Fighting Crime with KYC (By Richieson Gyeni-Boateng, CAMS)

Which family does he/ she comes from?, who is his/ her parent?, what does he/ she do for a living? etc are some of the questions thrown to us when we take our partner home and introduce him/ her to our parent. Our parents even go further to do a background check on the person by enquiring about the health history and general behavior of our partner’s family. What do you think our parents are doing or want to achieve? That is “KYC” being done over there. We always perform KYC when we meet someone for the first time in order to get some information about the person and know them better. The KYC is continued as the relationship grows stronger. So it is not only the financial institutions that performs KYC as it is assumed by many. KYC is critical for banks and other companies to comply with Anti-Money Laundering and/ or Combating Terrorist Financing reporting standards. This article turns to throw more light on what KYC is about and how proper KYC can help mitigate the risk of money laundering and terrorist financing.

What is “KYC”? KYC is an acronym for Know Your Customer and it is the process of verifying the identity of a customer and assessing potential risks of illegal intentions for business relationship. Know Your Customer processes/ principles are also employed by different companies of all size and may give different names for it. Similar words to KYC are Know Your Employee (KYE), which is adopted by employers, Know Your Partner (KYP), adopted by parents and family members, expressed above, Know Your Customers’ Customers (KYCC), Know Your Suppliers’ customers and Know Your Customers’ Suppliers (KYCS).

KYC principles/ guidelines are used to prevent banks and other companies from being used, intentionally or unintentionally by criminals for money laundering and terrorist financing activities. Also KYC procedures help financial institutions and other companies to better understand their customers and their financial dealings so as to manage their risk prudently. Proper KYC helps in the transaction monitoring; by understanding the intended use of the account, unusual activities performed by the customer will be know. Appropriate screening against sanctioned lists and identifying Politically Exposed Persons (PEPS) and Financially Exposed Person (FEP) are all reliant on data collected during the KYC process. The KYC checks can also be vital risk management strategies to avoid getting entangled in business relationships with potential clients who have participated in shady dealings or other illegal activities.

KYC can be used to fight money laundering/ terrorist financing when it is not turned into a tick box exercise, whereby we just collect the information and documents from the customer and keep them on file without verifying and analyzing the information. For example, the residential address provided by the customer need to be verified if we want to know the actual locations of the customers. Providing the residential address doesn’t guarantee that the person actually stays at the said location. The question (whether the customer actually stays there) can only be verified when the customer is visited unannounced at the address he/ she provided. This verification process can be impossible to achieve, taking into consideration the number of customer these financial institution may have. In developed countries, this is made easy as there is enough database for every house and the number of people living in that house.

Another way to fight money laundering/ terrorist financing through KYC is when we make KYC a process, which is constantly being reviewed, and not an event. Constant update of information about customers will help reduce the suspicious transaction reporting. Financial Institutions should find a way to encourage customers to update their records. Left to the criminal, he or she will not update any information held at the financial institutions. If current information about customers are kept, it will help in the investigation process and easy prosecution of criminals.

A financial institution having a customer acceptance policy in place is another way of fighting money laundering and/ or terrorist financing through KYC. Every firm should have a policy which spell out how, where, what and when a customer can be on boarded. The policy should try to address the following aspects of customer relationship in the firm:

  • No account is opened in anonymous, fictitious or numbered name(s)
  • Not to deal with a shell company (A company that at the time of incorporation has no significant assets or operations)
  • Parameters of risk perception are clearly defined in terms of the location of customer and his clients and mode of payments, volume of turnover, social and financial status, etc. to enable categorization of customers into low, medium and high risk
  • Documentation requirements and other information to be collected in respect of different categories of customers depending on perceived risk.
  • Necessary checks before opening a new account so as to ensure that the identity of the customer does not match with any person with known criminal background or with banned entities such as individual terrorists or terrorist organizations, etc.

The customer acceptance policy will help the financial institution to risk categorize its customers and for that purpose, individuals (other than High Net Worth) and entities whose identities and sources of wealth can be easily identified and transactions in whose accounts by and large conform to the known profile, may be categorized as low risk. Customers that are likely to pose a higher than average risk to the financial institution will be categorized as medium or high risk depending on customer’s background, nature and location of activity, country of origin, sources of funds and his customer profile, etc. In this case, an Enhanced Due Diligence (EDD) will be perform.

Mention can also be made of customer identification procedure as one of the ways to fight crime through KYC. Financial institutions are required by law to verify the identity of individuals wishing to conduct financial transactions with them. Section 1.5 of the BoG/FIC AML/CFT & P guideline for Banks and other Financial Institution states “Financial institutions shall identify their customers (whether permanent or occasional; natural or legal persons; or legal arrangements) and verify the customers’ identities using reliable, independently sourced documents, data or information. The guideline further states that the identity of beneficiary owners need to be determined and verified. A financial institution having a policy on customer identification procedures in place will help prevent impersonation. Financial institutions should try to invest in a digital ID verification process to enable them automatically capture customer demographic data which can be integrated into enterprise systems like a CRM. This will help streamline the customer onboarding process, conduct further due diligence and risk assessment. This can be linked to external resources for the review of PEPs (Politically Exposed Persons).

Monitoring of customers’ transactions is one of the KYC techniques used in fighting money laundering and terrorist financing in the banking industry. Financial institutions should put in place effective and efficient transaction monitoring programs and systems. This will help identify any suspicious transaction and report on them to the appropriate authorities. Although the types of transactions which could be used for money laundering are numerous, it is possible to identify certain basic features which tend to give reasonable cause for suspicion of money laundering. By combining transaction information with analysis of customers’ historical information and account profile, the transaction monitoring solution of financial institutions provide a “whole picture” analysis of a customer’s profile, risk levels, and predicted future activity, and can also generate reports and create alerts to suspicious activity. AML transaction monitoring solutions which has sanctions screening, blacklist screening, and customer profiling features help identify any criminal and blacklisted countries/ territories and prevent them from performing any banking transaction.

A core element in the fight against money laundering and terrorist financing using KYC principles is an adequate and effective risk assessment. The risk assessment is the foundation of a proportionate risk-based AML/CFT framework. Financial institutions clear understanding of the ML/TF risks and vulnerabilities they face, will help them adopt appropriate and effective risk management framework. Financial institutions’ ability to adopt a proper risk-based approach to fighting money laundering and terrorist financing, will enable them categorize their customers into low, medium and high risk and allocate the needed resources available to each category of customers. In assessing the risk of money laundering and terrorist financing, the financial institution should take into considering the following factors:

  • How the products and services are vulnerable to the risk of money laundering and terrorist financing? Low balance consumer depository accounts do not require the same level of scrutiny as higher-balance commercial accounts. Certain services, such as international wire transfers, inherently carry a higher level of risk. So knowing the risk associated with each product or service, helps the financial institution to mitigate these risks.
  • What geographies (locations) does the financial institution serve? Obviously, the more international the financial institution’s operations, the greater the concerns, and certain countries are higher-risk markets than others. Also the locations of the customers posse money laundering and terrorist financing risk to the financial institution.
  • What delivery channels do these product and service go through?  The further the connection between customer and financial institution, the greater the risk. Customers who visit branch locations and come face to face with employees pose a much lower risk than customers who interact with the financial institution solely through the use of technology.

KYC, if done properly, efficiently and effectively, will help financial institutions and other companies identify, verify and report criminals and their transactions (activities) to save the business from regulatory, reputation and compliance risk. This process can be burdensome and frustrating to some customers, but it is necessary in the fight against money laundering and terrorist financing.

If you require further information on this article, please contact Richieson @