To help fight crime, including terrorism, money laundering and identity theft, federal laws and regulations require banks and other organizations to “know” their customers. Know-your-customer (KYC) programs entail verifying customer identities and assessing risks associated with them. But even if your company isn’t required to adopt such programs, KYC can be beneficial.
As part of their KYC processes, financial institutions generally verify customers’ names, addresses and dates of birth and check them against lists of known criminals. In addition, they monitor transaction trends and high-risk accounts to determine their risk and whether they merit filing suspicious activity reports with the government. Customer due diligence techniques support KYC programs by digging deeper. For example, a bank might use enhanced due diligence for high-transaction-value accounts or accounts that deal with high-risk activities or countries.
For their part, companies that export products must be careful not to sell to customers on certain lists maintained by the federal government, including customers that have been denied export privileges. Exporters also are expected to review all information they receive about customers to ensure that nothing should have alerted them to the possibility a violation could occur.
Not your job?
Even if you’re not in the financial services industry and don’t sell products overseas, it can pay to understand who your customers are. Performing credit checks, for example, can help prevent your business from falling victim to “phoenix” companies that try to profit from bankruptcy.
What’s more, creating a comprehensive history of each customer’s credit limits and transactions enables you to identify your top customers. Doing so may not expose fraud or money laundering, but it will help you assess how vulnerable you are should you lose one or a few of your biggest customers.
Analyzing customers’ purchasing behavior allows you to isolate cross-selling and up-selling opportunities — along with any irregularities that could indicate nefarious activity. If a customer with a long record of annual purchases suddenly begins placing monthly orders, for example, you should delve deeper. The change may signal nothing more than your customer landing a large new account, but it also could be a sign that someone in your company is cooking the books.