Do You Know Your Customer?

Teksti | Annemari Kuhmonen , Melisa Heiskanen , Pekka Heino

In the context of international business, it is important for companies of all sizes to be aware of and manage KYC procedures. KYC stands for ”Know Your Customer” and refers to a process that businesses use to verify the identity of their customers. KYC procedures help a company in the export industry to comply with regulations, avoid legal and reputational risks, mitigate financial risks and protect against money laundering, bribery, terrorist financing, fraud and human right violations. They also enhance trusted customer relationships. To succeed in a rapidly changing operating environment, companies need to continuously monitor their KYC processes, which also requires continuous learning from their staff. The VIVA research, development and innovation (RDI) project built a virtual reality learning environment that SMEs can use to train their staff in the basics of KYC. Companies can also tailor the environment to their specific needs.

Photo by Fly D on Unsplash

Compliance with KYC procedures apply to different actors, including banks, investment and insurance companies and businesses engaged in the international trade. In the 2020s, we live in a world where financial crime, such as money laundering and terrorist financing, is a growing problem. An increasing number of regulators have tightened their anti-money laundering and counter-terrorist financing requirements. (European Council 2023.) The growth of digital payments and online commerce has also increased the need for careful KYC procedures (Mikkelsen et al. 2022).

Tensions and conflicts in world politics increase economic instability. The increased geopolitical risk has affected many Finnish SMEs trading with Russia, as Russia has become the most sanctioned country in the world because of its war of aggression against Ukraine (Finnish Government 2023; Mirmoeini 2023).

Why develop your KYC process?

KYC is crucial not only for large companies but also for small and medium-sized enterprises (SMEs) that operate in global markets for several reasons:

  1. Different countries and regions around the world have enacted legislation requiring companies to implement KYC processes, for example the existing “EU directive on the prevention of money laundering and terrorist financing” (Directive (EU) 2015/849). Failure to comply can result in severe penalties and damage to a company’s reputation.
  2. The identification of potential financial risks associated with customers’ creditworthiness and reputation helps SMEs to make informed decisions and reduce the risk of financial loss.
  3. The verification of the identity of customers and ongoing monitoring of transactions and behavior allow businesses to determine who they are dealing with. Ensuring that customers are who they claim to be reduces the risk of fraudulent activities.
  4. Demonstrating the commitment of preventing financial crime helps SMEs to establish trusted relationships and thus improves customer loyalty and retention.

The VIVA RDI project’s needs assessment discussions with SMEs operating in the export industry revealed that companies were looking for guidance on how to develop their KYC processes. Their concern was what are the minimum requirements and how to implement them in a cost-effective way, as most SMEs do not have specific teams and high budgets for KYC.

The purpose of the VIVA – Virtual Technologies Boost SME Exports project, funded by the Helsinki–Uusimaa Regional Council, is to provide SMEs with a new way to simulate and practice export trade interactions. The project encounters export trade, modern technologies and continuous learning. Modern technologies refer to Augmented Reality (AR) and Virtual Reality (VR). (Heiskanen & Kuhmonen 2021.)

VIVA explored KYC through both preliminary questions from SMEs to a keynote speaker and a keynote speech itself. The content of the keynote presentation served as a basis for building the VIVA’s “Know Your Customer” learning environment which was designed to motivate companies to train their staff and actively seek out more in-depth, company-specific information themselves. The VIVA environment consists of different microlearning chunks, such as animations, micro-podcasts and replicas of a talking Einstein. Learning can be tested through true or false statements and multiple-choice questions.

The KYC process is intrinsically linked to the risk-taking policy and trade agreement processes, so VIVA’s KYC environment also provides seamless access to those environments of the VIVA’s Export Skills Basecamp. Companies have thus the opportunity to practice the creation of risk-taking policies and trade agreements in the context of KYC training, if necessary.

The VIVA project team experimentally tested different AI applications for scripting animations and podcasts, creating learning tasks and producing images, among other things. The team, for example, discussed with OpenAI’s Chat-GPT and asked it questions on the basis of the keynote presentation and literature review. Chat-GPT is a large language model that uses machine learning to generate human-like responses to natural language inputs (Agomuoh & Larsen 2023). The other AI application used was DALL-E, which uses a neural network to generate original images from textual descriptions (Pasha 2023). The international business landscape visible from the window of a modern office was produced using DALL-E.

The VIVA team received positive feedback from the steering group on innovativeness and keeping courageously up with the rapid evolution of technology by using and deploying generative AI in learning, although such possibilities could not have been foreseen or included in the project plan at the start of the project in August 2021. Together with the steering group, it was discussed that the use of generative AI requires careful human work to ensure the accuracy of the data and reliability of the sources.

VIVA guidelines and future visions for KYC

The VIVA project concluded the minimum requirement checklist for SMEs to implement a successful KYC process (Malminen 2022):

  1. Create an internal compliance policy.
  2. Motivate sales for KYC.
  3. Investigate company data, owners and senior executives.
  4. Check that the customer is not on the list of sanctioned individuals or organizations.
  5. Google the customer but be careful with the information and doublecheck.
  6. Do at least your own KYC memorandum as government officers can ask this information later.
  7. If you have a large project, buy a due diligence report.
  8. Pay attention to early warning signals.
  9. Remember that reputational damage can have long-lasting consequences for your business.
  10. Create a culture of KYC awareness by training staff on the importance of KYC compliance and how to conduct effective KYC checks.
  11. Conduct periodic reviews of customer information to ensure that it remains accurate and up-to-date.
  12. Monitor customer behavior continuously for suspicious activity.
  13. Collaborate with other businesses and industry groups to share best practices.
  14. Be proactive in adopting new technologies and best practices.
  15. Don’t forget about ESG considerations. ESG refers to environmental, social and governance factors that companies should demonstrate when making business decisions to ensure sustainable, responsible, and ethical practices (Deloitte 2023).
  16. Remember that KYC regulations are legal obligations and the company itself is responsible for complying with them.

To conclude VIVA’s findings on the development of the KYC process for SMEs, there are several challenges that businesses face. One key challenge is the lack of a compliance policy, which is an internal guideline that defines the rules and practices by which a company complies with local and international laws, regulations and standards. SMEs may not be aware of the requirements and regulations of the KYC process or lack the resources and expertise to develop and implement an appropriate compliance policy. This can lead to a company’s KYC process not being sufficiently comprehensive or reliable, exposing the company to risks and potential losses.

Another challenge can be the collection and management of data. SMEs may have limited resources and information systems. At the same time, they need to ensure that they collect the necessary information about their customers and partners with sufficient accuracy. This may require investment in developing information systems and staff training.

In addition, companies need to bear in mind that the development of their KYC process requires continuous monitoring and updating, as they need to keep abreast of changes and adapt their process accordingly.

As a future vision, the VIVA team sees that SMEs are likely to rely more heavily on digital solutions to streamline and automate their KYC processes as technology continues to evolve. For example, blockchain technology may be used to securely store and verify customer information, and artificial intelligence may be used to analyze customer behavior and identify suspicious activity. Future KYC capabilities will increasingly take into account environmental and social factors, such as corporate responsibility and focus more on data sharing and collaboration between different actors.



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