$500m Seized in Nationwide Catalytic Converter Takedown. Know Your Customer more Important than ever. Who are you really doing business with?
On November 2, the Justice Department took down a nationwide catalytic converter theft ring with forfeiture more than $500 million in assets including homes, bank accounts, cash, and luxury vehicles. The Justice Department News stated, “Federal, state, and local law enforcement partners from across the United States executed a nationwide, coordinated takedown today of leaders and associates of a national network of thieves, dealers, and processors for their roles in conspiracies involving stolen catalytic converters sold to a metal refinery for tens of millions of dollars.” In total, over 21 individuals in 5 states have been arrested and/or charged for their roles in the conspiracy.
Who you do business with is becoming more important than ever. If you do not pay attention to who you transact with you could become a victim legally as well as financially. With the increase in precious metals prices and the surge in catalytic converter theft it is more important than ever that you know your customers and your suppliers.
In recent years, authorities in the US and abroad have increased their focus on modernizing and enforcing anti-money laundering and terrorism financing (AML) regulations. As part of these efforts, the US’s Financial Crimes Enforcement Network (FinCEN) proposed Know Your Customer (KYC) requirements in 2014, which became law in 2016.
KYC procedures are critical to helping you analyze and monitor risky customers. KYC is a legal requirement to comply with anti-money laundering (AML) laws.
Why Who You Sell to Is So Important?
Recently a very reputable recycler said to me, “Good people need to do business with good people.” This is true, but sometimes you don’t know if a company is “good people” and oftentimes you don’t think to check if a company is “good people” until something goes wrong. Unfortunately, in auto catalyst recycling, many unethical and criminal scandals abound. Converters get altered and sold under the guise of being more valuable than they are; full truckloads of scrap catalytic converters get paid for and never delivered; the money used to pay you for your converters can be money that is being “laundered.” Act before you are a victim or become part of an audit or investigation.
Create a Know Your Customer (KYC) Process
Each company is different, but the KYC process has similarities. Are you ready to Know Your Customer?
Step #1: Have Customers Fill Out a KYC Form
When you are considering working with a potential company, be upfront about your KYC policy. Say that you are interested in being compliant with AML laws and must work with reputable companies to protect yourself and your company from any implication. First, you need to establish the identity of your customer by having them fill out the following information on a KYC Form either in paper or electronically to begin assessing the risk:
· Title (e.g., owner)
· Phone number
· Email address
· Federal Employer Identification Number (FEIN) or Social Security Number
· Proof of identity (e.g., passport, driver’s license)
Step #2: Develop a Customer Identification Program (CIP)
To start your KYC procedure and remain compliant, develop a Customer Identification Program. In your CIP, outline how you will verify customers’ identities. Include what information you will ask potential customers for and how you will go about verifying the information provided. Consider also including how you will notify customers about your KYC policy and identity verification procedure.
Step #3: Look at Customer Due Diligence (CDD)
Customer Due Diligence is an important element in managing risks and protecting you and your business. With CDD, you must identify and understand your customers’ activities. Then, you can use the information you find to assess how risky they are to your business. Given the consequences of non-compliance (evidenced by unprecedented AML-related penalties levied against the industry in the past few years including jail time), companies should begin their implementation efforts as soon as possible, based on the proposed requirements and industry best practices. The most important part of due diligence is to establish the ownership and activities of the companies you sell to.
While FinCEN’s proposal does not specify risk factors that must be considered in assessing a customer-entity’s AML risk, companies should at a minimum consider the following questions:
· How complex is the customer’s ownership structure? Anyone with more than 10% ownership should be recorded.
· Is the customer operating in a heavily regulated industry? No? This is high risk.
· Is the customer’s home jurisdiction (or any of its neighboring jurisdictions) subject to sanctions, or home to terrorist organizations?
· Do the customer’s home jurisdiction lack effective AML regulations or have high levels
· To what extent is the customer’s business cash-based? This is particularly high risk.
· Has the customer taken any measures to mask the identity of its shareholders (e.g., via
nominee shareholders or bearer shares)?
· Is the institution’s relationship with the customer face-to-face?
Step #4: Continue to Monitor Customers
Now, you may think your job is done once you assess the customer’s risk and verify their identity. However, KYC is an ongoing process. Just because a customer passed your KYC test does not mean they should be off the hook. Continue to monitor each of your customers for risky activity. Some factors you should continue keeping an eye on include:
· Spikes in activities
· Patterns in unusual behavior
· Illegal activities
If you find a current or potential customer has suspicious activity, terminate the business relationship as soon as possible. Depending on your business, you or your bank can report the activity. Banking institutions can file a Suspicious Activity Report (SAR) to report unusual customer activity.
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