When do you say “No” to a prospect customer or counterparty? (Part 1 of 2)

Several hurdles should be jumped to show that you Know Your Customer

KYC is the foundation of the AML process. Knowing Your Customer is the most obvious way to spot suspicious behavior. When taking on a new customer or entering into a transaction with a new counterparty, it is very important to understand who you are dealing with. In this regard, there are a number of common base efforts that are usually made, such as verifying the ID cards of the individuals involved, checking the legal status of the companies and organizations involved, and checking utilities or other invoices from known providers in order to verify that the address information for the person or company is correct.

Collecting documents this is only the first hurdle. The next immediate step is to check the party against various government issued watch and sanctions lists. This is a step that is still in the “tick the box” approach; if the party is on the FBI Most Wanted list or has been sanctioned by the European Union for committing human rights violations, then clearly dealing with the party is a “No, No”. The only complications in this check are that there are a lot of various lists to check from different sources and that there are sometimes names that match the lists because the parties simply have the same name. The first case is easily addressed through the use of tools that enable searching all the lists at once. The second case requires comparing the list entry with the party in front of you in order to make a determination if it is a match or not. This is done by comparing attributes, such as date of birth.

After the second hurdle, the Risk Based Approach starts. This is a process moves into a grey area. It is here that KYC becomes a difficult and very personal affair. Two hurdles are overcome with yes or no answers. To set the third hurdle requires asking “How much risk does this party present and is it within our tolerances?”

In the next part of this article, I will discuss considerations of setting the third hurdle for the Risk Based Approach.