It’s obviously important for financial institutions to know about the backgrounds and behavioral profiles of the people and companies they do business with. But it’s also essential that they be aware of the financial crime risks their own employees present, and do everything reasonably possible to mitigate these risks.
After all, employees have more direct access to a company’s sensitive property and information than outsiders. So there’s a greater chance they may unlawfully take advantage of this access to further their own interests—or even those of other criminals.
That’s why financial institutions (FIs) need to conduct Know Your Employee procedures. This article will explain what those are; why they’re important; and how FIs can properly use them to combat fraud, money laundering, terrorist financing, and other financial crime.
What is Know Your Employee (KYE)?
Know Your Employee, often abbreviated as KYE, is the process by which businesses verify the identities and backgrounds of both current staff and potential hires. The objective of KYE is to ensure that employees are who they say they are, and are not overly risky due to having histories of criminal activity.
KYE can also sometimes refer to managers establishing good working relationships with their employees. This can include understanding their work rights, tailoring their roles towards their personal strengths, and creating a comfortable working environment for them. The goal is to improve employee satisfaction and productivity while limiting the risk of misconduct.
Why KYE is Important
Most businesses invest in Know Your Customer (KYC), Know Your Business (KYB), and Know Your Transaction (KYT) processes to protect against the threat of financial crime from outside the company. Know Your Employee, or KYE, is about protecting a company from insider threats.
When people are employed by a company, they have access to at least some of that company’s proprietary information and systems. These include customer identities, intellectual property, trade secrets, financial data, access-controlled buildings/rooms, computer networks, and so on. Without KYE, a company is at a much higher risk of its employees abusing these privileges for illegal personal gain, or illicitly sharing their privileges with unauthorized third parties.
Benefits of Know Your Employee (KYE) Processes
So what are the advantages of having a Know Your Employee policy for a business? Some examples include:
- Limiting employee fraud: Employees can take advantage of their access privileges within a company to steal physical property, funds, business opportunities, and other assets. Using KYE to screen current and potential employees for histories of illicit behavior allows a company to weed them out, or at least keep a closer watch on them.
- Guarding against money laundering: It’s essential that financial institutions use Know Your Employee for AML. Criminals may approach FI employees for help with finding loopholes in the FI’s processes in order to launder illicit funds. KYE can help protect against this by blocking potential hires with suspicious pasts or behaviors, or by identifying current staff who may have ties to money launderers.
- Managing employee onboarding and access control: Some criminals can steal from companies by impersonating employees and/or faking their access credentials. KYE helps a business avoid this by verifying that current and potential employees are who they say they are, and providing them with authorization appropriate to their roles.
- Building and retaining consumer trust: It’s especially critical to have a Know Your Employee policy in a bank because of how often it handles money. Customers will want assurances that their funds are safe, and letting financial crime happen—even internally—is a sure way for a bank to lose business. KYE mitigates the risk of this by helping a bank hire and retain only the most trustworthy employees.
- Improving employee loyalty: Employees who don’t feel comfortable, valued, or understood at a company are at a greater risk of misconduct. When done properly, KYE makes employees feel satisfied and like they’re part of a team at their job, which reduces the likelihood of them abusing their positions.
These are some things that an FI can enjoy if it does KYE properly. But what if it doesn’t? We’ll look at possible outcomes in the next section.
Consequences of KYE Non-Compliance
Ignoring KYE protocols puts a business at risk of failing to fulfill its legal employment obligations, and can lead to other bad things happening. These can include:
- Stricter regulatory monitoring: Financial crime attracts the attention of financial regulators, especially when it originates from inside a financial institution. If the FI is found to not be in compliance with applicable rules, it can be put under closer watch, have extra conditions put on its operations, or even lose its license to operate.
- Litigation: FIs can be held civilly or criminally responsible for financial misconduct committed by their employees. The FI may be penalized with fines, a criminal record, or even jail time for its leaders (in addition to the offending employees).
- Lost assets: Financial crime caused by an FI’s employees can result in more than the FI losing assets due to theft. The FI can also incur legal costs, or be fined by regulators for failing to have the proper protections in place to prevent employee misconduct.
- Damaged credibility: The fact that an FI let its employees commit financial crime will often push both current and prospective customers away. This is especially true of investors and client businesses, which often require proof of regulatory compliance before closing any deals.
So how does an FI do KYE right to reap the benefits while avoiding the consequences? We’ll discuss that next.
How to Use KYE for Anti-Money Laundering
A proper KYE process requires several facets. They include the following:
- Collecting identifying information: A business must collect essential ID information about current and prospective employees. This includes names, addresses, dates of birth, government-issued ID (such as social security numbers), work history, education, and references.
- Validating supporting documentation: The business also needs to ensure that any documents provided to verify an employee’s identity credentials are genuine and current.
- Checking backgrounds: The business should dig into relevant parts of its employees’ pasts for risk indicators. Having a criminal record is an obvious one, but other clues can be found in information such as their employment history or credit score.
- Confirming qualifications: A business should double-check that all employees meet the prerequisites for their roles. This can include requesting copies of official documents from educational institutions or industry certification organizations.
- Taking proper security precautions: Safeguards should be implemented to avoid employees abusing their positions. For instance, a company should only give employees access to information and systems related to their roles and responsibilities. In addition, it should monitor employees and conduct regular audits of their activity. Finally, it should inform employees of what to expect—and what’s expected of them—to keep the business secure.
- Establishing manager-employee relationships: Managers should maintain frequent communication with the employees under their supervision. They should discuss employee responsibilities, work environment/culture, role and/or career goals, and work-life balance. This helps to solidify employees’ loyalty to the company and limit the risk of employee misconduct.
- Keeping records up to date: A business should keep up-to-date records of employee identification information, certifications, employment history, performance reviews, and so on to know if an employee’s financial risk level changes.
Use Unit21’s AML tools to guard against internal financial threats
Risks of fraud, money laundering, and other financial crime can come from inside a business as well as from outside. Technology such as Unit21’s Transaction Monitoring and Case Management solutions can help to efficiently keep tabs on employees as well as customers.
Contact us today for a demo.