Know Your Customer (KYC) has become more of a priority with treasury teams as fraud and potential fraud exposures have exploded as AI and related technology have taken off along with political and regulatory uncertainty fueled by the policies, actions and rhetoric of the new administration in the United States government.

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Global economic uncertainty has also widened the view of KYC (Know your Customer) to more of a KYC (Know your Counterparty) perspective.  This lens means identifying and understanding Anti-Money Laundering (AML) and other risk and regulatory exposures related to sourcing from (suppliers) and selling to (customers) across the globe.

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Many corporate treasury teams only have the perspective of KYC from replying to banks who often request different information related to their company that is difficult and time consuming together. Treasury teams often see KYC as a nuisance. They do not realize a KYC program can be a valuable tool to document and manage critical company information and understand current and emerging financial and regulatory risk exposures. One objective of this blog article is to begin to inform treasury leaders about the importance of an effective KYC program. A future post of mine will offer the value proposition for treasury leaders to investing in an effective KYC program.

As I am on the Board of Advisors for a CFO tech fund, I was inspired to investigate the challenges of KYC for Funds / VC firms from the perspective of a treasury leader. There are many dimensions to KYC. It is important that Funds / VCs understand them to have any chance ineffectively managing a KYC program. My second objective for this blog is toinspire Funds / VC firms to improve their KYC programs.

The basic framework for “Know Your Customer” has three main components:

1. Customer Identification Program (CIP)

2. Customer Due Diligence (CDD) and

3. Enhanced Due Diligence (EDD).

At a minimum firms must obtain information about a customer (investor) including name, date of birth, address, and identification number. Firms should take the additional step of making sure that that customer/investor/potential customers/potential investors do not appear on government sanction lists, politically exposed person (PEP) lists, or known terrorism lists and investigate the history of available information related to the financial health of existing or potential business counterparties. This information often comes from reporting agencies, public databases and third-party sources. The acquisition and management of this information is often manual and managed in Excel which represents challenges even if the information is found.

The process of classifying and subsequent analysis of the information during the CIP process is Customer Due Diligence (CDD). The analysis of this information informs firms as to the financial health of an individual or company. This information can change quickly so itis important that firms are actively managing the latest information that can impact the financial health of an individual or company and if it is even legal to continue to do business with a counterparty,

If there are actual or perceived red flags that come up during Ongoing Due Diligence (ODD), firms undertake Enhanced Due Diligence (EDD) to make a more informed decision as to whether they should continue to do business with a given individual or company. Funds / VC firms often engage in EDD in vetting potential investors and potential investments including source of wealth verification, detailed management reports and relevant third-party research.

For Funds / VC firms blind spots relative to KYC can impact trust which is paramount in the investment industry and can show investors/potential investors and fund/potential fund companies a lack of commitment to compliance and financial integrity for investors and stakeholders. A high-profile data breach or failure to screen for sanctions will negatively impact a firm’s finances and reputation. An ineffective KYC program can take any Fund / VC out of business.

A KYC approach for Funds / VC firms involves identifying, monitoring and managing risk, legal and compliance exposures from existing investors, potential investors, companies that are in each fund, companies that are being vetted for investment, and suppliers related to running and managing each fund within a Fund / VC portfolio. This a daunting task at best and firms would do well to work with companies that offer solutions and advisory services that enable them to have effective KYC program

Funds / VC firms that invest in technology that automate and empower efficient streamlined KYC practices, mitigate risk, ensure legal compliance, secure their reputation and grow at scale. It has never been more important to improve the experience of investors and potential investors by ensuring them that your Fund / VC house is in order.

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WANT MORE? SOME RELATED KYC ARTICLES

Why KYC is Essential: Combating the Underlying Crimes in Financial Systems

Fear vs. Growth: What’s a Better Motivator for Doing KYC?

How to get started with implementing KYC: Ten steps and best practices

Why are VCs funding technology for the future - using KYC processes from the past?