Objectives of a KYC Policy in Anti Money Laundering

Objectives of a KYC Policy in Anti Money Laundering: The reputation of a business is usually at the core of its success. The ability to attract good employees, customers, funding and business is dependant on reputation. Even if a business is otherwise doing all the right things, if customers are permitted to undertake illegal transactions through that business, its reputation could be irreparably damaged. A strong KYC policy helps to prevent a business from being used as a vehicle for illegal activities.

Know your customer (KYC)

• ensuring that only legitimate and bona fide customers are accepted
• ensuring that customers are properly identified and that they understand the risks they may pose
• verifying the identity of customers using reliable and independent documentation
• monitoring customer accounts and transactions to prevent or detect illegal activities
• implementing processes to effectively manage the risks posed by customers trying to misuse facilities.

What risks are mitigated by KYC?

There are five types of risks that an effective KYC policy can help to mitigate:

• reputational
• operational
• legal
• financial

Reputational risk:

The reputation of a business is usually at the core of its success. The ability to attract good employees, customers, funding and business is dependant on reputation. Even if a business is otherwise doing all the right things, if customers are permitted to undertake illegal transactions through that business, its reputation could be irreparably damaged. A strong KYC policy helps to prevent a business from being used as a vehicle for illegal activities.

Operational risk:

This is the risk of direct or indirect loss from faulty or failed internal processes, management and systems. In today’s competitive environment, operational excellence is critical for competitive advantage.

If a KYC policy is faulty or poorly implemented, then operational resources are wasted, there is an increased chance of being used by criminals for illegal purposes, time and money is then spent on legal and investigative actions and the business will be viewed as operationally unsound.

Legal risk:

If a business is used as a vehicle for illegal activity by customers, it faces the risk of fines, penalties, injunctions and even forced discontinuance of operations.

Apart from regulatory risk, involvement in illegal activities could lead to third-party judgments and unenforceable contracts. In addition, professionals working within many financial and other professional sectors may also personally be subject to legal action or prosecution.

Due to the nature of business, these risks can never entirely be eliminated. However, if a business does not have an effective KYC policy, it will be inviting legal risk. By strictly implementing and following a KYC policy, a business can mitigate legal risk to itself and its staff.

Financial risk:

If a business does not adequately identify and verify customers, it may run the risk of unwittingly allowing a customer to pose as someone they are not. The consequences of this may be far reaching. If a business does not know the true identity of its customers, it will also be difficult to retrieve any money that the customer owes.

Concentration risk:

This type of risk occurs on the assets side of a business if there is too much exposure to one customer or a group of related customers. It also occurs on the liabilities side if the business holds large concentrations of funds from one customer or group (in which case it faces liquidity risk if these funds are suddenly withdrawn).

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