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KYS: Know Your Supplier

Definition

Know Your Supplier (KYS) is the process by which an organisation systematically verifies, monitors, and assesses the legitimacy, integrity, and risk profile of its suppliers and third-party vendors.

In the context of AML/CFT frameworks, KYS extends supply-chain due diligence to ensure that supply-chain partners are not being used as conduits for financial crime, sanctions evasion, corruption, or fraud.

Explanation

The concept of KYS builds on the familiar “Know Your Customer” (KYC) paradigm but applies it to the business-to-business (B2B) domain of suppliers and vendors.

Whereas KYC aims to understand and mitigate risks from customer relationships, KYS aims to understand and mitigate risks from supplier and vendor relationships.

These may include risks such as bribery and corruption, payment fraud, invoice manipulation, money laundering via invoice flows, sanctions violations, forced labour or human rights abuses, and business continuity disruptions.

KYS matters today because global supply chains are extensive, multi-tiered, and cross multiple jurisdictions, with each tier introducing additional risk vectors.

An organisation may be exposed to financial crime risk not just through its direct suppliers but through the direct supplier’s suppliers, and so on.

As such, the KYS process needs to cover identification, verification, risk scoring, monitoring, and periodic review of suppliers throughout the relationship lifecycle.

KYS in AML/CFT Frameworks

Within an AML/CFT compliance programme, KYS integrates in multiple ways:

  • At onboarding: The Supplier is screened for sanctions lists, adverse media, UBO (ultimate beneficial ownership) verification, legal entity information, and financial stability.
  • Ongoing monitoring: Supplier behaviour, payment patterns, contract changes, geographic footprint shifts, and associated risk-indicators are monitored to detect emerging risks.
  • Documentation and audit trail: Evidence of verification, risk scoring, remediation actions, and reviews is retained to demonstrate governance and audit readiness.
  • Escalation and control: Where supplier risk is high, enhanced due diligence (EDD) and more stringent controls (e.g., payment hold, alternative vendor sourcing) are triggered.

Key Components of a KYS Programme

Supplier Identification & Verification

  • Verify legal entity registration, business licence, ownership, and beneficial owners.
  • Confirm supplier address, management structure, and corporate linkages.
  • Screen beneficial owners, directors, and executives against sanctions lists, PEP lists, and adverse media.

Supplier Risk Assessment

  • Assess the financial stability and solvency of the supplier.
  • Evaluate operational reliability, including performance history, capacity, quality, and delivery records.
  • Consider geographic risk (supplier located in high-risk jurisdictions for financial crime, corruption, sanctions, and human rights).
  • Consider sector-specific risk (e.g., extractives, defence, chemicals, trade finance, high-volume low-value goods).

Supplier Monitoring & Review

  • Monitor payment flows and invoice patterns for anomalies (e.g., unusual payment recipient changes, pass-through flows).
  • Review changes in supplier ownership, governance, or location that may introduce new risks.
  • Periodically refresh verification data (e.g., every 12-24 months or sooner if risk changes).
  • Maintain a central supplier master file with status, risk score, end-date of documents, alerts, and remediation actions.

Control & Governance

  • Establish supplier code of conduct, procurement policy, and compliance commitments.
  • Link KYS with procurement, accounts payable, and compliance functions to ensure alignment.
  • Define thresholds for enhanced due diligence, payment holds, and supplier termination.
  • Provide training to procurement and finance teams on supplier risk indicators and fraud typologies.

Examples of KYS Scenarios

  • A supplier is newly onboarded in a country subject to sanctions. The verification reveals beneficial owners who appear on adverse-media lists. The organisation places the supplier on hold and conducts enhanced due diligence.
  • A longstanding supplier changes bank details, and invoices start going to a newly formed shell company. Monitoring flags this as unusual behaviour and triggers an investigation.
  • A manufacturing supplier located in a region with known forced-labour issues is flagged for high risk. The organisation requires additional documentation on the labour practices and supply-chain sub-tiers before continuing the contract.
  • A small vendor with minimal financial disclosure is found to be late delivering products and has sudden cost spikes. Financial assessment highlights liquidity risk and business continuity concerns; the company reduces exposure accordingly.

Impact on Organisations

Implementing an effective KYS programme offers multiple benefits:

  • Strengthened compliance posture and reduced exposure to sanctions violations, money-laundering, or corruption risk.
  • Improved operational resilience by mapping and understanding supplier dependencies, potential disruption,s and hidden risks.
  • Protection of reputation and brand through ethical sourcing, transparency, and supply-chain integrity.
  • Better procurement efficiency by segmenting suppliers by risk and applying tailored oversight rather than “one size fits all”.
     However, failure to apply KYS rigorously can lead to regulatory actions, financial losses (for example, through fraud or disrupted supply), contract termination, reputational damage, and lost business opportunities.

Challenges in KYS Implementation

  • Supplier data quality and completeness may be weak, especially in small or overseas entities, making verification difficult.
  • Multi-tier supply chains mean that an organisation may know its direct supplier, but not its subcontractors or raw-material providers upstream.
  • Balancing cost, efficiency, and thoroughness: Detailed due diligence and monitoring can be resource-intensive, especially for large numbers of suppliers.
  • Rapid change in supplier risk profile (ownership change, relocation, sanction status) demands dynamic monitoring rather than one-time checks.
  • Integrating KYS across multiple functions (procurement, finance, compliance, supplier management) often encounters organisational silos.

Regulatory Oversight & Governance

Global regulators and international standard-setters increasingly emphasise due diligence on suppliers as part of the broader third-party risk and financial crime mitigation regime. For example:

  • Anti-corruption laws often require companies to have robust third-party due diligence frameworks.
  • Supply-chain transparency directives (such as EU Corporate Sustainability Due Diligence) place obligations on companies to assess human-rights, environmental, and ethical risks in their supplier network.
  • Financial crime supervisors expect financial institutions to consider vendor and supplier risks as part of their AML/CFT third-party risk frameworks.

Importance of KYS for AML/CFT Compliance

KYS is a critical component of modern supply-chain risk management and AML/CFT compliance because:

  • It ensures that risk from third-party suppliers, which can be used to facilitate fraud, money-laundering, sanctions evasion, or corruption, is identified early and mitigated.
  • It allows tailored risk-based controls to be applied according to the supplier risk profile rather than treating all suppliers uniformly.
  • It supports forensic and audit readiness by generating documentation, audit trails, and governance evidence of supplier due diligence.
  • It strengthens the overall resilience of the organisation by reducing supplier-related disruptions, fraud, and reputational harm, thereby aligning compliance, ethics, and operational risk objectives.

Related Terms

  • Supplier Due Diligence
  • Vendor Risk Management
  • Third-Party Risk Management
  • Know Your Business (KYB)
  • Supply-Chain Transparency
  • Sanctions Screening
  • Corporate Sustainability Due Diligence

References

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