Know Your Customer (KYC) compliance regulation has proved to be one of the biggest operational challenges banks, accountants, lawyers and similar financial service providers worldwide have had to overcome.
World-Check, the industry standard KYC compliance solution, provides an overview of KYC compliance and its origins, and outlines the compliance mandate as applicable to banks, accounting firms, lawyers and other regulated financial service providers – not just in the UK, Europe and the USA, but all around the world. Relied upon by more than 3,000 institutions worldwide, this KYC database solution provides effective legal and reputational risk reduction.
Why “Know Your Customer?”
The 9/11 terrorist attacks on the World Trade Centre revealed that there were sinister forces at work around the world, and that terrorists activities were being funded with laundered money, the proceeds of illicit activities such as narcotics and human trafficking, fraud and organised crime. Overnight, the combating of terrorist financing became a priority on the international agenda.
For the financial services provider of the 21st century, “knowing your customers” was no longer a suggested course of action. Based on the requirements of legislative landmarks such as the USA PATRIOT Act 2002, modern Know Your Customer (KYC) compliance mandates were created to simultaneously combat money laundering and the funding of terrorist activities.
What is Know Your Customer (KYC)?
Know Your Customer, or KYC, refers to the regulatory compliance mandate imposed on financial service providers to implement a Customer Identification Programme and perform due diligence checks before doing business with a person or entity.
KYC fulfils a risk mitigation function, and one its key requirements is checking that a prospective customer is not listed on any government lists for wanted money launders, known fraudsters or terrorists.
If preliminary KYC checks reveal that the person is a Politically Exposed Person (PEP), for example, Advanced Due Diligence must be done in order to ensure that the person’s source of wealth is transparent, and that he or she does not pose a reputational or financial risk in terms of their finances, public positions or associations. Beyond customer identification checks, the ongoing monitoring of transfers and financial transactions against a range of risk variables forms an integral part of the KYC compliance mandate.
But to understand the importance of KYC compliance for financial service providers better, its origins need to be examined.
Origins of Know Your Customer (KYC) compliance
The arrival of the new millennium was marred by a spate of terrorist attacks and corporate scandals that unmasked the darker features of globalisation. These events highlighted the role of money laundering in cross-border crime and terrorism, and underlined the need to clamp down on the exploitation of financial systems worldwide.
Know Your Customer (KYC) legislation was principally not absent prior to 9/11. Regulated financial service providers for a long time have been required to conduct due diligence and customer identification checks in order to mitigate their own operation risks, and to ensure a consistent and acceptable level of service.
In essence, the USA PATRIOT Act was not so much a radical departure from prior legislation as it was a firmer and more extensive articulation of existing laws. The Act would lead to the more rigorous regulation of a greater range of financial services providers, and expanded the authority of American law enforcement agencies in the fighting of terrorism, both in the USA and abroad.
In October 2001, President George W. Bush signed off the USA PATRIOT Act, effectively providing federal regulators with a new range of tools and powers for fighting terror financing and money laundering. During July 2002, the US Treasury proceeded to introduce Section 326 of the PATRIOT Act, a clause that removed some key burdens for regulators and added significant enforcement muscle to the Act.
What 9/11 changed, in essence, was the extent to which existing legislation was being implemented. Using the provisions of the earlier anti-terrorism USA Act as a foundation, it included the Financial Anti-Terrorism Act, which allowed for federal jurisdiction over foreign money launders and money laundered through foreign banks. Significantly, it is this anti-terror law that would make the creation of an Anti Money Laundering (AML) programme compulsory for all financial institutions and service providers.
Section 326 of the USA PATRIOT Act dealt specifically with the identification of new customers (“CIP regulation”), and made extensive provisions in terms of KYC and the methods employed to verify client identities.
In accordance with this piece of updated KYC legislation, federal regulators would hold financial institutions accountable for the effectiveness of their initial customer identification and ongoing KYC screening. Institutions are required to keep detailed records of the steps that were taken to verify prospective clients’ identities.
Although current KYC legislation does not yet demand the exclusion of specific types of foreign-issued identification, it recommends the usage of machine-verifiable identity documents. The ability to notify financial institutions if concerns regarding specific types of identification were to arise, combined with a risk-based approach to KYC, proved to provide a robust mechanism for addressing security concerns.
Effectively, the risk-based approach to customer due diligence grants regulated institutions a certain degree of flexibility to determine the forms of identification they will accept, and under which conditions.
KYC compliance: Implications for banks, lawyers and accounting firms
The KYC compliance mandate, for all its positive outcomes, has burdened companies and organisations with a substantial administrative obligation. Additionally, KYC compliance increasingly entails the creation of auditable proof of due diligence activities, in addition to the need for customer identification.
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Jiro Okochi (Chief Executive Officer, Co-founder) Jiro Okochi is responsible for setting and executing the vision for Reval as the leading provider of financial risk management technology solutions and services. He has more than twenty years of experience in financial markets and management at Security Pacific, DKB, Deutsche Bank and Westdeutsche Landesbank. Prior to starting Reval in 1999, he was the head of derivatives sales at WestLB in New York. In 2003, Okochi was selected as one of the 100 Most Influential People in Finance by Treasury and Risk Management magazine. He is a frequent presenter at trade conferences, including The Association of Finance Professionals, Eurofinance, Treasury & Risk Management, Financial Executives International, Deloitte & Touche events and at Kase & Company. Okochi holds a bachelor's of science degree in genetics from the University of California at Berkeley. Woo Song (Chief Technology Officer, Co-founder) With more than fifteen years of experience with mission-critical trading systems, Woo Song oversees Reval's leading software and delivery architecture. As a technology expert who is also a former derivatives trader, he brings a unique perspective on the use of technology to enhance trading and risk management activities. Song is also Co-founder and Chairman of Intrasphere Technologies, Inc., a leading mid-size IT services firm located in New York City. In recognition of his achievements, he was named an Ernst & Young Entrepreneur of the Year in 2001. He currently serves on a number of non-profit boards, including the New York Software Industry Association, and was appointed by Mayor Bloomberg to the New York City Workforce Investment Board. Song attended Stevens Institute of Technology, where he majored in computer science. Dino Ewing (Chief Financial Officer) Dino Ewing is the chief financial officer at Reval where he is responsible for financial, human resource, and administrative management as well as professional services. Prior to joining Reval, he was the Chief Financial Officer of HealthFirst, Inc. and, prior to that, Vice President of Operations. At HealthFirst, he was responsible for financial management of a $200 million healthcare enterprise including: business planning, financial reporting, and medical risk management. Before that, Ewing worked as an investment banker at CS First Boston and as a strategy consultant at Booz Allen & Hamilton, Inc. He also served as Director of Budget & Analysis for the New York City Department of Transportation, overseeing the city's $3 billion bridge rehabilitation program. He holds a bachelor's of arts degree in economics, magna cum laude, from Yale University and an M.B.A. from Stanford University. Philip Pettinato (Chief Operating Officer) Philip Pettinato is responsible for the ongoing development and delivery of Reval's growing suite of products and services. Pettinato has more than fifteen years of experience managing and developing technology solutions for trading, risk management, accounting and operational processing of capital markets products. He joined Reval after seven years at EXIS Consulting, Inc., a leading financial software provider of fixed income trading systems, where he headed product development, operations and sales. Prior to that, he served in the global technology and operations group at JP Morgan, where he led the development of mission-critical systems for the government bond-trading desk. Pettinato holds a bachelor's of science degree in computer science from Syracuse University and an M.B.A. with honors from Baruch College's Zicklin School of Business. Jay McGlynn (Senior Vice President , Sales) Jay McGlynn is the senior vice president of sales at Reval where he is responsible for the growth of sales for North America, EMEA, and APAC. McGlynn has over 35 years experience in sales leadership roles at both large and early stage software companies. Most recently McGlynn was Senior Vice President of Worldwide Sales at Parlano, a leading provider of enterprise group messaging solutions, which was sold to Microsoft. Before Parlano, he was Vice President of Worldwide Sales for Marketsoft. He also held similar posts at early stage companies Fatwire and New Era of Networks. His background also includes key sales roles at Wang, DEC and IBM. McGlynn holds a bachelor of science in Business Administration from Villanova University. Vivian Shpigler (Chief Marketing Officer) Vivian Shpigler is the chief marketing officer at Reval where she is responsible for the global marketing and communications for the firm. Shpigler has fourteen years of experience in senior financial services marketing roles covering marketing strategy, integrated marketing communications, branding, public relations and market research. Shpigler joined Reval from Standard & Poor's where she held the roles of Director of Marketing Optimization and Director of Marketing & Brand Management. Prior to Standard & Poor's, she served as the Vice President of Marketing at Derivatech leading to the company's acquisition by a division of SunGard. She also held senior marketing roles at Market News International, Decalog and TheStreet.com. Shpigler holds a bachelor's of science degree in management from Lehigh University's College of Business and Economics. Justin Brimfield (Senior Vice President, Business Development) Justin Brimfield is the Senior Vice President of Business Development at Reval where he is responsible for guiding the firm through the development of strategic alliances and business partnerships. Brimfield brings with him a robust understanding of how Treasury professionals can leverage SaaS technology to meet their growing needs and responsibilities. Prior to joining Reval, Brimfield held a number of senior leadership roles at Thomson Reuters for their suite of Treasury products and services since 2000 which included the building and management of their fixed income consulting business. Over the years, Justin has worked directly with companies like General Electric, Ford and Amazon.com, advising on how to effectively manage capital markets transactions such as balance sheet restructuring, targeted bond issuance, tender and exchange offerings and open market repurchases. Justin graduated from the University of Rochester with B.A. degrees in Economics and Political Science.
