Know your customer (KYC) procedures
Financial institutions around the world, from New York to London, to Johannesburg, are required under the regulations of their country, to adhere to KYC procedures. In South Africa, the law is known as the Financial Intelligence Centre Act (FICA). Such institutions include banks, foreign exchange dealers, stockbrokers, attorneys and real estate agents.
The procedures are in place to ensure due diligence on the part of such organisations, so that they are not inadvertently complicit in criminal activity, for example, money laundering, smuggling, poaching, and theft of precious metals, which could lead to substantial fines. By ensuring that they have rigorous procedures in place to be compliant with such laws, companies help to minimise the risk of being involved in such activities and coming under the scrutiny of authorities.
Customer Due Diligence (CDD) measures
CDD measures are often carried out by banks and other financial institutions to ensure that they are compliant with KYC laws; such measures usually include verifying identity using documents and data from a reliable and independent source, as well as gathering information on the nature and intent of the business relationship. Such procedures can be time-consuming and costly for the firm, especially if carried out on an individual-by-individual basis.
It can also involve repeated scanning or fax the documents. However, it is often part of standard bank policy; by minimising supplier risk, their costs are lowered in the long term. They also reduce the risk of adverse damage to their reputation and credibility if high profile clients were to be discovered to be involved in the illegal activity; such a revelation could result in negative media coverage, sanctions or blacklisting.
The release of the Panama Papers in 2015 mainly brought the concept of ‘dirty money’ into the public spotlight around the world, and a large number of companies and individuals suffered reputational harm as a result.
KYC for businesses
Whatever industry a company is involved with, it will invariably be associated with a vast network of vendors, suppliers and intermediaries, making it tricky to exactly know who one is doing business with at all times. As it is illegal in many jurisdictions to conduct significant transactions with an entity known to be involved in criminal activity, it is of the utmost importance for companies to engage in robust, due diligence procedures to ensure compliance with federal requirements. Also, many banks need to make sure that their clients are properly engaged with appropriate compliance programmes.
KYC regulations, such as South African FICA or the US PATRIOT Act, apply both to individuals and to corporate entities such as sole proprietorships, close corporations and listed companies. There are checklists which must be completed depending on the type of client one is dealing with, being compliant with regulations. The records usually involve providing reliable documented evidence of the registered business name, head office address, operating address, tax and VAT reference numbers, plus personal details of persons who are connected to the company, such as members, agents, shareholders, beneficial owners, etc.
LSI Keywords: KYC, supplier risk, identity verification, regulation, due diligence, procedure, checklist, bank policy, shareholder, compliance, requirements