Author(s): Christopher Price
In the past four years, much attention has been focused on Section 352 of the USA PATRIOT Act – the ability to monitor client activity to detect suspicious activity. Anti-money laundering (AML) monitoring technologies have proliferated throughout the world-wide compliance landscape, and any financial institution (FI) that is in need of AML detection technology can speak to many vendors in that arena. More recently, a growing area of focus, especially in the United States, is on Section 326, which outlines Know Your Customer (KYC) and Customer Identification Program (CIP) requirements for an FI. These represent some of the most basic tenets of the USA PATRIOT Act, because of their importance to a sound compliance program. With the focus shifting to CIP/KYC, FIs are rethinking their client relationships and their client acceptance process. Firms that have given this problem the attention it deserves typically attack the problem from multiple angles. The first area is risk assessment. How do you actually risk-assess your existing client base and any new prospective clients? For most FIs this is an area that was never fully addressed and presents tremendous challenges. No longer can you simply establish risk categories that have little or no quantitative merit. Risk assessment is a science that requires real analytics and significant processes behind it. Secondly, the process known as customer acceptance, or the ability to determine based on client type what the firm expects to know about any new prospect, is a key factor in KYC programs. Because there may exist a multitude of client types, especially in FIs that offer a rich set of products and services, customer acceptance processes must be segmented and detailed for each client type. The issue of customer identity, or truly knowing the customer, is the basic foundation on which Section 326 is built. Identity verification techniques and customer assessments against criminal, global sanctions, and politically exposed person (PEP) databases are linchpins in this requirement. This white paper is intended to give the reader an overview of the customer risk assessment process, and it includes examples and an illustration.