United States: KYC Becomes More Important For US Companies When Working Across Borders

Overseas expansion remains a goal for many US companies, but even if that company is not looking to set up or sell in a foreign country, it's likely there will be a foreign component to even the most American of products and services. Yes, even an apple pie.

And while a US company will be very familiar with US regulations and requirements when it comes to doing business, it may not be so familiar with the regulations of its partner countries. Nor will it be familiar with the unique, local way a country has implemented global regulations, such as the anti-money laundering directives (AML). This is why a local compliance partner can become essential for a US business expanding or doing business abroad.

How well do you know your business partners?

In that global supply chain, it's likely you will work with a local representative somewhere, or hire a freelance worker, or even buy components from an offshore manufacturer. Procurement processes, after all, are often looking for cost efficiencies, and sometimes those cost efficiencies come from across the border.

But not all companies operate as stringent a regime as the US authorities. In fact, in some countries it is not unusual to give officials bribes, or even to use child labour. It can be culturally acceptable to give "extracurricular payments" to speed up processes or to ensure favourable treatment for a business, often without the knowledge of the ultimate lead partner or HQ. But if that happens in your business supply chain, you can be held responsible for it - in fact, you can be held responsible for the actions of employees or representatives working on your behalf, even if they're in a far-flung country.

Let's look at another example: in the US, 30% of all real estate sales are paid in cash. How does the estate agent know that cash came from legitimate means? The US Treasury Department issued an advisory in 2017 that real estate companies will be under the AML microscope, which caught some by surprise, as real estate is not traditionally considered a financial institution.

It's expected other countries will follow suit, especially with AML4 just implemented in the European Union, a big partner to the US, and a fifth AML directive on its way soon which is likely to look at other sectors including jewellery stores, car dealers, and those who deal in luxury items, as well as real estate. All of this builds up a compelling picture: companies anywhere, but especially those in the US, need to have a very clear picture of everyone in their supply chain.

Getting it done - and the consequence of getting it wrong

The best way to really know those you are doing business with - at any point along the supply chain, and in any type of arrangement - is to perform a Know Your Customer (KYC) check.

KYC goes beyond a nice-to-have these days; it's a mandated regulation that requires those active in the financial services sector to carry out due diligence on their clients to verify their identity and prevent identity theft, fraud, money laundering and terrorism financing. But more than something a financial institution needs to worry about, KYC can actually help to protect any business against unforeseen reputational damages.

US companies working with agents and subcontractors all over the world risk an unsavoury element sneaking in at some point in the chain - and if you rely on these people, you will be held responsible and fall foul of regulation. There is a reputational risk inherent in any business relationship. And regulation regarding anti-money laundering and avoiding terrorism financing is much stricter in the US than in a lot of other countries, so relying on foreign parties performing the check can be dangerous.

A robust KYC process will perform in depth structure analysis of an entity and check suppliers, staff, clients, financiers - anyone connected to a business - by performing due diligence. This includes checking identification, information collection, screening sanction lists, checking ultimate beneficial owners (UBO) and politically exposed persons (PEP). The KYC check - which can be quite laborious - creates a whole package of information which is then exposed to an additional media check, corporate analysis and finally developing a risk profile. These checks also should be periodically reviewed, as structure of partner's companies and sanction lists are changing.

Robust checks help protect your business

This is often more than is required by many KYC regulations, but given the US is among the most stringent in the world, it's best to go a little overboard - especially given the strength of penalties. In the years between 2010 and 2016, banks paid more than $160bn in penalties to the US government because they failed to pass compliance checks - and that's just the monetary penalties, not taking into account the damage to corporate reputation. Reputational damage from working with an unethical partner can forever shut the door into a new market. Media are actively picking up such news and the failure becomes public knowledge very quickly. The full list of enforcement actions by the US Securities and Exchange Commission makes for some pretty scary reading for US companies with ties abroad.

TMF Group's KYC experts have many years' experience performing this type of due diligence, and have expertise in more than 80 countries – this becomes crucial when you consider there is no international standard for KYC. With an increasing amount of fast-changing local regulations, as well as technology developments looming large – including the threat of cyber security, data protection needs, blockchain and cryptocurrencies – KYC services can provide businesses with peace of mind. Get in touch to discover more about our full suite of Know Your Customer compliance services.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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