KYC (Know Your Customer) and Due Diligence are key elements for the successful operation of any business, especially in today's globalized world, where the risks of fraud and financial crimes are increasing. These procedures help companies avoid legal problems, preserve their reputation and protect their financial interests.
What is KUS and Due Diligence?
KYC is a process of verifying the identity of a customer, which includes the collection and analysis of information about the customer in order to ensure his identification and confirm the legitimacy of his actions. It is mandatory for financial institutions, banks, insurance companies and other organizations dealing with financial transactions.
Due Diligence is a comprehensive process of checking and analyzing a company or an investment object before a deal. The goal is to assess risks, confirm the veracity of the information provided, and make an informed investment decision.
KYC methods include the collection and verification of identification documents (passport, driver's license), the use of biometric data, automated systems to verify customers (such as sanctions databases), and continuous monitoring of financial activity.
Due Diligence methods are more comprehensive and include analysis of large volumes of data, financial analytics, legal reviews, meetings with company management, process and asset audits, and the use of big data and cyber security tools to identify potential risks.
History of KYC and Due Diligence procedures
KYC (Know Your Customer)
The KYC procedure originates from regulatory measures aimed at combating money laundering and terrorist financing. The first steps in this direction were taken in the 1970s in the USA with the adoption of the Bank Secrecy Act (BSA). This law required financial institutions to keep records and submit reports that could be useful in detecting and preventing money laundering.
In the 1970s - 1980s, the rise of high-profile cases involving organized crime, drug trafficking and money laundering forced governments to recognize the need for stricter regulations. This led to the introduction of the first proper KYC rules by the Bank of England in the early 90s.
Subsequently, after the terrorist attacks of September 11, 2001, the USA PATRIOT Act was passed, which significantly strengthened the KYC requirements for financial institutions, including mandatory background checks to prevent terrorist financing. Subsequently, the practice of KUS procedures was adopted not only by financial institutions, but also by other businesses that care about their reputation and security.
Due Diligence
The history of Due Diligence also has its roots in the 20th century, with the development of financial markets and the need to reduce investment risks. The concept of "due diligence" first became widely known in the United States in the 1930s after the adoption of the Securities Act of 1933 (U.S. Securities Act of 1933). This law required sellers of securities to make full disclosures about their companies, and the Due Diligence process became a tool for potential investors to scrutinize the veracity of that information before making an investment decision.
The current state of KUS and Due Diligence procedures
The current state of KYC and Due Diligence procedures is characterized by a high level of digitalization, increased regulatory requirements and integration with other business processes. These procedures have become more technologically oriented, using biometrics, artificial intelligence, and big data. They also include new aspects such as cyber security and the assessment of ESG factors, allowing companies to manage risks, ensure compliance with regulatory requirements and achieve sustainable development more effectively.
The rise of financial crimes, cyber threats and the globalization of business are forcing companies to constantly adapt their approaches to customer screening and risk assessment. Also, modern CSO and Due Diligence procedures include assessment of environmental, social and governance (ESG) factors. Investors and companies are increasingly paying attention to business sustainability and its impact on society and the environment.
Consequences of non-compliance with the procedures of KUS and Due Diligence on the examples of major players
HSBC was fined $1.9 billion in 2012 for non-compliance with KYC regulations. The British-headquartered bank has been accused by US authorities of involvement in laundering money belonging to drug cartels and countries subject to US sanctions. This case is a prime example of how important it is to follow KYC procedures to prevent wrongdoing and avoid significant fines and reputational damage.
Another example is Amazon's 2017 acquisition of the Whole Foods grocery store chain for $13.7 billion.
Many experts wondered why they needed it, because Whole Market has been experiencing negative economic indicators for a long time. But
But before making this deal, Amazon conducted thorough due diligence, which included an analysis of financial condition, review of legal documents, assessment of market position and review of Whole Foods' operational processes. But before acquiring Whole Foods, Amazon conducted a comprehensive financial analysis of the company, including an assessment of revenues, expenses, assets, and liabilities. This helped Amazon assess the true value of Whole Foods and determine whether the deal would be profitable. Thanks to this, Amazon was able to make an informed purchase decision, expand its presence in grocery retail and increase its market share.
Conclusions
Therefore, the importance of KYC and Due Diligence procedures cannot be overstated, as they cover the following factors:
- prevention of fraud and financial crimes
- risk assessment
- preservation of reputation
- improvement of business processes
- ensuring compliance with legislation
KYC and Due Diligence procedures are integral components of a successful and safe business, so we recommend that even small businesses do not neglect these processes and implement them from the very beginning.
