How to Determine if Your Company Should Be Doing KYC / KYB
In today’s highly regulated business environment, Know Your Customer (KYC) - sometimes called Know Your Business (KYB) - has become an essential practice for many companies. This is not only a regulatory requirement in many industries but also a prudent business practice to prevent fraud, money laundering and other financial crimes. But in today’s world, KYC / KYB is no longer just for regulated companies. More and more, we see that KYC / KYB is quite normal for non-regulated companies. And regardless if companies are in a regulated or non-regulated industry, implementing KYC / KYB processes helps protect their reputation and foster trust with customers and stakeholders.
(As an aside, for the sake of simplicity for the rest of this article, wherever I talk about KYC, it includes KYB as well…)
Whether your company is required to perform KYC or your team has decided that it is a good pre-emptive business decision, determining how to implement KYC processes and procedures can sometimes be complicated and daunting. So I’ve come up with a checklist to help you ascertain if KYC is necessary for your business.
Understanding KYC and Its Importance
Before diving into whether your company needs to implement KYC, it’s important to understand what KYC entails and why it is significant. KYC procedures typically involve a series of checks to confirm the identity of clients and assess their potential risk levels. But fundamentally, it is more than merely identifying and assessing risks. It is also about understanding the nature of the business relationship and what to expect from it. As a part of the process, it is also to assess if you want to do business with the counterparty. That is, does the relationship make sense and does it fully benefit you as a company?
1. Identity Verification: Gathering and validating personal information such as name, address, date of birth and identification documents.
2. Risk Assessment: Evaluating the risk level associated with the client based on factors such as their business activities, geographical location and transaction patterns.
3. Ongoing Monitoring: For regulated companies, after the initial KYC, continuously monitoring clients’ activities to detect and report any suspicious behavior. However, for non-regulated companies, note that monitoring might be trickier.
In addition to these main KYC steps, there is a separate, but very connected process: Screening. As KYC is the foundation of effective sanctions screening, this is yet another benefit of having a robust KYC program.
The Need for KYC: A Growing Necessity
The necessity for KYC has grown significantly over the past decade, driven by increasing regulatory requirements and the rising threat of financial crimes. Various industries, particularly those in the financial sector are legally required to implement KYC processes.
However, even if your business is not legally mandated to do so, implementing KYC can still be beneficial. It enhances your ability to identify and mitigate risks, ensures compliance with global standards and strengthens your overall security framework.
Checklist: Should Your Company Be Doing KYC?
To help determine if your company should be implementing KYC procedures, consider the following checklist. This checklist outlines five key factors that indicate the necessity of KYC for your business.
1. Does your industry have regulatory requirements?
The first and foremost consideration is whether your industry is subject to regulatory requirements that mandate KYC processes. Industries that typically require KYC include:
- Financial Services: Banks, credit unions, insurance companies and investment firms are required to perform KYC to prevent money laundering and fraud.
- Legal Services: Law firms and legal professionals must conduct KYC to ensure they are not facilitating illegal activities.
- Real Estate: Real estate agents and firms are increasingly required to perform KYC to prevent money laundering through property transactions.
- Cryptocurrency and Fintech: Companies dealing with digital currencies and financial technology must comply with stringent KYC regulations.
If your business operates in one of these regulated industries, implementing KYC is not just advisable but mandatory.
2. Does your company deal with high-value transactions, large sums of money or frequent cross-border payments?
Consider the nature and scale of transactions your company handles. If your business deals with high-value transactions, large sums of money or frequent cross-border payments, KYC becomes crucial. High-value and international transactions are particularly susceptible to money laundering and fraud. By implementing KYC, you can better manage these risks and ensure the legitimacy of the funds and clients you are dealing with.
3. Do any work with any organizations that have a high risk profile?
Evaluate the risk profile of your customer base - as well as other parties that you work with (e.g. partners, suppliers, investors, etc.). Companies who are involved with politically exposed persons (PEPs), from high-risk jurisdictions or involved in high-risk industries, should prioritize KYC. High-risk counterparties are more likely to engage in illicit activities and KYC processes help in identifying and mitigating these risks.
4. Does your business model and/or services involve financial transactions or asset custody?
Your company’s business model and the services you offer also influence the need for KYC. Businesses that offer services involving financial transactions, account management or asset custody should implement KYC to protect against fraud and ensure compliance with legal standards. Additionally, if your business model relies heavily on customer trust and data security, such as in online services and e-commerce, KYC can enhance customer confidence and protect against identity theft and fraud.
5. Does your business operate in or transact with a high-risk region or a country with stringent KYC and AML regulations and sanctions?
The geographic regions where your business is located and where you do business can also impact the necessity for KYC. Companies operating in or transacting with clients from countries with stringent KYC and AML regulations must comply with these requirements. Additionally, businesses dealing with regions known for high levels of financial crime should adopt KYC to mitigate associated risks.
Did you answer YES to any of these questions in the checklist?
If so, you should strongly consider starting and strengthening the KYC process in your organization. By doing so, you will not only ensure compliance with regulatory requirements but also protect your business from financial crimes and build a stronger foundation of trust with your customers. Implementing robust KYC procedures can ultimately safeguard your company’s reputation and contribute to long-term success.
So how do I get started?
Implementing a KYC process doesn’t have to be an overwhelming and daunting task. Sune Warberg Clausen - Avallone’s VP of Financial Crime Prevention and Customer Success has written a useful ten step guide for this very purpose:
