Understanding KYC compliance

In the dynamic world of startups, securing reliable banking partnerships can make a significant difference in scaling your operations. A vital aspect of this relationship lies in understanding and navigating the Know Your Customer (KYC) framework that is built for clients by financial industry regulators and banks.

While it might seem like a complex set of rules and requirements, KYC is, at its heart, about ensuring a transparent and trustworthy relationship between banks and its clients. This article provides startup founders and CEOs with a comprehensive understanding of KYC from the bank’s perspective and offers actionable insights to address compliance inquiries efficiently.

KYC compliance expectations for new clients and prospects

As a startup founder, it's crucial you grasp the KYC compliance landscape and the due diligence expectations of banks before opening a new banking account for your company. US banking regulations mandate that all banks request and review specific information about you and your company during the due diligence process before making the decision to open a new bank account. The KYC process and review serves dual purposes: 

• Enables banks to offer products and services best suited to your needs 
• Ensures adherence to regulatory standards

Part of KYC is the Customer Identification Program (CIP). CIP is a regulatory requirement which mandates that all US banks have a program in place to verify the identity of their customers and ensure that the customers are not involved in any illegal financial activities, especially money laundering and terrorist financing. 

The process is also frequently referred to as Identity Verification (IDV), and you may see both CIP and IDV abbreviations in compliance-related emails you might receive from the bank. CIP and IDV processes require banks to verify the following:

• Prospect name
• Address
• Government ID (Social Security number for US persons)
• Date of birth

It also ensures identity verification, compliance with sanctions regulations and, most importantly, is used in other bank processes to help prevent fraud on your account. 

Each bank uses its own protocol which can be one of the following: 

• Non-documentary - Relying on information available with trusted third-party vendors, or
• Evidentiary - Using identity proofs like driver’s licenses, passports, or utility bills

CIP and IDV processes are applied to the company executives, shareholders, and might apply to material-related parties.

As a startup founder, it's crucial you grasp the KYC compliance landscape and the due diligence expectations of banks before opening a new banking account for your company.

Other information requested in addition to CIP/IDV

The bank may ask a series of questions to gain a deeper understanding of your business and corporate structure. These inquiries might encompass the nature of your business model, your sources of revenue or cash flow, the products or services you offer, and your operational geography — whether you operate within one country or across multiple countries. Gathering this data allows the bank to craft a profile for each customer, which is then used to analyze account activity. This not only assists the bank in assessing the risk and fraud prevention associated with each client but also reduces the frequency of reaching out to clients for regulatory compliance concerns and questions. 

Collecting and sharing this information upfront, before the account is opened, not only facilitates smoother account opening and operations but also minimizes further data requests, enhancing your experience. If you have this information available when opening your account, it can be opened quickly, and some qualifying products and services can be enabled at once. It also helps prevent the back-and-forth of due diligence questions.

Keeping your account in good standing

Once your account is active, the focus shifts to compliance maintenance. For a harmonious relationship with your banking partner, proactive communication and prompt responses to compliance inquiries are very important.

A key component of compliance maintenance is to keep your bank informed about significant changes in business developments or ownership structures. For instance, as your company grows and secures additional investor funding, the dynamics of its ownership are likely to evolve. While you might be updating these details on your company's internal cap table, it's equally vital to communicate such changes to your bank relationship manager, ensuring the bank's records remain updated.

Moreover, if your startup expands into international markets, such an expansion can inevitably alter the sources and destinations of your payments. By proactively sharing these changes with your bank, you can avoid inquiries and delays that might arise at inconvenient times — like when you're trying to process an urgent payment or open a new bank account swiftly.

By consistently engaging with your relationship manager, you help ensure that your client CIP profile remains accurate, reducing the chances of unexpected disruptions or additional information requests from the bank. This foresighted approach can help guarantee the smooth operation of your business.

For a harmonious relationship with your banking partner, proactive communication and prompt responses to compliance inquiries are very important.

Managing bank relationships to prevent account closures

It's crucial for businesses to recognize that banks might sometimes consider closing client accounts. There are a variety reasons why this can happen:

• Lack of response: If clients consistently fail to respond to the bank's compliance inquiries, it may lead the bank to believe that the relationship isn't transparent or trustworthy.
• Business incompatibility: Certain industries, such as gambling, may fall outside the bank's risk appetite or area of expertise. If a bank feels it lacks the expertise or the inclination to manage specific business models, it might opt to terminate the association.
• Sanctions compliance: In rare cases, if there are concerns related to sanctions compliance, banks may consider account termination as a precautionary measure.

To mitigate the risk of such unwelcome outcomes, you can take several proactive measures:

• Update key personnel information: Always ensure that the bank is aware of the most current information regarding your company's authorized representatives, directors and shareholders. Updated records can expedite various processes and reduce misunderstandings.
• Business model evolution: Companies can evolve. They develop and introduce new products or services, and sometimes even pivot to an entirely new business model, like transitioning to a marketplace setup. It's essential to keep the bank in the loop about these changes, so they can adjust their risk profile for your account accordingly.
• Geographical operations: For startups, global expansion often becomes a reality from day one. Whether you're selling products internationally, setting up a branch or subsidiary, or hiring remote employees and contractors in foreign countries, it's crucial to notify your bank about any changes to your international footprint. Banks are sensitive to geopolitical risks and being transparent about your global operations can reduce potential disruptions.

Conclusion

In sum, the foundation of a productive banking relationship is built on transparency, open communication, mutual trust and an understanding of the KYC framework. Prioritizing these elements can go a long way to help ensure that your business operations remain uninterrupted, and that your bank continues to be a supportive financial partner for your company’s growth.

If you have questions related to the KYC compliance process, reach out to your Relationship Manager.