When and Why Do I Apply KYC Controls to My Organization?

April 27, 2017 Chris Doxey

KYC laws and The Patriot Act

Know Your Customer (KYC) laws were introduced in 2001 as part of the Patriot Act. This section of the Act applied to financial transactions with enforcement policies to the Bank Secrecy Act of 1970 that are reflected in Title III of the Patriot Act.

payment security and know your customer controls with Chris Doxey

Know Your Customer (KYC) requirements

According to the Harvard Law School Forum on Corporate Governance and Financial Regulation, the U.S.’s Financial Crimes Enforcement Network (FinCEN’s) Know Your Customer (KYC) requirements were proposed in 2014 as part of a broader regulation providing the requirements of a customer due diligence (CDD) program.

These requirements for internal controls are intended to be beneficial to financial institutions to help avoid illegal transactions by gaining more visibility into their clients’ identities and their business relationships. The purpose of developing KYC compliance systems is to ensure the organizations you are doing business with are operating in a compliant and lawful manner. 

The impact of KYC

A global survey conducted by Thomson Reuters in 2016, highlights the lack of resources along with the enhanced volume of regulatory change were the top concerns among nearly 800 financial institutions who responded.

A similar survey conducted by Reuters indicated that 89% of their corporate customers did not have a positive KYC experience.

In summary, both global surveys revealed a single clear message: The costs and complexity for KYC risk management are rising and having a negative impact on business due to the complexity of customer due diligence programs.

KYC Controls and Customer Due Diligence (CDD) programs

As part of the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) requirements, the concept of a due diligence program begins with verifying the customer’s identity and determining if there are any risks associated with that customer. The focus should be on reviewing higher risk transactions that include: those of a high dollar amount and transactions suspicious of terrorist financing.

FinCEN recommends the following elements of a customer due diligence project for financial institutions. These compliance requirements can be applied to corporations and included in managing other control procedures to avoid “compliance silos.”

The following approach can be broken down into four steps to help reduce the cost and complexity as noted in the 2016 Reuters’ survey:

  1. Customer identification and verification
  2. Beneficial ownership identification and verification
  3. Develop a customer risk profile
  4. Ongoing monitoring

AML and KYC screening requirements can be combined into a compliance program. Additionally, corporate customer identification programs should include the same requirements and objectives as a financial institution’s program for maximum effectiveness.

About the Author

Chris Doxey

Chris Doxey, CAPP, CCSA, CICA is an independent management consultant providing Internal Controls and Business Process Best Practice Solutions. She has extensive experience in procurement, accounts payable, internal auditing, internal controls, Sarbanes-Oxley compliance, payroll, logistics, financial systems strategy, and financial integration at Digital, Compaq, Hewlett Packard, MCI, APEX Analytix, and Business Strategy, Inc. She was recruited to assist MCI (formally WorldCom) recover from their internal control challenges. She has a bachelor's degree in English, a bachelor's in accounting, a master's in business administration, and a graduate certificate in project management. Chris has written numerous articles and published two handbooks: AP Leadership Skills and Implementing a Controls Self Assessment Program for Your Accounts Payable Department.

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