By: Chris Dempsey, Sr. Software Product Manager — KYC
As illustrated in part one of this G2 Web Services blog on Business Classification Best Practices, significant risk lie hidden in the portfolios of banks and TPPPs unbeknownst to risk and compliance managers. In this segment, G2 outlines the steps banks and TPPPs should take to ensure their financial institutions have a robust business classification program in place.
Business Classification Best Practices
The first step in ensuring your commercial bank or TPPP has a sufficient process in place is determining which classification schema makes the most sense. In the United States, commercial banks typically employ the North American Industrial Classification System or NAICS to accomplish this. Alternatively, banks serving business customers in Europe, Asia and elsewhere may use the System of Industrial Classification or SIC, which NAICS is based from.
However, what both schema lack is a means of properly classifying certain high-risk business types. This shortcoming can allow bank customers to easily hide their true activities behind a seemingly innocuous NAICS or SIC code as demonstrated in the examples from part one of this blog.
Business Classification; Not Just a Box to Check Once
To ensure business customers are correctly classified banks can look at real-time web content from the customer’s online, or near-online presence. Businesses without a dedicated website can be verified by near-online presence, including social media such as Facebook or LinkedIn profiles, or from third-party sources such as Yellow Pages, Manta or Yelp. This exercise will allow the bank or TPPP to detect high-risk activity including an inactive URL, which should also be considered a red flag and trigger further investigation.
Once the bank or TPPP has determined that the business customer’s online presence validates the customer is correctly classified, the bank or TPPP’s responsibility does not end there. Banks should conduct ongoing web presence monitoring, especially of those higher-risk business types, to ensure the customer’s business model does not significantly change or exceed the bank’s risk profile over time.
For instance, G2 detected an online pet food distributor that had originally been classified as a low-risk business type. After several months of monitoring, G2 flagged online content providing links to online cannabis sellers, a category that was strictly prohibited by the bank. Without this ongoing monitoring, the bank would have continued to assume their original classification was correct, not realizing they were banking a customer outside of their risk profile. Even with a quick scan of the customer’s website, this may still have been missed as the offending content was buried behind several layers of innocuous content.
Business Classification Best Practices Reduce Risk and Drives Increased Revenues
Implementing the business classification best practices outlined above will increase the efficiency of financial institutions KYC and KYCC programs by identifying high-risk business customers faster. The FFIEC does not recommend de-risking entire categories of business types, and insists that commercial bankers and TPPPs should instead “manage” the risks posed by these customers appropriately. However, many banks find managing the risks of certain business types to simply be too burdensome and expensive to make profitable. This can represent a significant loss in revenue from higher fees charged for high-risk business types.
Implementing these best practices in a cost-effective manner can be achieved with a managed service partner such as G2. G2 Business Classification service can save banks and TPPPs time and help optimize their personnel resources by replacing manual due diligence and monitoring processes with automated tools and outsourced expertise. There is no need to feel that a robust, ongoing business classification process is out of reach for your organization.
Commercial banks and TPPPs should consider third-party vendors that have the technology and experienced analysts already in place as an alternative. G2 Web Services can provide your organization with business classification and ongoing web content monitoring at a fraction of the cost of going it alone!
For additional information on best practices of banking high-risk customers, G2 Web Services blogs, case studies, infographics, fact sheets and white papers are an invaluable resource.