Know Your Customer KYC Advisory

Know Your Customer or KYC program in the United States obligates financial institutions to develop a Customer Identification Program or CIP to confirm the identity of customers or potential customers who intend to perform financial transactions with the institution. The Know Your Customer program, which was created pursuant to the US Patriot Act, is a financial regulation that targets financial institutions and financiers who do business internationally.

The Customer Identification Program, which is more widely known as Know Your Customer, mandates that financial institutions develop a CIP appropriate for the size and nature of the firm’s business.

Know Your Customer requires trade finance providers to incorporate a continuing Customer Identification Program into the firm’s Anti-Money Laundering (AML) compliance program.

The CIP enacted by a firm must sufficiently enable the formation of a reasonable belief that it knows the true identity of its clients and customers. The CIP must include procedures that specify the identifying information the firm will obtain from each customer. It must also include reasonable and practical risk-based procedures for verifying the identity of each customer.

Customer Due Diligence

Customer Due Diligence (CDD) is the factual information about a customer that is sufficient to enable a financial institution to analyze the extent to which the customer exposes the institution to an extensive range of financial regulatory risks, which prominently include money laundering and financing to terrorists or terrorist organizations. To effectively and honestly perform these analyses, financial institutions, including trade finance providers, must know their customers, which means undertaking customer due diligence to:

• to comply with the requirements of relevant legislation and regulation;
• to assure the financier that the customer due diligence process provided reasonable certainty that the customer is who they claimed to be;
• to best position the financier to provide products and services to the customer which were requested by the customer and, more importantly, are the best products and services for the customer;
• to protect both the financier and the customer against fraud, impersonation and identity fraud;
• to arm the financier with information sufficient to identify anything unusual having to do with the customer over the course of a continuing relationship, thus protecting both the financier and the customer;
• to provide enough information to the financier to form a comfortable continuing relationship with the customer so that in the event anything unusual arises that does not have a business purpose or is not otherwise explainable, then they may involve money laundering, fraud, criminal or terrorist activity;
• to arm the financier with customer knowledge which is sufficient to assist the Financial Action Task Force personnel who may be investigating the customer as a result of reported suspicions, to either assist in convicting the customer of wrongdoing or exonerating the customer of any wrongdoing.

Customer Identification Program

The Customer Identification Program (CIP) enacted by a firm must sufficiently enable the formation of a reasonable belief that it knows the true identity of its clients and customers. The CIP must include procedures that specify the identifying information the firm will obtain from each customer. It must also include reasonable and practical risk-based procedures for verifying the identity of each customer. Financial institutions should conduct a risk assessment of their customer base and product offerings, and in determining the risks, consider:

• The types of accounts offered;
• The methods of opening accounts;
• The types of identifying information available; and
• The institution’s size, location, and customer base.

Risk-Based Customer Due Diligence

International standards require that a risk-based approach is applied to CDD. Consequently, the measures should be applied on a risk-sensitive basis depending on the type of customer/business relationship between the customer and financier, or nature of the transactions or activity. Higher risk categories should be subject to enhanced due diligence.

The risk assessment will determine how much of the information collected needs to be independently verified, as the following examples indicate.

• Only simplified or basic account opening information may need to be collected for a low-balance, low-turnover deposit account. The extent of information that is verified can be restricted to the identification evidence and information concerning the source of the funds and the expected frequency of deposits and withdrawals.
• For standard-risk customers, which are those who are permanently resident in the country, with a salaried job or another transparent source of income, only the standard information provided may need to be verified.
• Enhanced due diligence should be applied to higher-risk customers/clients. Enhanced due diligence must also be applied to the beneficial owners or controllers of higher-risk companies or structures.
• Quoted companies and their wholly-owned subsidiaries are considered to be lower-risk, requiring only simplified due diligence.

Privately owned companies and other entities, such as trusts, are generally assessed as higher risk than quoted companies because they are exposed to a lower level of external scrutiny than those that are publicly owned. For such relationships, the identities of the beneficial owners and controllers must also be verified in addition to verifying the identity of the corporate entity. Beneficial owners may also be executive directors or the settlors of trusts.

Know Your Customer Key Takeaways

Due Diligence investigations of counter-parties are essential for the success of any trade finance deal. They ensure clients comply with the law, and help to establish the basis for mutually beneficial business relationship. Knowing our customers is very important to us, so  performing client due diligence for every transaction in which we are involved has the desired effect of protecting our clients and ourselves.

Our Trade Finance Due Diligence advisory service performs all Trade Finance Due Diligence required by US law, including the Patriot Act, Anti-Money Laundering Act, Counter-Terrorism Financing Acts and Know Your Client (KYC) regulations. We perform these procedures for all transactions in which we are involved according to strict, consistent guidelines.