Know Your Customer, Know Yourself: The Push for Greater KYC Oversight

Know Your Customer, Know Yourself: The Push for Greater KYC Oversight

Welcome to the May 2024 edition of our newsletter!  In this issue, we’ll examine how an increase in “know your customer” regulations are affecting finance and other industries.

The Importance of Vetting Potential and Existing Customers

With the adoption of cryptocurrencies and digital peer-to-peer payment services in the last decade-plus, regulators are to some degree playing catch up trying to oversee innovations moving much faster than their bureaucratic processes.  Recently, the U.S. Securities and Exchange Commission and the U.S. Treasury Department’s FinCEN Network issued a joint proposed rule that would create standards of due diligence which an investment adviser would have to undertake to verify the identity of its client.  The rule “would make it more difficult for criminal, corrupt, or illicit actors to establish customer relationships—including by using false identities—with investment advisers for the purposes of laundering money, financing terrorism, or engaging in other illicit finance activity,” FinCEN said in a statement about the proposal.

One flashpoint which spurred this rulemaking was the war between Russia and Ukraine, as law firms and investment advisers have been investigated for helping Russian “oligarchs” evade sanctions.  The proposed rule specifically mentions that, if adopted, advisers would have to maintain documentation of their efforts to verify a customer’s identity, including checking to determine if that person or company appears on any sanction or enforcement watch lists.

Use of risk management professionals to verify information submitted by a client seeking to open a new account has gained greater importance in an era where regulators are seeking to exercise greater oversight over finance and other industries.  Vetting potential customers, typically done by an adviser’s compliance department, can provide a strong measure of prevention to help your firm avoid blow-back from assisting bad actors.