Know Your Customer
Know Your Customer (KYC) is an overarching word that encompasses one of the foundational measures designed to protect financial institutions against financial crime, money laundering, terrorist financing, sanctions breaches and bribery and corruption.
The “C” in KYC typically is an abbreviation for “Customer”, but it can also be an abbreviation for “Client” - for “Know Your Client” - or as we feel is most accurate at Avallone - “Counterparty” - for “Know Your Counterparty”.
Regardless of what an organization designates for the “C”, KYC is the process of collecting and analyzing data and documents for business/corporate counterparties.
Examples of counterparties include but are not limited to:
• Business customers
• Asset managers
• Construction companies
• Joint venture
The goal of KYC is to assess the likelihood of your counterparty being involved in risky activities - which is a risk to your company. KYC also encompasses organizational and governmental obligations for compliance.
The first step in KYC is identification. By identifying who you are doing business with, you can understand if the business relationship makes sense. This includes looking at your counterparty’s business model, source of funds, source of wealth, etc.
Following identification, you would use the information to do a thorough analysis of the counterparty’s:
• Legal Entity Structure
• Ultimate Beneficial Owners (UBOs)
Taking the information captured within KYC, then Screening can also be performed - which typically includes screening for some or all of these activities for the counterparty:
• Politically Exposed Persons (PEPs)
• Adverse Media
But if the screening is to be super thorough, then companies should also screen for:
• Watchlists / Warning lists
• Fitness and Probity lists
If a counterparty meets all of your KYC requirements and you are able to start having a business relationship, your KYC on that counterparty doesn’t stop there.
KYC should be done on the counterparty regularly on a periodic, ongoing basis to ensure that the counterparty is still meeting your requirements. For example, their company officers still not and are still not on any sanctions or adverse media lists.