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KYC is to ensure that the firm has not unknowingly started interacting with a corrupt individual or entity. It also helps protect the company from any legal implications that could arise when dealing with these entities.

This post will explore how KYC plays an integral role in maintaining compliance and preventing corruption in IB, research methods for conducting due diligence on customers, and conclude by exploring some of the challenges faced by firms seeking compliance.

The Know Your Customer process is to protect the integrity of financial institutions by preventing them from unknowingly conducting business transactions with corrupt or sanctioned individuals. KYC is used in conjunction with OFAC screening to comply with existing sanctions against Iran, North Korea, Russia, Cuba, etc., which prohibited trade or investment.

The key objectives include:

Within Banking, KYC processes provide an effective method of preventing the following practices, which is to be in breach of compliance standards:

  • Anti-Money Laundering (AML) is a process that Investment Banks conduct to prevent organizations or individuals from using financial institutions for illegal activities. It includes any money laundering methods related to terrorist financing, drug trafficking, and other unlawful activities.
  • KYC aims to ensure that an organization or individual is not engaging in any illegal activities, preventing them from using banking services for their benefit.
  • Investment Banks take the AML process further by using OFAC screening to ensure they do not conduct business with individuals, organizations, or countries associated with terrorist activities.
  • The US Department of the Treasury develops and disseminates lists of designated terrorists. Banks must check their customers against these lists to ensure that they are not conducting transactions with organizations or individuals who have been deemed a security threat by OFAC.

Why is KYC important for a country?

Due to its importance in the financial services industry, KYC has become a regulatory requirement in many countries. Banks must have proper risk management systems to meet international compliance standards and monitor existing customers by checking their information against current sanctions lists.

  • KYC is towards the Financial Intelligence Unit (FIU) in each country, responsible for receiving and analyzing suspicious transaction reports (STRs).
  • It is a statutory requirement that banks report unusual transactions to the FIU.
  • KYC standards define by national laws and regulations but also include international standards such as the rules of the World Bank, International Monetary Fund (IMF), United Nations (UN), Organization for Economic Co-operation and Development (OECD), etc.
  • International standards support the idea that all banks can use similar KYC procedures, but each country adapts these standards following its unique legal and regulatory environment.

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