Know Your Customer compliance is basic due diligence

KYC, AML / CFT are acronyms more familiar to large financial enterprises and banks than smaller companies and enterprises, but they shouldn’t be. They refer to the Anti-Money Laundering and Counter-Terrorism Financing Act (AML/CTF) requirements currently aimed at financial and digital currency institutions. Quite simply, they require that organisations within certain industries know who their customers are and what their financial dealings are.

Why do we need legislation at all?

The legislation was introduced in 2006 by the Australian Transaction Reports and Analysis Centre (AUSTRAC) with the aim of deterring money laundering and terrorism funding. The legislation suggests that by understanding their customers, who’s behind them and their financial activities, companies are able to mitigate the potential risks.

According to AUSTRAC, companies who do business with non-individual customers wear a different level of risk than those doing business with individuals. Understandably, it’s easier to know who you’re dealing with when it’s just one person. It gets significantly more complicated – for companies of all sizes – when there are multiple individuals or trusts with a stake. So, at this stage companies who operate in the financial services, bullion, gambling and digital currency exchange sectors have been identified as high-risk and have strict obligations under the AML/CTF Act.

It’s simple really

The KYC process as part of the AML/CFT Act requires just a few steps: verification of the company and its directors, calculation of the Ultimate Beneficial Owner (UBO) structure, Verification of Identity and then finally a Politically Exposed Person (PEP) and Sanction search needs to be run. Once this due diligence is completed, all the records need to be maintained.

While the steps completing all the steps can sound time-consuming, some are already part of the upfront checks run by businesses as part of their onboarding process. For others, a CreditorWatch AML screening report can be downloaded and available with just the click of a button.

It’s not just for the legislated industries

The thing is, a lot of the information that the AML/CFT Act requires, is generally just good business. They are basic due diligence steps that every business should be undertaking to protect themselves from fraud or non-payment.

While they won’t face fines or other consequences for non-compliance, an increasing number of companies outside of the legislated industries are embracing KYC procedures and are taking the same steps to verify the identities of their clients and assess the potential risks of doing business with them.

In fact, as it stands 22 percent of CreditorWatch companies in non-legislated industries are actively choosing to use KYC/AML and Ultimate Beneficial Owner (UBO) tools as part of their due diligence.

Knowing your customer in the future

Given the fact that they deal directly with trust accounts and regularly move money on behalf of customers, it’s likely that the real estate industry, accountants and lawyers will one day be included among the legislated industries. Instigating a KYC process ahead of time will not only assist with onboarding and ongoing risk assessment but ensure that companies operating in these industries are ahead of any potential issues.

Similarly, industries like building and construction, or in fact in any industry whereby large companies operate or undertake significant transactions, that would benefit from the extra due diligence.

As digital connectivity grows, it’s increasingly difficult for companies of any size to know that the businesses they are dealing with are exactly who they say they are. Beyond fraud and money laundering, it’s also about protecting your business and ensuring that your customers are reliable, risk-averse and able to pay you on time. KYC checks simply help you to make smarter business decisions, fast.

Author: Patrick Coghlan, CEO CreditorWatch