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Manish Jain - Infosys Ltd

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Financial Risk Management

This network brings together professionals involved in the oversight and management of their company's financial risks and exposures as well as solution vendors, in order to discuss risk issues including interest rate risk, foreign exchange risk and commodity price risk, among others.

Customer Conversion -Reputation Risk for Banks?

01 May 2012  |  2752 views  |  1

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.

TagsRisk & regulationRetail banking

Comments: (1)

Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 02 May, 2012, 17:36

In most jurisdictions, when a bank opens a business account, it is required to review the company's incorporation documents including Articles of Association and Memorandum of Association. If they say an applicant is a bullion trader, then he is and the bank has to accept it. Unless I'm missing something, I fail to see how it's possible for a money launderer to masquearade as bullion trader even under the present KYC framework.

KYC imposes so much friction as it is. So-called KYCB and KYCR will exacerbate the situation even further without adding proportionately to risk mitigation. I remember a banker recently lamenting "no transaction, only compliance" in the context of KYC for Business Correspondents involved in financial inclusion. End of the day, like any other business, banks cannot follow a risk avoidance policy. Putting more and more hurdles to doing business in pursuit of risk avoidance will neither help banks nor their customers. 

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Manish Jain

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industry principal

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Infosys Ltd

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