KYC: Hidden Risks

Sometimes appearances are deceptive or the camouflage is so good that it is difficult to discover the reality. It may be that not all of your business partners are behaving as you suppose. A glance behind the façade can uncover unexpected risks – for your company and for you personally. You should therefore run a KYC check on your suppliers and customers both when initiating the business relationship and on an ongoing basis.

Find out how to go about it in our due diligence checklist.

Definition: What is Know Your Customer (KYC)?

Know Your Customer (KYC) is the aspect of due diligence that deals with the precise identification of customers. It involves checking personal and business details in order to exclude negative hits such as sanctions lists, watch lists and PEP lists and to identify ownership relationships and links between companies. To help tackle economic crime, money laundering and other criminal activities, minimum standards for due diligence checks have been introduced. The legal basis for the due diligence that makes a KYC analysis necessary is the 3rd EU Money Laundering Directive. Failure to comply with the due diligence requirement can result in heavy fines, reputational damage or even a prison sentence and withdrawal of your business permit.

Know Your Customer (KYC) and Know Your Supplier (KYS) checks should therefore be a fixed component of your compliance management system (CMS). The nature and depth of the check depend on the expected level of risk. Transactions are also screened to identify possible unusual activities.

One of the aims of Know-Your-Business-Partner due diligence is therefore to reveal the origin and whereabouts of funds. Risky activities that render such checks necessary include:

Money Laundering


Tax evasion

Terrorism financing

Preventing Economic Crime

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A robust Know-Your-Customer program helps companies avoid becoming embroiled in economic crime. Money laundering, corruption and fraud are issues that can affect any company, either directly or indirectly. Businesses must therefore ensure that they put effective anti-money laundering (AML) and anti-bribery & corruption (ABC) measures in place.

Failure to do so can result in fines and prison sentences. Affected companies often suffer reputational damage. In serious cases, business permits may be withdrawn.

A KYC check is therefore no longer just something for companies in the financial sector: organizations in all sectors need to take them seriously.

Client due diligence must be particularly thorough if it involves people who have links with politicians or government bodies, because politically exposed persons (PEPs) are particularly vulnerable to corruption and bribery.

Small customers can be excluded from customer due diligence (also: client due diligence) if contract values are low and their business situation is not unusual.

With a professional KYC tool companies can uncover the necessary background information on companies and individuals. The access to valid databases via a single platform simplifies research and reveals the relevant information quickly.

Legal Principles

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The legal basis for KYC checks is the 3rd EU Money Laundering Directive. This, combined with the UK Bribery Act, the UK Modern Slavery Act and the Financial Action Task Force (FATF), provides the framework for Know-Your-Customer activities.
Legal principles internationally
The international regulations are relevant event to companies that are not located in the affected countries but have business links with them.

Know-Your-Customer software helps you uncover criminal activity by companies and individuals. For example, it enables you to identify dummy companies that are being used by beneficial owners for money laundering or tax evasion.

Using a risk-based approach, you need to decide what resources to invest in a KYC check.

Do not rely on your partners’ good reputation but uncover risky activities: know your customer!

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