Know-Your-Customer (KYC) Regulations

Know Your Customer (KYC) regulations are critical for international businesses. They’re used to assess risk and to fulfill the legal requirements of Anti-Money Laundering (AML) laws.

These regulations are complicated enough when operating nationally, but complexity multiplies with each additional territory. Cross-border transactions merit in-depth precautions. As a result, global companies need a robust framework to comply at the local and global level and continual oversight to maintain compliance.

Here’s what you need to consider and how you can overcome this challenge.

What are “Know-Your-Customer Regulations”?

Know-Your-Customer regulations govern when and what information a company must gather about their clients and how they must track it. They’re intended to verify the identity of the individual or company and assess their money laundering risk level.

This transparency is meant to reduce money laundering risk. However, it also imposes a significant burden on brick and mortar businesses and online entities.

Compliance requirements vary depending on what your business does. Regulated banking, lending, money transfer, gambling and gaming are held to different standards due to the increased risk of money laundering.

Nonetheless, the severe implications of money laundering on any business make KYC processes and procedures an integral requirement for effective risk management.

Know Your Customer compliance includes a Customer Identification Program (CIP) and Customer Due Diligence (CDD). CIP is the process of legitimizing a new client through identification, while CDD assigns a risk rating, monitors activities and reports suspicious activities.

Due Diligence Levels

The level of effort a company needs to demonstrate when doing due diligence varies depending on the circumstance. The three levels are Simplified Due Diligence (SDD), Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD).

Simplified Due Diligence (SDD) includes minimal tasks when risk is very low. However, most companies follow the Customer Due Diligence (CDD) process which provides a basic level of scrutiny for every new customer.

When companies enter an area with weak money laundering laws they may need to follow the Enhanced Due Diligence process. Businesses may also need to use the enhanced process for high-risk customers known as politically exposed persons (PEP). Typically, these include people of influence such as government officials, military leaders and senior executives.

Corporate KYC

Corporate accounts follow Know-Your-Customer regulations too. The process is similar to that of individuals, but more involved. It includes identifying the company’s vital information such as legal name, address, etc. However, exact requirements vary between jurisdictions.

One of the most important aspects in Know-Your-Business (KYB) regulations is the determination of ownership percentage and structure of the company, including defining the Ultimate Beneficial Owners (UBOs). Once known, your business validates their business executives as a prerequisite to authenticating their corporate account.

Besides legal considerations, there are also social and ethical responsibilities when deciding which companies you want to interact with. In 2016, the Panama Papers revealed a global network of 600 previously hidden people working in 42 countries taking advantage of anonymous company structures around the globe. Not everyone involved was a crook, but involvement led to timely and costly taxpayer and company investigations and negative press.

Varying Thresholds

The monetary thresholds within each country, region and industry vary greatly before companies are required to comply with KYC regulations.

As an example, Spain requires customer due diligence for one-off transactions (single or linked) over EUR 1,000. Portugal requires customer due diligence for transactions over EUR 15,000, with exceptions.

Customer Identification Requirements Vary

The strictness of due diligence regulations can also vary greatly, from basic to extremely strict. For instance, in Ethiopia institutions must verify identification documents from independent sources, but the regulator does not specify how this must be done.

Conversely, France requires legally certified documents from individuals and entities to prove due diligence.

Multiple Regulators

Each region decides how they will enact laws to comply with the Financial Action Task Force (FATF) overarching standards. Governmental agencies act as regulators for oversight, direction and rulings.

Some industries such as banking and gaming have a greater compliance obligation and may not have a dedicated regulating body. As a result, some countries use several agencies to oversee KYC regulations.

As an example, Portugal uses three separate regulatory bodies for banking, securities and gaming.

Ongoing Monitoring

Companies must conduct periodic due diligence assessments, because customer risk ratings can change. Unexpected transaction types, increased dollar value and spikes in activity or frequency can all increase the potential for money laundering. Cross-border activities also require close scrutiny.

Regulatory audits typically demand in-depth records of all CDD and EDD performed on customers. Companies may need to file a Suspicious Activity Report (SAR) if the account activity is deemed unusual.

Repercussions of Non-Compliance

Non-compliance can lead to government enforcement actions, steep fines and sanctions. Anti-Money laundering (AML), Know your Customer (KYC) and sanctions regulation fines for financial institutions alone topped $36 billion since 2007.

However, monetary implications are only part of the reason for concern. Non-compliance can also negatively impact your reputation and international credibility. Plus, in some jurisdictions non-compliance can include imprisonment.

Managing Know-Your-Customer Regulations

This article only touches on the expansive requirements of Know-Your Customer regulations. Smaller organizations may not have the resources or the knowledge needed to meet these requirements on their own.

Fortunately, Blueback Global has solutions. We offer global KYC expertise, accurate tracking and reporting and scalability. We monitor continually changing regulations so your company remains in compliance. Data is easily accessible for analysis, audits and regulatory reporting.

With a network of global professionals each with regional knowledge and local business savvy, we simplify KYC regulations. We’re well-positioned, highly-experienced and can help you overcome your multinational business challenges.

Let Blueback Global provide you with accurate advice to minimize the impact on your business as you set up Know-Your-Customer processes and procedures. Any company trying to manage KYC regulations alone will find it a daunting, expensive task.

Without expert assistance, it can be nearly impossible to scale needs to company growth and deliver compliance cost-effectively. This can lead to unreasonable cost burdens. Nonetheless, KYC compliance is vital to company success.

Don’t go it alone. Contact us for a free consultation and get the advice you need.

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