What does the term Know your customer / KYC mean?
The term “Know your customer”, or KYC is broad and may feel a little unclear to some Here we go through the most important points in the concept that ultimately aim to prevent and limit the possibilities for money laundering and financial terrorism.
By Anders Green
What does the term “Know your customer” mean?
The Act on Measures against Money Laundering and financial terrorism contains a special chapter on customer awareness. In order to protect your business and comply with the law, an operator – ie a company – must ensure that they have sufficient knowledge of their customer to be able to handle the risk of money laundering or financial terrorism. Therefore, people talk about knowing their customer or KYC (Know Your Customer), which is based on risk assessment and several active measures. The nature and accuracy of the measures are based on the risk that is deemed to be associated with the customer.
What does the law say?
With regards to insufficient customer knowledge, the law describes that an operator (in practice, a company) may not establish or maintain a business relationship or carry out a transaction if the operator does not have sufficient knowledge of the customer to handle the risk of money laundering or financing terrorism. No business relationship may be established or a transaction performed if there is any suspicion of this. The company must identify the customer and check the customer’s identity – but this does not always apply to the specific customer. An agent also needs to be checked regarding his identity and his authority to represent the customer. It is also important for companies to ensure that the customer has a real principal, which means that the customer is owned or controlled, directly or indirectly, by one or more people to more than 25%. Here is customer knowledge and KYC something you need to have clear routines for, and work actively with so that nothing will be missed.
PEP – Person in a vulnerable political position
It must also be checked whether the person is a so-called PEP, a person in a politically exposed position, or a known employee or close relative of such a person. PEP is an abbreviation for the English Politically Exposed Person. By this is meant a person who has, or has previously had, important public functions in any organization or state. These may be politicians, civil servants, judges, senior officers, CEOs, or members of international organizations or state-owned companies. Working with the concept of Knowing your customer or KYC is just as important when it comes to a person in a vulnerable political position. By being a person in a vulnerable political position, they can be exposed to bribery. It is also important to know which people are family members or employees of a PEP.
Not only banks are affected by the law
Sweden’s first version of the Money Laundering Act was introduced in 1993 and has since received several updates. On January 1st, 2020, the Fifth Money Laundering Directive entered into force, and as early as December 1st, 2020, the next update was implemented from the EU. In connection with the various updates, the law has been broadened to include more companies and areas of activity. The classic example that people often think of questions you can get at a bank office if you are going to deposit money into an account. It is a very direct example of KYC. But, it is much wider than that.
The law covers both the people who commit an act and the company that participates in, for example, a transaction that is made for the purpose of money laundering or to finance terrorism. The latest law expands which industries are covered by the law. Today, this applies to banks and companies with business areas such as life insurance, credits, deposits, securities, and currency exchange. Fund companies are also included in the law. These are industries with the potential for large financial flow and large amounts, but the law also includes authorized accountants, auditing companies, and other companies engaged in accounting services. Casinos and gaming companies are also covered, with their often many transactions of both small and large amounts. The law states that all professional trading in cash sales to values over 5000 Euro is covered by the Money Laundering Act. In other words, the demands have increased over the years for more and more industries to adapt their operations, and good customer knowledge is today a must.
“A simple measure that provides security and flexibility at work is to use a 365id-Scanner. The user-friendly system will verify ID documents in real-time, store them automatically, and immediately warns if something is wrong.”
Five practical tips for Know your customer / KYC
To make the law on money laundering, and compliance with it, understandable in relation to KYC, we have put together five points that can be good to keep in mind when you conduct the work.
- Review risks and create clear routines
Preventive work is smart and a key for everything to operate smoothly. Everyone at the company should know what to do in their daily work. You need to assess the risks you may encounter and how to act. You need to know who your customers are and what work they do. How do you ensure that you have the correct customer information? These routines must be evaluated at least once a year.
- Know your customer well enough!
The routines and measures you introduce should be adapted to different situations. Sometimes it is enough to ask for identification, and at other times you may need to ask more questions than that. If you have had a long-term relationship with a customer, it is still important to stay up to date on their business. Has anything changed since the last time? Is it the same principle? If the gut feeling is not right – take the safe before the unsafe and ask once more.
- EU sanctions and high-risk third country
There are countries outside the EES that have been identified by the EU as high-risk third countries. Companies covered by the Money Laundering Act must check whether their customers are established in such a country. In the same way, you need to have good knowledge of the customer to know if they are part of a group or organization that is subject to EU sanctions.
- Contact with the financial Police force in case of doubt or irregularitets
In the routines, it must be clear that ongoing business relationships are monitored and that individual transactions are assessed. If there is any suspicion of illegality or if something like this is discovered, the Financial Police must be contacted immediately. You always have the right to refuse assignments from a customer or otherwise indicate that you can not take part in their business if it is deemed illegal.
- Update and transparency
Rules, laws, and regulations are updated, and thus you need to ensure that you always have the latest information. There should be openness in the company about questions about KYC, PEP, and other things, and all employees should know what applies and who they can ask if there are any doubts. As a new employee, you can’t know everything, so it is important to support new hires so that they can act with confidence and with the company backing them up in meetings and situations that might otherwise be perceived as uncomfortable.
Facilitate customer awareness and Know your customer with 365id
The Money Laundering Act and the recommendations for customer knowledge place high demands on companies covered by it. How do you ensure that the routines are easy to understand and complied with by all employees? A simple measure that provides security and flexibility in the work is to use 365id. The user-friendly system will verify ID documents in real-time, store them automatically, and immediately warn if something is wrong.
Every day, more than 20,000 documents are scanned through 365id’s system. We encounter between 100–200 invalid ID documents every day. This simple solution protects companies and employees while saving time and energy and guaranteeing compliance with legal requirements. With technology from 365id, companies meet the prevailing requirements in a simple, convenient and safe way.