Across the business and financial sectors, Know Your Customer, or KYC, is an incredibly important practice that serves as the backbone of global anti-money laundering efforts. When implementing KYC schemes to prevent financial crime, however, institutions must remember to take KYC “reasonable assurance” into account.
Key to achieving “reasonable assurance” in KYC discovery is acknowledging that, no matter the quality of information used or effort spent on research, it is impossible to be certain that any customer is entirely free from risk. Realising that 100% certainty is not attainable forces compliance professionals to take realistic, risk-based approaches to KYC consideration and the prevention of financial crime. By acknowledging that risk can never be eliminated entirely, compliance officers and legislators can craft anti-money laundering policies that are both as effective and as unburdensome as possible. The latter point is significant not only in terms of making the process less costly for banks; taking sensible risk-based approaches also frees up compliance officers’ time, which allows them to focus on larger and more harmful violations of the law.
That being said, when operating with reasonable assurance compliance officers must still periodically check up on low-risk clients and accounts to ensure that nothing is unusual or out of place. Conversely, once compliance officers have completed KYC research with the appropriate professional skill and care, they may feel reasonably able to move on, even though they are aware that the risk of criminal financial activity cannot be entirely eliminated.
The precise definition of what constitutes “reasonable” assurance varies depending on various factors, including different national anti-money laundering legislations and the type of financial institution involved. In some countries, there are very high standards for what type of client is considered to be reasonably low risk, while in other countries, fewer requirements have to be met. Therefore it is crucially important for financial institutions and companies that are required to follow anti-money laundering legislation to stay up to speed on what will qualify as reasonable assurance across different jurisdictions and scenarios.
KYC reasonable assurance also pertains to how much information should be collected about a customer. Naturally, this relates again to determining whether or not particular customers are high risk and which processes or investigations must be completed if they are. If a financial institution has reasonable assurance that a person poses some risk, they must then decide how much is an appropriate amount of information to gather. If, however, the customer poses a theoretically low risk, the financial institution will need to determine how much time they should spend monitoring the customer’s account, if any.
Reasonable assurance is also particularly relevant to institutions that are required to partake in KYC Enhanced Due Diligence. These institutions must dedicate more effort than normal towards monitoring accounts and searching for financial crimes, and the standards for what classes as reasonable assurance will be higher.