Knowing your customer is in everyone’s interest in the export trade
Financial institutions are bound by the duty to know their customers – Finnvera’s KYC policy
Many elements in financing operations are based on national and international laws and regulations, which Finnvera must also comply with. The obligation to know your customer is based on the EU money laundering directive. Its national application is regulated and monitored by the Finnish Financial Supervisory Authority (FIN-FSA). Following the recent reform of the Finnish Money Laundering Act, Finnvera will also redefine its Know Your Customer (KYC) policy from January 2018.
In essence, the new and more effective KYC means more systematic and documented CDD (customer due diligence) practices towards customers and, in certain cases, other parties to a funding project.
What does KYC mean in concrete terms?
KYC refers to an obligation under the Money Laundering Act that is related to the prevention of money laundering and terrorism. It means the duty of financial institutions or other bodies to recognise and know their customers and have knowledge of the nature and extent of the customer’s operations.
In concrete terms, when a company is applying for funding, the basic-level KYC duty includes registering the customer’s identifying data and information on the company’s ownership structure and the nature of its business operations. In this context, ‘customer’ refers to the company applying for funding and the beneficiaries of Finnvera’s guarantee.
Where necessary, it is also possible to obtain various background information related to the so-called risk of damage to reputation, such as negative news, possible authority penalties, or appearance on sanction or corruption lists.
From June 2018, the KYC policy will also cover the buyer client of an export company, the so-called ‘third party’. This means that the buyer and other necessary parties will be subjected to an investigation of the risk of damage to reputation in cases that involve a buyer credit guarantee of more than two years, an export credit, or a letter of credit or bill of exchange guarantee of more than two years. While not required by law, such third party due diligence is part of Finnvera’s responsible financing operations.
Why is Finnvera revising its practices?
A more extensive KYC of the parties to funding projects reflects current practice. Our owners, partner banks and Fiva either require or strongly recommend such responsible financing practices. Similar KYC obligations are applied widely in the financial sector. It is also a part of sensible risk management to conduct an independent review of project parties.
What does this require from customers and other parties to funding projects?
We will need more information on companies and, where necessary, the other parties to a funding project. As far as possible, Finnvera uses information available in public registers and other databases. Our aim is to minimise the extra work for our customers.
The background studies conducted by Finnvera may also benefit other parties to a funding project. We are allowed to exchange information with bodies, such as banks, that are participating in the same project.
Why is Finnvera asking for the same information on the same projects that the bank has already requested?
Although parties involved in the same project may exchange information, the Money Laundering Act ultimately requires knowing your customers independently. Therefore, we may not rely solely on investigations performed by others. Of course, whenever possible, we will collaborate with banks if the project involves a foreign buyer or other party that the bank may already know.
What does Finnvera do if the KYC investigation reveals negative news of the borrower company or other similar information? Will Finnvera refrain from granting a guarantee?
Refusing to grant a guarantee is not our primary option. Negative issues revealed about a borrower (such as corruption, violations of human rights or the environment, or other criminal activities) will always be dealt with on a case-by-case basis and the risk assessed from the perspective of the applied project. In assessing such issues, their relevance depends on how recent the events have been, whether the company has taken corrective action due to the event and, above all, whether it is possible to obtain reasonable assurance that the applied project will not be affected by such issues.
What are the requirements and practices of export credit agencies in other countries?
Enhanced KYC of the parties to funding projects is a common trend among credit agencies today. Recently, the responsibility for funding operations has gained more momentum, particularly among public providers of financing. In practice, this means enhanced KYC obligations. KYC resources and databases are becoming increasingly extensive.
Finnvera’s model has been prepared largely on the basis of the model of other Nordic export credit agencies, and the risk management model applied in Sweden is very similar.
For more information, please contact
Anne Haataja, Compliance Officer, Finnvera, tel. +358 29 460 2852