Central Bank guidelines mandate banks in most countries to run their new customers through Know Your Customer (KYC) checks. However, this has its limitations as the checking is restricted to address, photo identification, income verification, credit history
and risk classification. Banks need to look beyond mere KYC compliance and strengthen their reputation risk management mechanism with KYCB (Know Your Customers’ Business) and KYBR (Know Your Customers’ Business Risk) processes.
The following examples show how KYCB and KYBR processes are central to detecting reputation risk: When a bank signs up a bullion trader as a customer, it anticipates large and frequently occurring transactions. While frequent, high value transactions are
typical of legitimate bullion trading, their pattern is very similar to money laundering transactions. Unless the bank closely investigates the customer’s business credentials, it will never be able to detect if the transactions – which look genuine – are
actually a front for illegal activity.
In-depth customer (and customer business) understanding will facilitate awareness of interrelated risks between different groups of stakeholders like customers, investors and guarantors, and highlight the possibility of a cascading effect were one of these
relationship nodes to come under pressure. Such investigation assumes great significance especially in trust-based transactions.