Know Your Customer (KYC) is an overarching word that encompasses one of the foundational measures designed to protect financial institutions against financial crime, money laundering, terrorist financing, sanctions breaches and bribery and corruption.

The “C” in KYC typically is an abbreviation for “Customer”, but it can also be an abbreviation for “Client” - for “Know Your Client” - or as we feel is most accurate at Avallone - “Counterparty” - for “Know Your Counterparty”.

(Also, sometimes KYC is used interchangeably with Know Your Business (KYB).)

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Regardless of what an organization designates for the “C”, KYC is defined as part of the due diligence process in which data is collected and used for identification and understanding of the counterparty. The KYC process is defined as the data collection process, review and approval of collected data, as well as the collection of additional data when needed.

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Examples of counterparties include but are not limited to:

• Business customers
• Asset managers
• Investors
• Vendors
• Tenants
• Construction companies
• Joint ventures
  

The goal of KYC is to assess the likelihood of your counterparty being involved in risky activities - which is a risk to your company. KYC also encompasses organizational and governmental obligations for compliance.

The first step in KYC is identification. By identifying who you are doing business with, you can understand if the business relationship makes sense. This includes looking at your counterparty’s business model, source of funds, source of wealth, etc.

Following identification, you would use the information to do a thorough analysis of the counterparty’s:

• Legal Entity Structure
• Ultimate Beneficial Owners (UBOs)
  

Taking the information captured within KYC, then Screening can also be performed - which typically includes screening for some or all of these activities for the counterparty:

• Sanctions
• Politically Exposed Persons (PEPs)
• Adverse Media
  

But if the screening is to be the most thorough that it can be, then companies should also screen for:

• Watchlists / Warning lists
• Fitness and Probity lists
  

If a counterparty meets all of your KYC requirements and you are able to start having a business relationship, your KYC on that counterparty doesn’t stop there.

KYC should be done on the counterparty regularly on a periodic, ongoing basis to ensure that the counterparty is still meeting your requirements. For example, confirming that their company officers are still not on any sanctions or adverse media lists.