KYC-Know Your Customer - Bosch Software Innovations
KYC-Know Your Customer - Bosch Software Innovations
KYC-Know Your Customer - Bosch Software Innovations
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As of March 2009<br />
<strong>KYC</strong> – <strong>Know</strong> <strong>Your</strong> <strong>Customer</strong><br />
White Paper<br />
<strong>Bosch</strong> <strong>Software</strong> <strong>Innovations</strong><br />
Americas:<br />
<strong>Bosch</strong> <strong>Software</strong> <strong>Innovations</strong> Corp.<br />
161 N. Clark Street<br />
Suite 3500<br />
Chicago, Illinois 60601/USA<br />
Tel. +1 312 368-2500<br />
info@bosch-si.com<br />
www.bosch-si.com<br />
Asia:<br />
<strong>Bosch</strong> <strong>Software</strong> <strong>Innovations</strong><br />
c/o Robert <strong>Bosch</strong> (SEA) Pte Ltd<br />
11 Bishan Street 21<br />
Singapore 573943<br />
Tel. +65 6571 2220<br />
info-sg@bosch-si.com<br />
www.bosch-si.com<br />
Europe:<br />
<strong>Bosch</strong> <strong>Software</strong> <strong>Innovations</strong> GmbH<br />
Ziegelei 7<br />
88090 Immenstaad/GERMANY<br />
Tel. +49 7545 202-300<br />
info-de@bosch-si.com<br />
www.bosch-si.de
<strong>KYC</strong> - <strong>Know</strong> <strong>Your</strong> <strong>Customer</strong><br />
Bettina Kunz<br />
Content<br />
Introduction 2<br />
What Information Is Contained In a <strong>KYC</strong><br />
Profile? 3<br />
For Which <strong>Customer</strong>s Is a <strong>KYC</strong> Profile<br />
Created? 4<br />
Administration of a <strong>KYC</strong> Profile 5<br />
Use of Data from the <strong>KYC</strong> Profile 6<br />
Endnotes 6<br />
Introduction<br />
The term <strong>KYC</strong> – <strong>Know</strong> <strong>Your</strong> <strong>Customer</strong> – means that<br />
financial institutions such as banks and i nsurance<br />
companies are obligated to record information on their<br />
customers and to check the plausibility of the information<br />
entered. The basis for <strong>KYC</strong> is Article 8 of the 3rd<br />
EU Anti-Money Laundering Directive and, for Switzerland,<br />
Article 17 of the SFBC Money Laundering Directive.<br />
The <strong>KYC</strong> principle goes far beyond the simple<br />
identification process, such as using an identity card.<br />
The source of the asset and the funds that are utilized<br />
as part of the business relationship and/or transaction<br />
as well as their intended use also must be determined.<br />
In the event that the source of the asset(s) is not clear,<br />
an investigation must be c arried out that includes directly<br />
asking the customer. In cases of doubt, the customer<br />
must provide appropriate evidence of the legal<br />
validity of the asset(s).<br />
This information is stored as the “<strong>Know</strong> <strong>Your</strong> <strong>Customer</strong>”<br />
profile (<strong>KYC</strong> profile). Using appropriate software,<br />
<strong>KYC</strong> profiles can be ent ered, updated and administered.<br />
Complete electronic processing, documentation<br />
and historization means that the data can be called up<br />
quickly by other users, and all steps can be t racked<br />
individually after the event and m ade available to the<br />
internal audit department.<br />
The initial setup of a <strong>KYC</strong> profile involves some work. If<br />
the information to be recorded in the <strong>KYC</strong> profile is<br />
then used gainfully in another area (e.g., client relationship<br />
management), a financial institution achieves<br />
added value simply by complying with the requirements.<br />
Links to the Wording of the laws:<br />
3. EU Anti-Money Laundering Directive (Article<br />
8):http://www.bosch-si.com/fileadmin/pdfen/legal/directive_2005-60-EC.pdf<br />
SFBC Money Laundering Directive (GwV EBK)<br />
(Article 17) in German:<br />
http://www.boschsi.de/fileadmin/pdf/legal/955.022.de.pdf<br />
© <strong>Bosch</strong> <strong>Software</strong> <strong>Innovations</strong> GmbH 2/6
<strong>KYC</strong> – <strong>Know</strong> <strong>Your</strong> <strong>Customer</strong><br />
What Information Is Contained<br />
In a <strong>KYC</strong> Profile?<br />
A <strong>KYC</strong> profile is an aggregate collection of information<br />
on a customer. This information is used to get to know<br />
the customer, and enables the financial institution to<br />
assess the customer's business operations, activities<br />
and the plausibility of all statements.<br />
As described in the introduction, the <strong>KYC</strong> profile contains<br />
much more information than the identity of the<br />
customer. This additional information is described in<br />
the following sections.<br />
Information On The Person<br />
A distinction is made with regard to the information<br />
collected between natural and juridical persons. In<br />
general, all readily available information such as name,<br />
country of domicile, customer number or customer<br />
account manager is transferred from the master data<br />
into the <strong>KYC</strong> profile.<br />
Individual<br />
In the case of individuals, the following additional information<br />
is recorded:<br />
� Occupation and/or business activity<br />
employed yes/no<br />
if yes: freelance or salaried, job details, industry<br />
sector, etc.<br />
if no: relevant details, e.g., housewife, pensioner<br />
or other; previous occupation, trainee, etc.<br />
� Purpose of the business relationship<br />
personal payment transactions, e.g., salary account,<br />
account for pension payments, etc.<br />
savings, investment or asset management<br />
other (more detailed description required)<br />
Business Entity<br />
In the case of business entities, the following information<br />
is recorded depending on the type of company:<br />
� For operating companies<br />
type of company, business activity, industry<br />
sector, industry sector code, number of employees,<br />
partners, ownership percentages<br />
expected level of turnover and payment transactions:<br />
level of receipts and payments, volume<br />
of cash transactions (receipts/payments)<br />
� For a domiciliary company (foundation, trust, etc.)<br />
purpose of the company (investment or asset<br />
management, estate administration or planning,<br />
tax optimization, etc.)<br />
countries with established links<br />
more detailed description of the purpose<br />
� Other business entities such as investment companies<br />
or institutional investors (pension funds, insurance<br />
companies, etc.)<br />
type, business activity and industry sector, etc.<br />
Origin and Source of the Asset<br />
Legislation requires appropriate actions be t aken in<br />
order to determine the source of the asset, and t he<br />
funds that are applied as part of the business relationship<br />
and/or transaction. In the event that the source of<br />
the asset is not clear, an investigation must be carried<br />
out that includes directly asking the customer. In cases<br />
of doubt, the customer must provide appropriate evidence<br />
of the legal validity of the asset.<br />
The following information is to be obtained:<br />
� Source of the assets<br />
commercial / freelance/ salaried work<br />
inheritance<br />
sale of investments<br />
sale of property<br />
other<br />
If possible, additional information is to be recorded on<br />
each sub point such as type and s ource of income,<br />
name of deceased, details of the investment, location<br />
of the real estate, etc. In an i deal situation, this information<br />
can be substantiated by appropriate documents<br />
and attached to the <strong>KYC</strong> profile as an electronic copy.<br />
It is also possible to specify in the <strong>KYC</strong> profile whether<br />
bank employees are able to inspect the document.<br />
� Amount of asset inflows to be expected on the<br />
opening of the business<br />
� Amount of assets to be deposited on a long-term<br />
planned basis<br />
� Expected account turnover per year (receipts and<br />
payments)<br />
� Type of asset receipt<br />
cash<br />
bank transfer (from which bank)<br />
transfer of securities account (from which bank)<br />
other (delivery of physical stocks, etc.)<br />
Beneficial Owner<br />
Information on the beneficial owners also belongs in a<br />
<strong>KYC</strong> profile. If this information is already recorded in<br />
the master data in another area, it can simply be imported<br />
into the <strong>KYC</strong> profile. If data on t he beneficial<br />
owners is not administered in another area, the relevant<br />
persons are recorded in the <strong>KYC</strong> profile.<br />
© <strong>Bosch</strong> <strong>Software</strong> <strong>Innovations</strong> GmbH 3/6
<strong>KYC</strong> – <strong>Know</strong> <strong>Your</strong> <strong>Customer</strong><br />
Politically Exposed Persons<br />
If the customer or one of the beneficial owners is a<br />
politically exposed person 1 (PEP), the following information<br />
must be entered:<br />
� Function of the PEP<br />
� Country<br />
� City/town<br />
If the customer or one of the beneficial owners has a<br />
close relationship with a PEP (family member, relative,<br />
etc.) the following information must be recorded:<br />
� Type of relationship<br />
� Name of the person in power<br />
� Function of the PEP<br />
� Country<br />
� City/town<br />
Asset Manager<br />
If the contractual partner uses the services of an external<br />
asset manager, the following information is to be<br />
obtained:<br />
� Name of the asset manager<br />
� Residence of the asset manager<br />
Actions<br />
Which actions are taken with respect to the business<br />
relationship should also be recorded, including:<br />
� Whether the business relationship can be continued<br />
without any conditions<br />
� Whether the business relationship can be continued<br />
with conditions (describe the conditions)<br />
� Whether the business relationship must be subjected<br />
to a thorough review and any additional action<br />
that is required, up to the termination of the<br />
business relationship.<br />
History<br />
Historization ensures that all information about the<br />
initial creation of the <strong>KYC</strong> profile – including the author,<br />
and the office that approved it – is documented. Ideally,<br />
all changes and all further approvals, such as following<br />
the expiration of the validity, are documented as<br />
well. Recommendations or comments made by central<br />
units that were involved in the approval process, such<br />
as the money laundering technical unit, internal compliance,<br />
supervisors, are also recorded here.<br />
For Which <strong>Customer</strong>s Is a<br />
<strong>KYC</strong> Profile Created?<br />
This question should be ans wered by taking into account<br />
the respective situation of the financial institution.<br />
There are several options as follows.<br />
<strong>KYC</strong> Profile for All <strong>Customer</strong>s<br />
This procedure is recommended for financial institutions<br />
or private banks with a s mall customer base,<br />
whose customers have an above-average or high net<br />
worth. In this case, it makes sense to create a K YC<br />
profile for each customer. In the ideal situation, this is<br />
created immediately during the opening of the business<br />
relationship.<br />
<strong>KYC</strong> Profile from a Defined Risk Level<br />
For financial institutions that have a l arge customer<br />
base, perhaps as a result of being very active in the<br />
retail business, it does not make sense to create a<br />
<strong>KYC</strong> profile for each customer, but only for those customers<br />
who, for instance, indicate an increased risk.<br />
The procedure to be applied in this case is as follows:<br />
In an i nitial step the customers are classified into defined<br />
risk categories 2 . In this case, parameters held in<br />
the master data – such as individuals and business<br />
entities, industry sector, nationality, domicile, countries<br />
with established links – are taken into account. In addition,<br />
transaction patterns (turnover to assets) and asset<br />
relationships should be taken into account.<br />
If the customers are classified into risk categories in<br />
this way, a determination is then made as to which risk<br />
category a K YC profile must be created. It is recommended<br />
that this is monitored electronically and that<br />
the <strong>KYC</strong> profile also be r equested on an electronic<br />
basis.<br />
<strong>KYC</strong> Profile for Specified Attributes<br />
Instead of a r isk classification based on def ined<br />
attributes, it is also possible to request that a <strong>KYC</strong> profile<br />
be created for specific types of legal entities (foundations,<br />
trusts, etc.), specific industry sectors or involved<br />
risk countries.<br />
<strong>KYC</strong> Profile for Politically Exposed Persons (PEPs)<br />
Given the increased due d iligence obligations that<br />
must be met with respect to politically exposed persons,<br />
the origins of all assets must be determined using<br />
appropriate means – in other words, a <strong>KYC</strong> profile<br />
should be created for each PEP.<br />
© <strong>Bosch</strong> <strong>Software</strong> <strong>Innovations</strong> GmbH 4/6
<strong>KYC</strong> – <strong>Know</strong> <strong>Your</strong> <strong>Customer</strong><br />
Administration of a <strong>KYC</strong> Profile<br />
Creation of a <strong>KYC</strong> Profile<br />
If possible, new customers are immediately checked to<br />
determine whether one of the criteria set out in Section<br />
‘For Which <strong>Customer</strong>s Is a K YC Profile Created’ applies.<br />
In the optimal situation, both the opening of a<br />
business relationship, as well as the administration of<br />
the <strong>KYC</strong> profile, are processed electronically. The<br />
workflow logic as to when a <strong>KYC</strong> profile is to be<br />
created is managed within the <strong>KYC</strong> application, and<br />
required by the relationship manager.<br />
If these sets of rules, determined by the workflow logic,<br />
are not followed, then it may not be possible to open<br />
the business relationship at all.<br />
Furthermore, a situation can arise in which, through a<br />
change in the risk classification, a K YC profile has to<br />
be created for a c ustomer for whom it was not previously<br />
necessary to create such a profile. In addition,<br />
certain parameters, such as payment patterns, cannot<br />
be determined at the beginning of a business relationship.<br />
In order to ensure this process is carried out<br />
properly, it is important that, firstly, the risk classification<br />
is performed on a r egular basis; and, secondly, a<br />
check is automatically performed by the system to determine<br />
whether a risk profile has to be created.<br />
The initial implementation of the <strong>KYC</strong> principle in a<br />
company can be timeconsuming, as suddenly a <strong>KYC</strong><br />
profile must be created for a large number of customers.<br />
However, these customer profiles can only be set<br />
up one af ter the other. It is therefore recommended<br />
that the higher risk cases be processed first. Criteria to<br />
be applied in these cases can be certain industry sectors,<br />
risk categories or high net worth customers.<br />
Validity Period of a <strong>KYC</strong> Profile<br />
A <strong>KYC</strong> profile should be r eviewed and up dated at<br />
regular intervals; information entered at one point may<br />
change over time (such as profession, origin of assets,<br />
and more). Thus the <strong>KYC</strong> profile should be gi ven a<br />
period of validity. Following the expiration of that validity<br />
period, the information contained in the <strong>KYC</strong> profile<br />
must be r eviewed, checked for plausibility and approved.<br />
Ideally, a software solution maps this updating process<br />
through the escalation mechanisms. In this process it<br />
can be s pecified that all <strong>KYC</strong> profiles have the same<br />
validity period. Different validity periods can also be<br />
applied based on the risk classification. This mechanism<br />
should also then be taken into account in the automatic<br />
monitoring.<br />
Ideally, the start of the validity period should be t he<br />
date on which the profile was created and/or approved.<br />
In practice, a check can also be made at regular intervals<br />
(e.g., on a m onthly basis) across all <strong>KYC</strong> profiles<br />
to determine whether they are still valid. All changes<br />
(who has approved what and when) should be documented<br />
or stored in the system. A new version of the<br />
profile is created after each change.<br />
Approval of a <strong>KYC</strong> Profile<br />
It is recommended that a <strong>KYC</strong> profile is approved under<br />
the dual-control principle. This is normally the customer<br />
account manager and a s upervisor. This can<br />
help ensure that all required information about business<br />
background is provided. For profiles with a lower<br />
risk, it is also possible to have only the initial <strong>KYC</strong> profile<br />
approved under the dual-control principle. Subsequent<br />
approvals (e.g., at the end of a validity period)<br />
can then be authorized by a single person.<br />
<strong>KYC</strong> Profile – Electronic or Hard Copy<br />
It makes sense and it is efficient to have a <strong>KYC</strong> profile<br />
administered solely in an electronic form. The approval<br />
process can be structured electronically – the validity<br />
monitored automatically, and data importedfrom (master<br />
data, etc.) and transmitted to other systems.<br />
Breakdowns in processes always occur when data is<br />
administered in the form of hard copies. It is virtually<br />
impossible for another unit to meaningfully use data<br />
that is administered in the form of a hard copy. Listed<br />
below are only some of the problems that result from<br />
administering the <strong>KYC</strong> profile as a hard copy:<br />
� The problem of duplicates (several <strong>KYC</strong> profiles for<br />
a customer instead of one with a continuous history)<br />
� Access to a <strong>KYC</strong> profile (where is the <strong>KYC</strong> profile<br />
physically filed, can the customer account manager<br />
obtain it without any problems?)<br />
� Validity (expired <strong>KYC</strong> profiles are not updated)<br />
� Additional data processing (information on paper<br />
cannot be used by another unit)<br />
� Unclear approval history (who has approved what<br />
and when, under what conditions, etc.)<br />
Use of Data from the <strong>KYC</strong> Profile<br />
If the <strong>KYC</strong> profile is administered electronically and the<br />
information is stored on a s tructured basis, the data<br />
can be used in other systems.<br />
Use with Regard to the Prevention of Money Laundering<br />
The information recorded in the <strong>KYC</strong> profile lends itself<br />
to be r eviewed on an ongoing basis during the business<br />
relationship. Included in this review are checks as<br />
to whether the forecasted annual account turnover<br />
specified in the <strong>KYC</strong> profile is in line with the actual<br />
flows in or out of the account. Also, whether the information<br />
given at the time of the opening of the business<br />
relationship regarding the assets expected to be re-<br />
© <strong>Bosch</strong> <strong>Software</strong> <strong>Innovations</strong> GmbH 5/6
<strong>KYC</strong> – <strong>Know</strong> <strong>Your</strong> <strong>Customer</strong><br />
ceived, as well as the amount of assets to be dep osited<br />
on a planned basis, match the actual amounts<br />
received.<br />
It makes sense to integrate these checks into an antimoney<br />
laundering software. The relevant transactions<br />
and data such as account turnover, assets, etc. are<br />
already available in the system. The corresponding<br />
key figures (e.g., annual volume of cash transactions)<br />
are then calculated and compared to the information<br />
contained in the <strong>KYC</strong> profile. If there is a significant<br />
variance between the information, a w arning can be<br />
generated by the system. The facts must then be clarified,<br />
i.e., the customer must explain the variances. If<br />
the information provided by the customer is plausible,<br />
the <strong>KYC</strong> profile can be appropriately adjusted.<br />
The integration of the monitoring process with antimoney<br />
laundering software is highly recommended as<br />
it is virtually impossible to perform the monitoring<br />
process on a manual basis.<br />
Use with Regard to <strong>Customer</strong> Relationship Management<br />
(CRM)<br />
Another benefit of monitoring <strong>KYC</strong> profiles in this manner<br />
is that the information contained in the program<br />
can be gai nfully used in CRM software. The informa-<br />
Author<br />
tion contained in the <strong>KYC</strong> profile regarding asset relationships,<br />
planned initial deposit, etc., can be used as<br />
a first step in assessing the potential of the customer.<br />
The information can also be used to discuss specific<br />
investment opportunities with the customer.<br />
Endnotes<br />
Bettina Kunz, Senior Sales Manager <strong>Bosch</strong> <strong>Software</strong> <strong>Innovations</strong><br />
1 There is a separate white paper relating to the topic<br />
“Politically exposed persons: Increased due diligence<br />
obligations”. This can be obtained from <strong>Bosch</strong> <strong>Software</strong><br />
<strong>Innovations</strong>: http://www.bosch-si.com/downloadwhite-papers.html<br />
2 There is a separate white paper relating to the topic<br />
“Classification of Risks - <strong>Customer</strong>s”. This can be obtained<br />
from <strong>Bosch</strong> <strong>Software</strong> <strong>Innovations</strong>:<br />
http://www.bosch-si.com/download-white-papers.html<br />
© <strong>Bosch</strong> <strong>Software</strong> <strong>Innovations</strong> GmbH, 2011. All rights reserved.Dissemination or reproduction of this publication or any part of it for any purpose<br />
or in any form whatever is not permitted without the prior express written consent of <strong>Bosch</strong> <strong>Software</strong> <strong>Innovations</strong> GmbH. Information contained in<br />
this publication may be subject to revision without advance notice. MLDS, Visual Rules and Work Frame Relations are registered trademarks of<br />
<strong>Bosch</strong> <strong>Software</strong> <strong>Innovations</strong> GmbH. BOSCH and the symbol are registered trademarks of Robert <strong>Bosch</strong> GmbH, Germany. Some of the product<br />
and company names used in this white paper are trademarks and/or registered trademarks. They are used explicitly for reference purposes and<br />
are, independent of marking, property of their respective owners.<br />
© <strong>Bosch</strong> <strong>Software</strong> <strong>Innovations</strong> GmbH 6/6