Know Your Vendor overview and best practices
Modern businesses face quite a few risks associated with an overwhelming number of financial transactions, where every single one of them presents a potential risk. So, what’s the best way to identify suspicious transactions on time, when you have to deal with the large number on a daily basis? Know Your Vendor (KYV) diligence procedures can prove themselves to be extremely helpful when monitoring and preventing these kinds of risks, with the following steps:
- Verify the identity of the vendor using a third party data source
- Understand the nature of your vendor’s activities, with a primary goal of making sure that the sources of the vendor’s funds are legitimate.
- Carefully evaluate the potential money laundering risks associated with that vendor. Anti-Money Laundering Guideline
Know Your Vendor Best Practices
The best-practice Know Your Vendor (KYV) programs can include the following elements:
Customer Identification Program(CIP) is a starting point for any KYV process, which includes collection, verification, and record keeping of vendor identification information. Here is where a strong Supplier Onboarding and Supplier information Management process comes into play
Basic Vendor Due Diligence (VDD) relates to creating controls around your internal process related to verifying the identity of vendor and evaluate the risks associated with them.
Enhanced Due Diligence (EDD) represents additional information gathered for higher-risk vendors to provide a more profound understanding of vendor activity to reduce associated risks.
Ongoing Monitoring (OM) function includes close evaluation of financial transactions and accounts treated as part of a vendor’s risk profile. Best results for organizations are achieved when transaction monitoring systems and being refreshed regarding due diligence information every couple of months up to one year.
While implementing these components the Know Your Vendor (KYV) activity should be taken very seriously. All processes and results obtained should be thoroughly documented to create a reliable audit trail for all necessary decisions and actions. Your organization should run an internal database, which contains data of all approved and disapproved vendors to minimize the risks and avoid duplication of efforts.
Finally, in determining what level of a potential risk, an individual vendor represents, a company should always look for the so-called “red flags”, such as:
Know Your Vendor Red Flag List
Nature or occupation of business
Business transaction purposes
Patterns of financial activities, such as transaction types, volume, and frequency
Expected origin and method of payment
Incorporation documents, partnership agreements, and business certificates
Understanding of the vendor’s customers
Identification of rightful and beneficial account owners
Relevant details of other personal and business relationships the vendor maintains
Payment policies and procedures in place
Appropriate third-party documentation
Local business reputation evaluation through reviews of available media sources