KNOW YOUR COUNTERPARTY (KYC)
& ANTI-MONEY LAUNDERING (AML)

To help prevent, mitigate, and manage risks that undermine responsible sourcing, companies should collect, verify and archive information on their customers, suppliers, contractors and other third parties with they conduct business regularly. These measures, called Know Your Customer/Counterparty (KYC), are  considered a first step for conducting due diligence.

Members of the jewellery and gemstone industries should apply KYC to their supply chains, establishing wherever possible the identity of all organisations with which they deal, having a clear understanding of their business relationships, and having a reasonable ability to identify and react to transaction patterns appearing out of the ordinary or suspicious.

A key objective  of KYC is for the company to demonstrate that it has carried out checks on its counterparties, even if to rule out their association with any money laundering or illicit activities. The expectation is that reasonable effort should be taken to complete these checks, commensurate with the size and nature of the business.

Money laundering is the illegal process of concealing the origins of money that is generated by criminal activity. “Dirty” money is “laundered” by passing it through a complex sequence of bank transfers or commercial transactions in order to hide its origins. The laundering process aims to make “dirty money,” generated by criminal activities, look “clean,” as if it comes from a legitimate source. Gold, silver, diamonds and coloured gemstones have at different times all been associated with money laundering.

Anti-money laundering (AML) procedures, which include KYC, help mitigate the incidence of money laundering in the supply chain.

Even if a business is small, but is involved in business relationships and trading of material that could be perceived as having links with money laundering or the funding of terrorism (by virtue of its country of origin, for example), then a greater effort should be AML due diligence. If a counterparty is considered to be a “high risk,” additional information should be collected about the counterparty to provide a deeper understanding of its activity, in order to mitigate associated risks.

These KYC principles should also apply to existing or “grandfathered” stocks of precious metals or gem materials, which may otherwise not be included in due diligence of current active supply chains.

It is advisable that each business has a written KYC policy. This need not be long or complicated, but should state the clear intent to apply KYC principles on all customers, suppliers, contractors and other third parties with which the business has a formal relationship.

The policy statement does not have to be stand alone, but rather can form part of a broader set of policies.

It also is advisable that each business has a a documented KYC procedure.

Examples of KYC procedures may include:

1. Collection and analysis of basic identity information
2. Name matching against lists of known parties (such as company registers)
3. Details of the member’s policies and procedures (especially relating to identification of sources of scrap/recycled supply)
4. Determination of the member’s risk, especially in terms of propensity to supply precious metals and gem materials from an area of conflict and the trade of these products on a cash transaction basis
5. An expectation of a customer’s transactional behaviour
6. Monitoring of a customer’s transactions against their expected behaviour and recorded profile
7. Documentation relating to the application of KYC is recommended for all sources of recycled or “scrap” materials.

At a minimum, when implementing a KYC procedure, one should:

• Establish the identity of the organisations with which the business deals
• Provide a clear understanding of the business relationship
• Confirm beneficial owners, meaning, the person(s) who directly or indirectly ultimately owns or controls the corporate entity
• Confirm that beneficial owners are not featured in lists of known criminals issued by the government.

The information gathered from these exercises should be documented and stored in a place that can be easily accessed by responsible staff and senior managers.

To collect information on counterparties in a structured format, the business can use a form or questionnaire, which can be filled out by the counterparty or internally by the business itself. In all cases, the counterparty should be given the opportunity to verify the information and to affirm its accuracy.

Over the course of the business relationship, businesses should monitor transactions, in order to identify patterns that might be appearing out of the ordinary or suspicious. To do so, businesses should maintain records of all cash or cash-like transactions, with a value above the defined financial threshold under applicable law. Where required, they should report these to the relevant designated authority.

Ongoing monitoring should be also based on a counterparty’s risk profile. More frequent and stringent attention should be paid to counterparties based on:

1. The activities that the counterparty is or has been involved with.
2. The location where the counterparty carries out the activities.
3. The expected volume of transactions and payment methods.
4. The counterparty’s customers and business relationships.
5. The counterparty’s anti–money laundering policies and procedures.
6. Any negative information or allegations about your counterparty in the media.