Let’s talk about Know Your Customer compliance or KYC. It means with regards to sanctions compliance and what you have to ask your customer to effectively mitigate sanctions risks.
Why Is It Important To Know Your Customer?
Know Your Client, also known as Know Your Customer, is an investment industry standard that ensures investment advisors have detailed information about their clients’ risk tolerance, investment knowledge, and financial position.
KYC safeguards both clients and financial advisors. Clients are safeguarded by having their investment advisor know which investments are best suited to their individual circumstances. Investment advisors are protected because they understand what they can and cannot include in their clients’ portfolios. KYC compliance usually entails requirements and policies like risk management, customer acceptance policies, and transaction monitoring.
Customers are the core of every business, whether in the public or the private sector. Yet customers also present a risk to an organization with regard to sanctions compliance. For this reason, knowing and understanding the customer is critical in sanctions compliance programs, including identifying and verifying a customer’s identity and understanding the nature and purpose of the customer’s business.
KYC Program Measures
In fact, the more an organization knows about its customers, the better it can mitigate the risk of non-compliance with applicable sanctions regulations. In particular, as a minimum, an organization should implement the following measures into their Know Your Customer programs:
First of all, an organization should be identifying the customer and verify the customer’s identity using reliable, independent source documents, data, or information.
Secondly, an organization should be identifying the beneficial owners and take reasonable measures to verify the identity of the beneficial owners
Thirdly, an organization should understand and, as appropriate, obtain information on the purpose and intended nature of the business relationship. With special regards to sanctions compliance, you should make sure to get information about the following: What goods and services do your customer trade-in; Where is your customer located and where is its principal place of business; Where does your customer intend to send funds or receive funds from; What are the source of funds and the source of wealth of your customer.
And lastly, an organization should be conducting ongoing due diligence on the business relationship and scrutinizing transactions undertaken throughout the course of the relationship to ensure that the transactions being conducted are consistent with the institution’s knowledge of the customer, their business, their risk profile, and, where necessary, the source of their funds.
Now contrasted with AML requirements, sanctions information can be focused, for example, when considering geographic risk exposure. For AML purposes, understanding a customer’s exposure to high-risk countries may be appropriate. However, for sanctions purposes, this understanding may be narrowed to identifying a customer’s risk exposure to those sanctioned countries, which represent a smaller list.
Because sanctions risks can also linger in complex supply chain structures, it is important to determine how the customer’s supply chain can be exposed to sanctions risk, even indirectly, in addition to understanding the geographic risk exposure. This fact highlights the importance of also knowing third parties.
Understanding Know Your Client (KYC)
The Know Your Customer rule is an ethical requirement for those in the securities industry who deal with customers during account opening and maintenance. This topic is covered by two rules that were implemented in July 2012: Financial Industry Regulatory Authority (FINRA) Rule 2090 (Know Your Customer) and FINRA Rule 2111. (Suitability). These rules are in place to protect both the broker-dealer and the customer, as well as to ensure that brokers and firms treat clients fairly.
The Know Your Customer Rule 2090 essentially states that when opening and maintaining client accounts, every broker-dealer should use reasonable effort. It is required to know and keep records on each customer’s essential facts, as well as identify each person who has authority to act on the customer’s behalf.
The Know Your Customer rule is important at the start of a customer-broker relationship because it establishes the essential facts about each customer before making any recommendations. The essential facts are those that are required to effectively service the customer’s account and to be aware of any special handling instructions for the account. In addition, the broker-dealer must be familiar with each person who has the authority to act on behalf of the customer and must comply with all securities laws, regulations, and rules.
Establishing A Customer Profile
Investment advisors and firms are responsible for understanding each customer’s financial situation by investigating and gathering information such as the client’s age, other investments, tax status, financial needs, investment experience, investment time horizon, liquidity requirements, and risk tolerance. Before opening an account, the SEC requires that a new customer provide detailed financial information such as their name, date of birth, address, employment status, annual income, net worth, investment objectives, and identification numbers.
Final Thoughts
Know Your Customer (KYC) standards are used in the investment and financial services industries to verify customers, their risk profiles, and financial profiles. KYC in the investment industry mandates that every broker-dealer make a reasonable effort to manage client accounts.
The Financial Crimes Enforcement Network (FinCEN) established minimum KYC requirements, including the verification of beneficial owners and the establishment of third-party dealing standards. Before opening an account, the SEC requires that a new customer provide detailed financial information. KYC standards are not required in the cryptocurrency market, though some have been implemented.
