Financial Crime World

Barbados: Understanding the Importance of Know Your Customer (KYC) Procedures

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In an effort to combat illegal activities that utilize the financial industry, governments and central banks globally have been strengthening their Know Your Customer (KYC) policies, expanding regulations to cover nearly every part of the global financial ecosystem.

The Growing Prevalence of Financial Crime

The increased focus on KYC is partly attributed to the growing prevalence of financial crime worldwide. Moreover, it reflects the increasing connections between financial institutions and corporate companies across countries and territories. With more value being transferred globally each day, regulators have adapted and strengthened KYC checks to stay ahead.

Case Study: BNP Paribas and BASF

Streamlining their KYC information collection process, BNP Paribas and BASF have successfully minimized the burden of KYC on both financial institutions and corporate customers.

Traditional KYC Processes

Information Collection

Financial institutions initiate the KYC process by requesting basic information about a company’s business operations and individuals. This includes:

  • Names of directors
  • Business addresses
  • National insurance or social security numbers
  • Company numbers
  • And more

Publicly available information from open sources, such as registration numbers, stock exchange listings, and annual reports, is also supplemented.

Verification Process

The collected KYC information is then compared to lists provided by governments and law enforcement agencies, which aim to identify:

  • Individuals suspected of criminal activities
  • Jurisdictional sanctions
  • Intelligence on bribery or money laundering
  • Politically Exposed Persons (PEPs)

Risk-Based Approach

After comparing the gathered KYC information with relevant lists, a financial institution decides whether it can do business with an entity. If approved, the entity receives a risk rating based on its likelihood to pass future KYC checks.

If an entity’s risk rating exceeds a set threshold, enhanced due diligence (EDD) is required, involving a more in-depth review of their activities and associations.

Risk factors include:

  • Companies operating in sanctioned territories or countries with high corruption rates
  • Directors being PEPs
  • Legal persons named as main ultimate beneficiary owners
  • Non-resident clients
  • Cash-based businesses
  • Inadequate AML/counter-terrorism systems

The Rise of KYC Registries

Completing KYC checks on all customers and entities imposes a costly burden on financial institutions. Furthermore, KYC information must be updated regularly due to evolving regulations and company details. This leads to frequent requests for KYC information from customers, putting strain on business relationships.

A central KYC registry has recently emerged as a solution to alleviate this headache for financial institutions and corporate customers. A registry is a centralized repository that stores and updates necessary KYC information, allowing financial institutions to log in and access the required information at any time.

For example, Swift’s own KYC Registry enables the standardized exchange of nearly all KYC information, significantly reducing the burden on both financial institutions and corporate customers.