we have fulfilled our regulatory obligations and we are sure we can manage any risks identified); and an investment asset (a productive customer relationship).

This will hopefully all result in a lovely family home -or the overall acceptance of the customer.

The moral of my rather rambling story – a lovely family home needs to be built on solid foundations, commensurate with lifestyle and it requires attention to detail to make that happen.

 

How can ICA help?

  • The ICA Certificate in KYC and CDD is an online training course provides a foundation knowledge of core know your customer (KYC) and customer due diligence (CDD) concepts, an introduction to CDD frameworks and an overview of the key components of working in the KYC environment.
  • The ICA Advanced Certificate in Practical Customer Due Diligence has been designed for KYC Analysts and professionals who manage risk in the Customer Due Diligence (CDD) process. The only professional qualification in practical CDD in the UK, this course will help you make sound judgements and pinpoint areas of potential risk.


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