KYC COMPLİANCE

Know Your Customer (KYC) compliance regulation has proved to be one of the
biggest operational challenges banks, accountants, lawyers and similar financial
service providers worldwide have had to overcome.World-Check, the industry
standard KYC compliance solution, provides an overview of KYC compliance and its
origins, and outlines the compliance mandate as applicable to banks, accounting
firms, lawyers and other regulated financial service providers – not just in the
UK, Europe and the USA, but all around the world. Relied upon by more than 3,000
institutions worldwide, this KYC database solution provides effective legal and
reputational risk reduction.Why “Know Your Customer?”The 9/11 terrorist attacks
on the World Trade Centre revealed that there were sinister forces at work
around the world, and that terrorists activities were being funded with
laundered money, the proceeds of illicit activities such as narcotics and human
trafficking, fraud and organised crime. Overnight, the combating of terrorist
financing became a priority on the international agenda.For the financial
services provider of the 21st century, “knowing your customers” was no longer a
suggested course of action. Based on the requirements of legislative landmarks
such as the USA PATRIOT Act 2002, modern Know Your Customer (KYC) compliance
mandates were created to simultaneously combat money laundering and the funding
of terrorist activities.What is Know Your Customer (KYC)?Know Your Customer, or
KYC, refers to the regulatory compliance mandate imposed on financial service
providers to implement a Customer Identification Programme and perform due
diligence checks before doing business with a person or entity.KYC fulfils a
risk mitigation function, and one its key requirements is checking that a
prospective customer is not listed on any government lists for wanted money
launders, known fraudsters or terrorists.If preliminary KYC checks reveal that
the person is a Politically Exposed Person (PEP), for example, Advanced Due
Diligence must be done in order to ensure that the person’s source of wealth is
transparent, and that he or she does not pose a reputational or financial risk
in terms of their finances, public positions or associations. Beyond customer
identification checks, the ongoing monitoring of transfers and financial
transactions against a range of risk variables forms an integral part of the KYC
compliance mandate.But to understand the importance of KYC compliance for
financial service providers better, its origins need to be examined.Origins of
Know Your Customer (KYC) complianceThe arrival of the new millennium was marred
by a spate of terrorist attacks and corporate scandals that unmasked the darker
features of globalisation. These events highlighted the role of money laundering
in cross-border crime and terrorism, and underlined the need to clamp down on
the exploitation of financial systems worldwide.Know Your Customer (KYC)
legislation was principally not absent prior to 9/11. Regulated financial
service providers for a long time have been required to conduct due diligence
and customer identification checks in order to mitigate their own operation
risks, and to ensure a consistent and acceptable level of service.In essence,
the USA PATRIOT Act was not so much a radical departure from prior legislation
as it was a firmer and more extensive articulation of existing laws. The Act
would lead to the more rigorous regulation of a greater range of financial
services providers, and expanded the authority of American law enforcement
agencies in the fighting of terrorism, both in the USA and abroad.In October
2001, President George W. Bush signed off the USA PATRIOT Act, effectively
providing federal regulators with a new range of tools and powers for fighting
terror financing and money laundering. During July 2002, the US Treasury
proceeded to introduce Section 326 of the PATRIOT Act, a clause that removed
some key burdens for regulators and added significant enforcement muscle to the
Act.What 9/11 changed, in essence, was the extent to which existing legislation
was being implemented. Using the provisions of the earlier anti-terrorism USA
Act as a foundation, it included the Financial Anti-Terrorism Act, which allowed
for federal jurisdiction over foreign money launders and money laundered through
foreign banks. Significantly, it is this anti-terror law that would make the
creation of an Anti Money Laundering (AML) programme compulsory for all
financial institutions and service providers.Section 326 of the USA PATRIOT Act
dealt specifically with the identification of new customers (“CIP regulation”),
and made extensive provisions in terms of KYC and the methods employed to verify
client identities.In accordance with this piece of updated KYC legislation,
federal regulators would hold financial institutions accountable for the
effectiveness of their initial customer identification and ongoing KYC
screening. Institutions are required to keep detailed records of the steps that
were taken to verify prospective clients’ identities.Although current KYC
legislation does not yet demand the exclusion of specific types of
foreign-issued identification, it recommends the usage of machine-verifiable
identity documents. The ability to notify financial institutions if concerns
regarding specific types of identification were to arise, combined with a
risk-based approach to KYC, proved to provide a robust mechanism for addressing
security concerns.Effectively, the risk-based approach to customer due diligence
grants regulated institutions a certain degree of flexibility to determine the
forms of identification they will accept, and under which conditions.KYC
compliance: Implications for banks, lawyers and accounting firmsThe KYC
compliance mandate, for all its positive outcomes, has burdened companies and
organisations with a substantial administrative obligation. Additionally, KYC
compliance increasingly entails the creation of auditable proof of due diligence
activities, in addition to the need for customer identification.