Financial institutions, investment service companies, insurers and creditors generally are required to implement and follow know-your-customer (KYC) policies as part of a larger anti-money laundering (AML) effort. Although most other nonregulated businesses don’t have a KYC mandate, such procedures can help prevent fraud and significant financial losses from criminal activity, among other benefits. In addition, following KYC principles sends a message to customers, vendors and other stakeholders that you take trust and security seriously.

Due diligence requirements

As part of their KYC processes, regulated businesses have three duties to perform: customer due diligence, enhanced due diligence and continuous monitoring. In practice, this means they verify customers’ names, addresses and dates of birth and check them against lists of known criminals. In addition, they monitor transaction trends and high-risk accounts to determine their threat level and whether they merit filing suspicious activity reports with the government.

Enhanced due diligence techniques dig deeper. For example, a bank might look closely at high-transaction-value accounts or accounts that deal with risky activities or countries.

Export companies subject to the regulations must be careful not to sell to customers on certain lists maintained by the federal government, including customers that have been denied export privileges. Exporters are also expected to review all information they receive about customers to ensure that they’re alerted of the possibility that a violation could occur.

Antifraud and marketing benefits

Even if you’re not in the financial industry and don’t sell products overseas, it can pay to understand who your customers are. Routinely performing credit checks on major customers, for example, can help prevent your business from falling victim to “phoenix” schemes where companies attempt to profit from bankruptcy.

What’s more, creating a comprehensive history of each customer’s credit limits and transactions enables you to identify your top customers. This may not expose fraud or money laundering, but it can help your business assess how vulnerable it would be if it lost one or a few of its biggest customers.

Analyzing customers’ purchasing behavior also allows you to identify cross-selling and upselling opportunities — along with any irregularities that could indicate nefarious activity. If a customer with a long record of annual purchases suddenly begins placing monthly orders, for example, you may want to delve deeper. The change may signal nothing more than your customer expanding its business, but it also could be a sign of fraud.

Crypto risks remain

The emergence of cryptocurrencies has increased customer-related risk for some businesses. Although crypto companies now must adhere to AML regulations and follow KYC procedures, some money launderers have found workarounds. So exercise greater caution when conducting transactions involving crypto.

(This is Blog Post #1576)