Know Your Customer

Know Your Customer (KYC) is an overarching word that encompasses one of the foundational measures designed to protect financial institutions against financial crime, money laundering, terrorist financing, sanctions breaches and bribery and corruption.

The “C” in KYC typically is an abbreviation for “Customer”, but it can also be an abbreviation for “Client” - for “Know Your Client” - or as we feel is most accurate at Avallone - “Counterparty” - for “Know Your Counterparty”.

Regardless of what an organization designates for the “C”, KYC is the process of collecting and analyzing data and documents for business/corporate counterparties.

Examples of counterparties include but are not limited to:
• Business customers
• Asset managers
• Investors
• Vendors
• Tenants
• Construction companies
• Joint venture

The goal of KYC is to assess the likelihood of your counterparty being involved in risky activities - which is a risk to your company. KYC also encompasses organizational and governmental obligations for compliance.

The first step in KYC is identification. By identifying who you are doing business with, you can understand if the business relationship makes sense. This includes looking at your counterparty’s business model, source of funds, source of wealth, etc.

Following identification, you would use the information to do a thorough analysis of the counterparty’s:
• Legal Entity Structure
• Ultimate Beneficial Owners (UBOs)

Taking the information captured within KYC, then Screening can also be performed - which typically includes screening for some or all of these activities for the counterparty:
• Sanctions
• Politically Exposed Persons (PEPs)
• Adverse Media

But if the screening is to be super thorough, then companies should also screen for:
• Watchlists / Warning lists
• Fitness and Probity lists

If a counterparty meets all of your KYC requirements and you are able to start having a business relationship, your KYC on that counterparty doesn’t stop there.

KYC should be done on the counterparty regularly on a periodic, ongoing basis to ensure that the counterparty is still meeting your requirements. For example, their company officers still not  and are still not on any sanctions or adverse media lists.

Know Your Customer's Customer

Know Your Customer’s Customer (KYCC) is an additional compliance measure to have an even more thorough understanding of the risk profile of who you are working with. At Avallone, we like to refer to this as Know your Counterparty’s Counterparty - as we feel this is a more accurate representation to include all types of organizations that you would work together with - not just a customer.

Similar to KYC, KYCC supplementary measures are designed to protect financial institutions against fraud, corruption, money laundering, and terrorist financing. With a thorough understanding of the business relationships of your counterparties and the activities of their counterparties - including a deep knowledge of their supply chain / business ecosystem, you can ensure the legitimacy of these organizations and minimize your risk of Passthrough Sanctions breaches and penalties - and being associated with financial crimes such as money laundering, corporate fraud, corruption and the like.

Whether KYCC stands for “Know Your Counterparty’s Counterparty”, “Know Your Customer’s Customer” or the like, KYCC is becoming increasingly common. Even without regulatory requirements, most financial institutions and banks would expect that you can provide them with an explanation of the activities of your counterparties and proof of your processes to check on the legitimacy of your counterparties.

Know Your Supplier

While Know Your Supplier is not a term that is commonly used in the industry - yet! - it is becoming more and more important that organizations are specifically performing KYC on the companies that they outsource to - particularly if it is for a primary business function. In today’s geopolitical environment, a company can be held accountable for violations of their suppliers and vendors - resulting in large monetary fines and damage to their corporate reputation.

Know Your Business

Know Your Business (KYB) is another term or variation of KYC. KYB involves the same processes and practices within KYC where data and documents from business/corporate counterparties would be collected and analyzed to ensure organizational and governmental compliance obligations are being met and risk is minimized.