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Risk Management : February 2009
Peter Sandman interview
Raising the Standard
Workplace surveillance: Who's watching Big Brother?
Age splits field on risk perception
Veins open new front in fraud fight
Data loss costs $1.5 trillion
Do you really know your customer?
Outlook gloomy on global risks
OHS: Tough times demand tough standards
Meltdown fuels financial fraud
Employees rapped for data risk
DUE DILIGENCE Wily criminals can circumnavigate even the best-intentioned internal controls, meaning risk managers need to raise the bar when it comes to customer due diligence. As Chris Cass, Eileen Vuong and Crispin Yuen explain, it is imperative to know your customer. customer? T Do you really know your he latest corporate scandals of the Satyam fraud and Madoff ponzi scheme serve as timely reminders about the importance of customer due diligence, or “know your customer” (KYC) procedures. Had the financiers of some of these frauds had the appropriate systems and processes in place they may have detected anomalies in cash flow and asset values, which could have significantly reduced the effects and longevity of the frauds. Unfortunately, KYC procedures are often misunderstood and ignored or carried out ineffectively. Many organisations erroneously believe that initial credit checking will suf- fice as KYC without appreciating its specific purpose. However, unprecedented economic volatility, brought about by the global financial crisis, suggests that KYC will play an increasingly important role in choosing and retaining business partners. Not only are customers’ circumstances changing, but opportunities for mergers and acquisitions are likely to rise and these will have KYC implications. In particular, as com- panies acquire their target’s customer base, they will need to assess the target’s risk pro- file and any differences to their own KYC procedures. But integrating or developing overarching KYC programs can be costly, and may result in hidden costs and reputational issues not factored into the acquisition price. Revenue opportunities and risk minimisation Most businesses appreciate the benefits of collecting and verifying KYC information at the outset of any customer relationship. Knowing customers’ background, circumstances and commercial intentions means you can better identify their specific needs, which can lead to more revenue opportunities. Undesirable customers expose organisations to potential catastrophes, including shareholder and customer class actions, regulatory scrutiny, reputational damage and adverse publicity. The stakes are now considerably higher for any association with customers prepared to breach laws and regulatory requirements. The US Government again reiterated its seriousness about sanctions and counter- terrorism measures with the $US350 million ($530 million) fine imposed on Lloyds TSB last month. In Australia, the Department of Foreign Affairs and the Reserve Bank also administer sanctions, and although neither has issued fines of such magnitude, they are armed with an array of actions to take against non-compliant organisations. So, how can businesses be sure about the integrity of prospective customers? The truth is there is probably no guarantee. 22 RISK February 2009
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