Understanding the relationships of your client, counter-party or competitor is essential to your understanding of their motivations, resources and future behaviors.
1. Seeing the relationships will reveal if the target is “legitimate”. If the person claims to be a banker from the United Kingdom, is the person connected to the people that would normally be expected? Are there past banking relationships and business partnerships that show a track record confirming the person’s history?
2. Through relationships we may better understand the source of funds. Suppose the person who is opening an account at your institution claims to have a successful flower shop and intends to deposit several hundred thousand dollars per month in a business account, then you should expect to see a well established business in a good location that has been around for some time. If not, the relationships may reveal something else. For example, the person may be married to a city council member who actually controls hundreds of millions of dollars in zoning….
3. Relationships can be used to measure political exposure. If the person or company you are looking at is closely connected to politicians or their close relatives, then you may have a case of Political Exposure. This isn’t necessarily bad, but politically exposed persons must be treated differently. This is because politically exposed persons have a higher propensity to accept bribes or be involved in corruption and therefore need a different level of monitoring in your risk management program.
4. Relationships can reveal past mis-deeds or associates. A person may appear to be clean, but a relationship review may reveal that the person is in fact closely related to a problematic person from the past or has been involved in unwanted behavior in the past. Or perhaps this person is close to someone who has a bad past and is now “fronting” for that person.
We can use social networks on an ad-hoc basis to get some personal relationship information – as we tend to do with friends and family. But to understand real relationships – those with a legal dimension – we need to look at corporate and civil filings. Through analysis of these documents, we can see the connections and understand the past and present interests of our clients, counter-parties and competitors. Doing this in a structured manner with a tool like KYC3 is essential to any professional risk management effort.
KYC3 - Know Your Customer, Counterpaty and Competitor 