For years, banks, financial service and investment companies, and exporters have been required to follow know-your-customer (KYC) processes to thwart criminal activity. Developed to help certain businesses comply with anti-money laundering and anti-terrorism regulations, these programs aren’t mandated for most nonfinancial businesses. But you might want to consider adopting some KYC principles anyway. They can help you prevent fraud — including occupational fraud and identity theft — and even boost your marketing and sales efforts.

Enhanced due diligence

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 look closely at high-transaction-value accounts or accounts that deal with risky 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.

Fringe benefits

Even if you’re not in the financial industry and don’t sell products overseas, it can pay to understand who your customers are. Routinely performing credit checks on major customers, for example, can help prevent your business from falling victim to “phoenix” company schemes that attempt 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. This may not expose fraud or money laundering, but it serves another risk-prevention purpose: helping your business assess how vulnerable it would be if it loses one or a few of its biggest customers.

Analyzing customers’ purchasing behavior allows you to isolate cross-selling and upselling 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 expanding its business, but it also could be a sign of fraud.

Protect relationships — and your budget

Most businesses are more interested in catering to customers than scrutinizing them. But KYC practices don’t have to interfere with your customer relationships — or bust your budget. Contact us for information on KYC protocols you can implement easily and inexpensively.

© 2021

Tony LaNasa,
CPA/CFE
anthony.lanasa@hwco.cpa