Financial institutions, investment service organizations, insurers, and creditors typically are required to implement and follow “know your customer” (KYC) policies as part of a larger scale anti-money laundering (AML) effort. While most other nonregulated organizations don’t have a KYC mandate, such procedures can help prevent fraud from criminal activity as well as significant financial losses, among other benefits. In addition, following KYC policies sends a message to customers, vendors, and other stakeholders that you are serious when it comes to trust and security.
Due Diligence Requirements Part of KYC Policies
As part of their KYC policies, regulated organizations have three duties to perform: customer due diligence, enhanced due diligence, and continuous monitoring. In practice, this means they verify customers’ names, addresses, and dates of birth and check them against lists of known criminals. In addition, they monitor transaction trends and high-risk accounts to determine their threat level and whether they merit filing suspicious activity reports with the government.
Enhanced due diligence techniques dig deeper. For example, a bank might look closely at high-transaction-value accounts or accounts that deal with risky activities or countries.
Export organizations subject to the regulations must be careful not to sell to customers on certain lists maintained by the federal government, including customers that have been denied export privileges. Exporters are also expected to review all information they receive about customers to help ensure that they’re alerted of the possibility that a violation could occur.
Antifraud & Marketing Benefits
Even if you’re not in the financial industry and don’t sell products overseas, it can pay to understand who your customers are. Routinely performing credit checks on major customers, for example, can help prevent your organization from falling victim to “phoenix” schemes where organizations attempt to profit from bankruptcy.
What’s more, creating a comprehensive history of each customer’s credit limits and transactions enables you to identify your top customers. This may not expose fraud or money laundering, but it can help your organization assess how vulnerable it would be if it lost one or a few of its biggest customers.
Analyzing customers’ purchasing behavior also allows you to identify cross-selling and upselling opportunities — along with any irregularities that could indicate nefarious activity. If a customer with a long record of annual purchases suddenly begins placing monthly orders, for example, you may want to delve deeper. The change may signal nothing more than your customer expanding its business, but it also could be a sign of fraud.
Crypto Risks Remain
The emergence of cryptocurrencies has increased customer-related risk for some organizations. Although crypto companies now must adhere to AML regulations and follow KYC policies, some money launderers have found workarounds. So, exercise greater caution when conducting transactions involving crypto. Contact us for more information.