KYC- Knowing Your
Customers is the Heart of a Sound BSA Program
When evaluating the strength and effectiveness of a given
bank’s BSA program, one of the key areas of focus will be the system used by
the bank to get to know who their customer are and what it is that the do. The process of obtaining proper identification,
background information and making an assessment of the overall BSA/AML risk
presented by a customer can collectively be called the Know Your Customer
(‘KYC”) process. We have found that
this process is just as much art as it is science. In addition, we note that the stronger the
KYC portion of a program is, the more likely it is that the overall program
will pass regulatory muster.
KYC and CIP a
Potent One-Two Punch
The basis for the requirements of KYC is the USA Patriot
Act. The Patriot Act requires a bank to
develop a program for properly identifying its customers.
The CIP is intended to enable the bank to form a reasonable
belief that it knows the true identity of each customer. The CIP must include
account opening procedures that specify the identifying information that will
be obtained from each customer[1]
The Patriot Act is very specific
about the types of identification that must be presented and received by a Bank
when opening an account. Customers must
be able to fully identify who they are using official documentation. However, as the examination manual (and many
an examiner) points out, simply getting the proper identification of the
customer is not enough. The real key is
to be able to develop a “backstory” on the customer. The ability to be able to put a customer’s
activity in the proper context is a real key to determining the level or
existence of suspicious activity. For
example, a business account that shows cash deposits of $6, 000 every other day
might at first blush appear to be an example of structuring. However, if you knew that the customer was a
coin operated laundry and that the owner emptied the machines every other day,
would that change your mind? In context,
the activity of a particular customer comes into clear focus. By the same measure when activity is viewed
that does not fit in with the back ground of the client, then you have true
suspicious activity.
The ability to truly know and
understand the nature of your clients is the very best way to protect against
terrorist financing and money laundering.
KYC-Compliance and Marketing
The fact is that the more
information that you have about a customer the better. This is true in the compliance area, but it
is also true in the area of marketing.
Information about a customers needs is a direct pipeline into the
various products that your bank may offer.
Getting information about what a new business operator plans can provide
a wealth of marketing opportunities.
“You say that you want to open a new restaurant? Perhaps we can interest
you in a line of credit, a mobile banking app, or electronic bill pay! The more information the merrier! This same information can be used to develop
a risk profile for BSA/AML purposes.
We strongly suggest that a
marriage or cross selling and BSA can be a happy and prosperous one! One of our more innovative has used this
approach. The compliance group has
joined forces with marketing to develop account opening forms that are mutually
beneficial. Questions such as:
·
How did you happen to find out about our bank?
·
How do you envision getting your customers to
pay you?
·
Have you considered ACH rather than wires?
The answers to these questions are
used both to create a strong KYC file and a marketing profile.
KYC is only as Strong as the Documentation you maintain
One of the complaints we often
hear from our clients goes something like this- “we know our clients well, but
the regulators did not give us credit for know them. The fact of the matter is that without
documented evidence of your knowledge, you will not receive credit for knowing
your customer. There must be a clear
record of the information that you have developed about a customer and the
analysis that goes with the information.
It is not enough to merely maintain a file filled with statistics about
the number of wire received and sent, the fact that these wires represent a
growth in the business is the analysis that indicates a strong knowledge of the
customer. [2] It is critical that a KYC contain facts,
statistic and analysis. It is the
analysis that outs the context the transactions that are being viewed.
Bringing KYC to Life
A fact of life for BSA staff
trying to monitor customer activity is the staff that opens accounts is the
eyes and ears of BSA. They are the
people that are looking directly into the eyes of the new customer and have the
best opportunity to get all of the relevant information directly from the
client. It is also a sad fact of life
that often times, the people who open accounts and start relationship with
customers receive only a cursory training on BSA. Many banks do the annual online training for
this area. And while there is no
argument that this training meets the regulatory requirement, we recommend an
additional step. It has been our
experience that when people understand the purpose and the goal of a
regulation, compliance is able to get much stronger “buy-in”. Therefore, we recommend that the BSA take the
additional step of extensive KYC training for the people who are starting
relationship with customers. Make sure
that the lending and customer service staff understands the goal of KYC and the
consequences of noncompliance.
By developing a strong narrative for a customer,
a bank can clearly define what is and is not suspicious activity
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