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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

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