It’s a bad, bad world… or at least it can be. If you’re working with partners across borders, how do you protect yourself by ensuring they’re legitimate? Any potential partner can expose you to serious liability and put you in legal peril. Can you be sure that you’re not involved in drug trafficking, fraud, counterfeiting, or stock manipulation? A person convicted of money laundering can face up to 20 years in prison and a fine of up to $500,000. It’s all about Knowing Your Customer (KYC).
One of the best ways for a network economy business to avoid being an unknowing participant in money laundering schemes or TFOs (terrorist financing offenses) is to properly verify the identity of their partners (e.g. suppliers, affiliates, vendors, etc.) when their account is opened and subsequently throughout the business relationship.
Right off the bat, if a partner refuses or is unable to provide identifying information (contact name, business and DBA name, mailing address, how they wish to conduct transaction payments, etc.), then you need to question their motives and even consider alerting the authorities. You may also consider checking with OFAC (Office of Foreign Assets Control) databases. Some additional starting information you may ask your partners for:
- A copy of the company legal formation
- W-9 for US registered company.
- Federal Tax ID for US registered company
- Country-specific tax ID for non-US registered company
- Ownership documents
Strict customer identification and verification policies and procedures can be the most effective weapon against money laundering.
KYC Best Practice Basics
Your business’s KYC policy has should the following elements:
- User Identification: Establishing the identity of a partner is central to KYC both for establishing initial business relationships and for the ongoing monitoring of transactions. For example, our own due diligence at Tipalti when onboarding payer customers involves obtaining a range of required information and documentation before we open an account for them. On one hand, it can seem a nuisance, but in order to mitigate risk and maintain a strong alliance with our banking infrastructure partners, it’s a necessity.
- User Account Acceptance: Once the identification information is obtained, we screen each payer customer to determine acceptance or rejection. By following good user acceptance policies, we avoid dealing with entities and individuals who might engage in illegal transactions. When you go to build your own policies, you’ll have to make a determination of where your line is.
- Accounts & Transactions Monitoring: The next step is to properly classify partners in terms of low, moderate, or high-risk and monitor the relationship regularly. The first six months after you start working with a partner is critical for monitoring transactional behavior. Through checks and thresholds, unusual activities or activities by high-risk accounts must be reviewed. Even normal relationships can become high risk and require monitoring. In the area of partner payments, Tipalti can identify anomalies in payout processes or hone in on questionable situations.
- Risk Management: To ensure that the risks posed by money laundering are consistently addressed, good risk management practices are essential. At Tipalti, one technology we’ve developed is the ability to identify risky payees across our entire ecosystem. If you’re interested, you should contact our operations team for more information.
