Due diligence is a fundamental rule of business which is basically a process carried out by businesspeople to identify their business opponents. In addition to the Customer Due Diligence (CDD) or Know Your Customers (KYC) process, there is another Due Diligence process which is a derivative process of KYC, namely Know Your Customer’s Customer (KYCC). KYCC is a procedure that is part of the due diligence which is carried out to identify all customer characteristics of the customer. The identification that is carried out is focused on “person profiling” from management, assessing the level of associated risk, and looking at customer-related activities that involve customers from customers (payment processing, products, projects, and other activities).
KYCC is a derivative of the standard KYC process, which is required as the risk of business fraud from fraudulent individuals or companies may be hiding in second-tier business relationships, namely customers. By doing KYCC, businesspeople can find out whether the prospective customer is serious about making transactions with the company or has bad intention/goals.
It is not only the financial services sector that is required to comply with anti-money laundering regulations. Businesses are also required to implement certain regulatory measures to curb money laundering. A term that was recently coined for the requirement is Know Your Customer or Know Your Customer’s Customer. With the regulation that is now put forward by global regulatory authorities, banks and other businesses now need to implement sound measures to find out the customers’ customers.
There are several terms for companies that have bad intention/goals, namely “A Front”, “A Shell”, or “Dummy” companies. Although there are many terms used in the business world, these companies have the same goal, namely to protect their main company from liability or surveillance. So that they can carry out business activities that are limited by law freely, in particular, the activities that are limited by privacy protection regulations and limitation of liability.
Most businesspeople believe that this is their way of avoiding taxes, money laundry, or other bad activities. Many countries were initially less affected by this as many of them had carried out KYC processes which were believed to be limiting. However, this is changing with the increase in demand due to the increasing gap in the KYC process. As a result, several countries have started making new regulations which require a Know Your Customer’s Customer (KYCC) process to handle it.
KYCC adapts these requirements to the next level and identifies who the customer is doing business with, their source of funds and their legitimacy, and the risk that the third party is doing money laundry.
One example is that in the case of Panama Paper, the Panama Paper regulator now has a spotlight on profit ownership and complex routes to hide money for tax evasion. There are more than 2,000 companies that are registered in it and become problematic companies that are involved in cases of corruption and tax evasion.
There are many companies that work with these companies who are involved even though they do not know and do not commit these violations. The impact, this will reduce the credibility and trust of the company in the eyes of other partners who try to avoid these problems. However, by carrying out the KYCC process, businesspeople will get to know more about the partner’s business and identify the existence of these risks.
The following is brief information regarding Customer Due Diligence (CDD) in foreign countries and continent:
United States of America
In the US, the final Customer Due Diligence (CDD) rule changes to “full effect” or mandatory on May 11, 2018: “Specifically, the core of the rule contains three requirements: (1) identify and verify the identity of the owner who benefits from opening an account; 2) Understand the nature and purpose of the customer relationship to develop a customer risk profile; and (3) carry out ongoing monitoring to identify and report suspicious transactions and, based on risk, to maintain and update customer information.”
In Europe, the 4th AML directive came into effect on June 26, 2017 and has new initiatives in terms of beneficial ownership. As the Commission notes, “Understanding beneficial ownership of companies is at the heart of financial crime risk mitigation and prevention strategies for regulated companies.”
In Canada, the new regulations in proceeds of crime (money laundering) and the Terrorist Financing Act (PCMLTFA) came into effect or mandatory on June 17, 2017. Some changes include listing specific customer information requirements, updating customer ID requirements, and closing Gap with respect to AML and CTF (counter-terrorist financing). Today, reporting companies should consider: “Any new developments with respect to, or the impact of new technology on, their clients, business relationships, product or delivery channels or geographic location of their activities”; and any risks that result from the activities of the Canadian affiliated financial entities.