Know Your Vendor (KYV)

By implementing a Know Your Vendor process, companies aim to verify and assess the suitability and reliability of their third-party vendors. By bringing in verified, legitimate service providers and vendors, companies ensure they comply with Anti-Money Laundering (AML) laws and regulations, ensuring secure transactions. 

However, there are other reasons beyond compliance. KYV helps assess risks and improve internal risk management controls, particularly those linked to third-party B2B relationships. It helps evaluate a vendor’s business practices, financial health, ethical standards, and overall track record. 

Different from a single KYV process or component, a Know Your Vendor program consists of detailed tactics that are designed not only to onboard a new vendor (in other words, verify them) but also to ensure fair practices and consistent compliance with that vendor throughout the entire business relationship (after they’ve been verified).

High-risk businesses that are regulated, such as banks, need to adopt this approach and have a proper program to maintain compliance. A compliant KYV program also helps detect red AML flags, such as suspicious financial transactions, and protects against fraudulent third parties that could compromise business operations.

Know Your Vendor (KYV) and Know Your Business (KYB) serve the purposes (compliance and risk management) but focus on distinct entities.

Here’s a more detailed explanation:

• KYV is designed to ensure operational reliability, reduce exposure to external threats, and maintain compliance when engaging with external partners. KYV expands beyond traditional KYB methods by specifically evaluating the risks associated with third-party vendors.
• KYB is a general term and a legal requirement for banks and other regulated institutions to ensure compliance with anti-money laundering (AML) laws. This includes standard corporate entity compliance measures, such as verifying business registration documents, cross-checking information with government databases, identifying beneficial owners, conducting bank account verification, etc. 

There are three types of risks in vendor due diligence:

1. Operational risk. When a vendor fails to meet their contractual obligations, it disrupts the company’s operations. That’s why many big corporations have backup vendors for example, for KYC compliance and user verifications. 
2. Regulatory risk. A third-party service provider with a regulatory fine or even the slightest link to crime, such as fraud and money laundering, can automatically expose the original organization to non-compliance fines. KYV helps prevent such consequences by spotting red fags in real-time.
3. Reputational risk. A supplier can get into a scandal for unethical practices, such as forced labor or illegal advertising methods. This can result in adverse media and damage to the company’s brand image. 

Businesses that use an automated KYV system can:

• Minimize operations costs
• Simplify work for compliance staff
• Free up time due to switching to an automated workflow
• Receive instant AML alerts when monitoring vendor activities
• Assess risks and receive risk scores automatically
• Get real-time alerts about suspicious activity
• Allow focusing on other business processes

Automated screening and monitoring processes help streamline the whole Know Your Vendor program, helping identify risks in operational disruptions through measures like tracking the vendor’s financial transactions and identifying potential dangers that could harm the supply chain.