Know Your Supplier (KYS)

By examining another supplier’s credentials, financial standing, and legal compliance practices, companies can ensure that their vendors are reliable. This makes supplier due diligence an important component of the overall AML compliance framework, which requires companies to assess their partners and their credibility by conducting in-depth background checks, reviewing financial documents, and evaluating their overall track record.

Certain key steps help companies build a robust KYS process. To achieve this goal, you should:

• Perform risk analysis and classification of suppliers. Businesses should identify high-risk businesses for closer examination.
• Gather and assess comprehensive supplier data. Companies need to include company structure and beneficial owners.
• Conduct thorough background checks. Organizations should examine previous instances of legal and regulatory compliance, screening suppliers and identifying cases of non-compliance. 
• Assess the financial integrity and stability of suppliers. Companies need to ensure continuous oversight and maintain ongoing compliance and risk reduction.

In general, the KYS process differs based on the jurisdiction that the business operates. Despite that, global regulatory systems have recommendations that often have the same unified approach for supplier due diligence. For example, the Organization for Economic Co-operation and Development (OECD) programs and international standards offer guidance on integrating KYS measures.

Using supplier due diligence and assessing third-party partners means better fraud prevention and a more serious approach towards not only verifying your customers but also your business partners. KYS measures help prevent various illegal activities that exploit the financial system, such as fraud, corruption, and money laundering. Conducting throughout background checks, like verifying all shareholders or conducting adverse media checks, can be part of a company’s KYS framework. 

Without KYS, companies can face serious consequences like financial loss, tarnished reputation, or legal issues. So, to safeguard their operations, companies actively address the threat of financial crime through KYS. However, KYS is not only a popular practice in the financial sector. Industrial companies also use such measures, particularly those importing raw materials and products from overseas. By verifying suppliers, companies can protect themselves against accusations of bad working conditions or violation of human rights.

While it’s certain that supplier due diligence is vital for businesses that want to ensure transparency in their operation, like with many regulatory compliance tasks, there are certain challenges that can emerge. The most common are scalability issues and increased costs, especially if the company is just starting to scale and doesn’t have the resources to hire in-house due diligence experts. 

Some helpful tips that can boost your KYS process include:

• Understanding your supply chain partners and their business models. 
• Checking all purchased goods and services in order to ensure that they meet your standards.
• Monitor your supply chain in order to detect and address any issues in a timely manner. 
• Use external software or some sort of automation technology to optimize your KYS procedures. 

Naturally, balancing the costs of supplier due diligence with non-compliance risks requires careful consideration. Collaborating with reliable third-party AML software providers can help alleviate some of these challenges and minimize risks linked to supply chain fraud. 

The KYS process verifies corporate clients and identifies high-risk suppliers, finding particularly dangerous red flags of money laundering and other illegal activities. KYS enhances a company’s defense against financial crime. It helps identify high-risk suppliers and potential red flags, keeping the company clear of illegal activities, reducing the risk of supply-chain fraud and corruption, as well as safeguarding the company’s assets.