Every organization must know the relevance of KYC or Know Your Customer for effective sanctions screening. Sanctions screening is part of the customer onboarding process therefore, it is a control to be applied before onboarding or establishing business relationships.
Know Your Customer is part of the CDD measures, which enables the organization to know the credentials, and background of the prospective customer. Sanctions screening is part of the customer onboarding process therefore, it is a control to be applied before onboarding or establishing business relationships.
Relevance of KYC for Effective Sanctions Screening
Organizations such as financial institutions are required to perform the KYC process before onboarding the customer and update the KYC later on at different stages, such as during the process of periodic compliance reviews or investigations. The KYC process protects an organization from being used for money laundering or terrorist financing activities, which may be performed by the customer, after getting onboarded by the organization, such as a financial institution.
Sanction screening as part of KYC enables the organization to avoid the risk of onboarding the criminals such as money launderers or persons associated with criminals in any manner. Onboarding the criminals causes the entity to face reputational losses, and imposition of penalties from the regulator. KYC process is a mandatory process that is followed at the time when the customer contacts the organization either physically or through online portals, for opening an account, or provision of any services, therefore, name screening should be performed in these earlier stages.
KYC process is also performed when the customer or walk-in customer conducts a random transaction, international wire transfer, or when there is a suspect of money laundering or when there is a doubt regarding the accuracy of previously collected consumer’s identity data or information. Sanction screening or name screening from sanction lists should be performed for these types of customers.
Organizations develop the KYC policy which is approved by the Board of Directors and implemented down the line for compliance purposes. KYC policy should include the provisions related to the performance of sanction screening, to ensure that account opening or onboarding time complies with the sanctions screening requirements.
Sanctions screening as part of the KYC process helps in understanding a customer’s identity, financial activity, and risks. In the broader sense, sanctions screening and the KYC process include the following:
- Client’s identification using initial documents, provided by the customer.
- Identifying the true beneficial owner of the customer and taking appropriate measures to verify his or her identification. If the beneficial owner is a legal person, trust, company, foundation, or similar legal arrangement the organizations are required to take reasonable measures to understand the ownership and control structure of that legal person, trust, company, foundation, or similar legal arrangement.
- Understanding the objective of opening the account or establishing the relationship
Identification and verification of the client and true beneficial owner is part of the Board-approved KYC policy. Identity verification of the prospective customer should be appropriate and reasonable to meet the applicable regulatory requirements. The purpose is to onboard only identified and verified customers, after the performance of sanctions screening and KYC process.
Know Your Customer, or KYC, refers to the steps that organizations must take to verify the identities of their consumers both before and during their engagement. Customers must supply accurate and thorough personal information used to establish their identities to most banking, credit, and insurance organizations. Companies also utilize this information to determine the compliance risk assessments required by their company and to ensure that consumers are not involved in financial crimes or are on sanctions lists.
KYC rules safeguard not just the economy and the industry as a whole from damaging money laundering tactics, but also financial institutions from compliance penalties, reputational damage, and even criminal responsibility that may arise as a result of financial crime.