Sanctions screening in KYC protocols is crucial for financial institutions to ensure they do not inadvertently engage in transactions with individuals or entities associated with illicit activities, thereby maintaining compliance with international regulations.
Know Your Customer, or KYC is part of the CDD measures, which enables the organization to know the credentials and background of the prospective customer.
Sanctions screening is part of the customer onboarding process; therefore, it is a control to be applied before onboarding or establishing business relationships.
Organizations such as financial institutions must perform the KYC process before onboarding the customer and update the KYC at different stages, such as during periodic compliance reviews or investigations.
The KYC process protects an organization from being used for money laundering or terrorist financing activities, which the customer may perform after being onboarded by the organization, such as a financial institution.
Sanctions Screening in KYC Protocols
Sanction screening as part of KYC enables the organization to avoid the risk of onboarding criminals such as money launderers or persons associated with criminals. Onboarding the criminals causes the entity to face reputational losses and penalties from the regulator. KYC is a mandatory process when the customer contacts the organization physically or through online portals to open an account or provide any services. Therefore, name screening should be performed in these earlier stages.
KYC process is also performed when the customer or walk-in customer conducts a random transaction, or international wire transfer, when there is a suspect of money laundering, or when there is a doubt regarding the accuracy of previously collected consumer identity data or information. Sanction screening or name screening from sanction lists should be performed for these customers.
Organizations develop the KYC policy, approved by the Board of Directors, and implement it down the line for compliance purposes. KYC policy should include provisions related to the performance of sanction screening to ensure that account opening or onboarding time complies with the sanctions screening requirements.
However, there is no harmonized KYC process. It depends on the requirements of the respective country and the supervisory authority.
In any case, an organization should identify and verify a customer’s identity and, if applicable, ultimate beneficial owners (UBOs). The organization should also obtain information on the purpose and intended nature of the business relationship.
Relevant Information for sanctions compliance are:
- What goods and services does your customer trade in?
- Where is your customer located and where is its principal place of business?
- Where does your customer intend to send funds or receive funds from?
- What are the source of funds and the source of wealth of your customers?
In addition, the organization should conduct ongoing due diligence on the business relationship.
Sanctions screening as part of the KYC process helps understand a customer’s identity, financial activity, and risks. In the broader sense, sanctions screening and the KYC process include the following:
- Client’s identification using initial documents provided by the customer.
- Identifying the true beneficial owner of the customer and taking appropriate measures to verify their identification. Suppose a beneficial owner is a legal person, trust, company, foundation, or similar legal arrangement. In that case, organizations must take reasonable measures to understand the ownership and control structure of that legal person, trust, company, foundation, or similar legal arrangement.
- Understanding the objective of opening the account or establishing the relationship
Identification and verification of the client and true beneficial owner is part of the Board-approved KYC policy. Identity verification of the prospective customer should be appropriate and reasonable to meet the applicable regulatory requirements. The purpose is to onboard only identified and verified customers after the performance of sanctions screening and the KYC process.
Final Thoughts
The Know Your Customer (KYC) procedure is an integral component of the Customer Due Diligence (CDD) measures that enables organizations, particularly financial institutions, to ascertain the legitimacy and credentials of potential customers. Sanctions screening, a fundamental aspect of the KYC process, is vital during customer onboarding to mitigate risks associated with associating with illicit entities. It safeguards organizations from potential reputational damage, regulatory penalties, and being inadvertently complicit in money laundering or terrorist financing activities.
While there isn’t a uniform KYC procedure, it is contingent on specific national requirements and supervisory authorities. Regardless of these variations, at its core, the KYC process mandates the verification of a customer’s identity, understanding their business intentions, and continuously monitoring their financial activities. This stringent process, when effectively implemented and updated, ensures that organizations remain compliant, maintain their integrity, and prevent potential financial and reputational pitfalls.
