KYC in Commodities – digitalisation is key

Know Your Counterparty (KYC) has played an important role in commodity risk management for a long time. Even before KYC regulations and policies, individuals preferred to work with counterparties they knew and trusted. Personal relationships continue to play a role in KYC today, but they are now supplemented by increasing amounts of data as regulations continue to become more robust and internal risk management processes improve. As we will see below, better KYC protects the organisation from risk and can provide other benefits and opportunities.

Counterparty onboarding

With the move to remote work and ongoing limits on travel, counterparty onboarding has become more of a challenge for most companies. However, commodity management technology can make this initial KYC stage much easier. Documents can be managed and shared by individuals working remotely by uploading them to a counterparty’s record in a central repository such as a commodity management system. For example, Gen10’s CommOS CTRM includes a CRM module for you to manage your counterparty relationships and store all their information and documents.

A good cloud-based CTRM will also allow multiple people in different locations to collaborate on KYC processes. For example, when a new counterparty is added to CommOS, individuals can see exactly what information is required, and once it is completed, they simply click to send it for approval. The CTRM automatically notifies the approver, who can easily approve the counterparty or use the same automated system workflow to send any notes or clarification requests back to the person who began the process. And once counterparties are approved and their credit limits set, they are immediately available within the CTRM for all to see.

This due diligence can be enhanced by digital tools to support audits, such as Gen10’s Aud.IT app. This mobile app can be used by suppliers or inspectors to answer your due diligence questions, with supporting evidence including photographs and the device’s GPS coordinates to verify the data. Aud.IT can also be integrated with your CTRM to improve the flow of data for the onboarding process.

Lifecycle KYC

A commodity management system or CTRM can also help with KYC on an ongoing basis, particularly if it is a modern system that allows people to carry out their role and automates tasks. Because people are using the system to complete their tasks, data is consolidated in one place and in real time.

There are several benefits to this consolidated, real-time data, including the fact that credit lines are updated throughout the day, and can be integrated with general ledger systems to update as soon as invoices are paid, meaning that credit can be utilised much more efficiently. It also means that pre-approvals are possible. Risk managers can assign pre-approval limits to each counterparty, and these pre-approvals are used within the system to enable traders to create contracts without needing manual risk approval, in the knowledge that they reflect the organisation’s actual risk position at that time.

Consolidated information on each counterparty also supports ongoing KYC by providing the information teams need to monitor fraud and other risks. They can instantly see the counterparty’s usual behaviour, such as whether their payments are usually on time and how frequently they interact with the business, alongside KPIs such as their credit line usage and any relevant documents or certificates. Teams can even check which counterparties may be being underutilised or which have not interacted with the business in a given timeframe, to improve supply chain relationships as well as mitigate risk.

This ongoing monitoring can be further enhanced with alerts and calendar reminders such as, for example, an annual notification to conduct a review, or a notification when a counterparty’s certification is about to expire.

Not just for risk

Digitalising KYC processes is therefore an important step in protecting the organisation from risk and has many advantages in this area. But it also improves other areas of the business including collaboration between teams and relationships with partners. It can also improve access to trade finance.

With recent high-profile scandals involving trade finance and less risk appetite from banks, there has been a “rush to quality”, where trade finance providers look to perceived safer investments such as large commodity traders, leaving smaller players more likely to struggle to access finance. The advantage of digital KYC processes is that they show trade finance providers that your organisation not only has the robust processes but also the transparency and governance to really understand your counterparties, protecting yourself and other partners from risk.

KYC is constantly evolving as regulations change and organisations make more of an effort to protect themselves from risk and to improve counterparties’ experience of working with them to gain a competitive advantage. Digital technology is empowering organisations to know their counterparties better than ever before, and to share this knowledge rapidly within their business and with their other partners to gain a wide range of benefits.

Get in touch with us today to find out how Gen10 technology can help you transform your KYC.