‘Know your customer’ - what does this actually mean, and who is responsible?
By Michelle Bailey
The term Know your customer forms part of a firms Customer Due Diligence (CDD) process. It implies that we need to know who our customer is, such as where they are based, why they want to open an account with us and also the nature of the business they will be conducting and likely transactions. Knowing your customer isn’t just about documentation gathering, it’s about having an understanding of the customer themselves.
So why is it important to know your customer?
The principle behind this is to make sure that we are preventing money laundering, terrorist financing and market abuse, but how is this achieved? If we know the nature and business of our customer then we can review their transaction history with more informed thinking. We are able to identify if they have traded outside of the norm and we can also look at the risk associated with this customer in more detail. If they are domiciled in a high risk jurisdiction or transact in a high risk jurisdiction then this could prompt a need for Enhanced Due Diligence. All the while we are building up a better picture of the customer.
So, if this is so important, whose responsibility is it?
Last summer the FCA published a thematic review - Understanding the money laundering risks in the capital markets - in that review they used the phrase “good practice” three times:
1. “We observed good practice where the complexity of an underlying corporate ownership structure was driving the level of EDD at the onboarding stage, including assessing and challenging whether the complexity of the structure was commensurate to the rationale for the business relationship.”
2. “We observed good practice where participants revised terminology or lexicons for their electronic communications surveillance systems to incorporate lessons learned from money-laundering case studies in the media, such as the Deutsche Bank case.”
3. “…we observed good practice where a participant encouraged accountability in the first line of defence by asking the business sponsor to attest that they were responsible for the customer, including that the business’s CDD requirements for that customer would be met.”
When the front line attest to the fact that it is their responsibility to know their customer and that all CDD documentation will be gathered in line with their firm’s risk appetite, there are likely to be better outcomes.
Within a firm there needs to be mutual respect between the front line and second line. It has long been the case the customer onboarding teams, and compliance are seen as a barrier for customer approval and the front line often complain that onboarding takes too long and that other competitors do it quicker. However, customer onboarding and compliance form a defence against the business and should work in harmony with the front line. Whilst the onboarding team/compliance may do the documentation gathering for a customer, the front line need to know and appreciate the complexities that can arise on a case by case basis. Effective onboarding occurs when dialogue between the two is free flowing and each can rely on the other for assistance should a situation arise where they need to seek guidance and clarification. All of this works towards the goal of protecting the reputation and integrity of the firm by helping to prevent money laundering, terrorist financing and market abuse.
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If you would like to read the thematic review (TR 19/4) referenced in this blog click here