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#Customer Due Diligence

The importance of knowing your customer

International Compliance Association

CDD , KYC

Through the advent period, International Compliance Association will be publishing an insight on each Advent Sunday to focus on the topic of KYC – Know Your Customer.

You have a copy of their passport, you have verified where they live and have checked their birthday against their driving licence (questionable photo and all), but do you really know your customer?

The requirements

Each jurisdiction has in place its regulations detailing the circumstances in which customer identification and verification are required. These are derived from Financial Action Task Force (FATF Recommendations. For most financial services firms the source requirements can be found within Recommendation 10. Knowing your customer is not just restricted to making sure they are who they say they are at account opening, ongoing due diligence is also integral to the process.

These reasons to following KYC requirements and implement customer due diligence (CDD) are well known to AML professionals. We could simply say that the importance of knowing you customer is because the regulations require you to do so, but that would turn it into a tick box exercise, which undermines the importance.

There is no denying the importance of KYC to a risk based anti money laundering programme, an effective and meaningful process identifies and mitigates money laundering or terrorist financing risks, preventing criminals from using your products and services. It informs other important AML processes, such as transaction monitoring; by understanding the intended usage of the account, this will help you understand whether activity is unusual for that customer. Appropriate screening against sanctioned lists and identifying politically exposed persons are all reliant on data collected during the KYC process.

Using the analogy between building a house and an AML framework, a risk assessment could be seen as the blue prints but KYC is the house’s foundations.

Assessing the risk

One of the issues that we can be guilty of is relegating customers to their data sets. There is no denying the importance of collecting the correct data on customers, but if we think about customers purely in terms of data that is held on the system to meet requirements, then do we really know our customer?

Imagine a scenario where a customer facing employee is in conversation with an existing customer, who in discussions has mentioned that they are getting married to a senior government official. We all know that alarm bells should ring – this could potentially mean that the customer will become a close relative of a politically exposed person (PEP). But if the employee only concentrates on the tick box approach, with a mindset of ‘what information do I need in order to complete this task?’, there is a very real risk that key red flags could be overlooked.

The nature of customer relationships is highly diverse and circumstances vary constantly. Abiding by narrowly defined rules is not conducive to dealing with this diversity and a set of simple, clear outcomes for CDD will help KYC professionals deal more effectively with unusual situations or cases of heightened complexity by providing the key principles underpinning effective CDD.

 

An effective process should also ensure that employees are trained on why they need to obtain the information; this knowledge allows them to apply it in real world scenarios, ensuring that they are better able to identify risk.

Working together

There are often a number of misnomers about where the responsibility to know your customer lies: it only applies to customer facing employees, or is it within the KYC team? Or maybe the relationship managers? Guidance often quotes ‘the firm’, so it must be senior management. But in reality everyone has their own important role to play.

Working in a second line of defence role you may never speak to a customer, but you may be required to assist in the review of the financial crime risk posed by a customer. Your expertise on AML combined with the information obtained at account opening, and throughout the customer relationship, will help ensure that your firm knows who they are doing business with, and keeps it from being used to launder illicit funds.

 

Through International Compliance Association qualifications we teach students why the KYC and CDD process is important and how to do it well. Enabling students with the practical skills to apply their knowledge in their work environment.

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