Know Your Supplier (KYS)

In today’s interconnected global economy, the supply chain forms the backbone of modern business operations, linking companies with a vast network of suppliers, vendors, and retailers globally. This rapid expansion in supply chain networks not only brings opportunities for growth and innovation but also unprecedented levels of risk.

Businesses fall prey to hidden third-party risks, regulatory exposure, lack of transparency of ultimate beneficial owners (UBOs), and pressure to meet regulatory standards such as Anti Money Laundering (AML) and  Environmental, Social, and Governance (ESG). 

Know Your Supplier (KYS) emerges as a strategic solution enabling businesses to verify identities, uncover ultimate beneficial ownership, monitor sanctions, Politically Exposed Persons (PEPs)  lists, and assess reputational risks for supplier due diligence to stay compliant and safe.

What is Know Your Supplier (KYS)?

Know Your Supplier (KYS) is a due diligence measure designed to assess and manage risk associated with third-party suppliers.  It is a systematic process that enables companies to evaluate suppliers before and during business relationships to ensure the quality and safety of the supply chain. 

KYS is part of Anti Money Laundering Compliance, which any individual (compliance officers, risk managers)  or sector( Fintechs, banks) and industries (retail & ecommerce) can use to perform due diligence on potential suppliers. This process gives companies a holistic view of all supplier risks to develop an appropriate framework for better risk management. 

Compliance Requirements for Supply Chain Security 

When it comes to supply chain security and risk mitigation, it is necessary to comply with specific supply chain regulations such as UFLPA, which mandates checking if the potential supplier is not using forced labour and meets the legal requirements.

By using the Know Your Supplier service, companies ensure their compliance with Anti Money Laundering (AML)  laws under the Corporate Transparency Act (CTA) and various ESG regulations such as the Uyghur Forced Labor Prevention Act (UFLPA).  

These regulations oblige businesses, compliance officers, and retailers to evaluate the operational integrity of potential suppliers, including understanding who is performing the labor and under what conditions.

What is the Uyghur Forced Labor Prevention Act (UFLPA) in the Supply Chain?

The Uyghur Forced Labor Prevention Act (UFLPA) is a U.S. law enacted to combat forced labor.  It specifically targets the use of forced labor among Uyghur and other minority populations. The law has significant implications for companies importing goods into the U.S. 

The UFLPA presumes that any goods mined, produced, or manufactured with forced labor are banned, such as from  China’s Xinjiang Uyghur Autonomous Region (XUAR), which is subject to using forced labor, and therefore banned from import into the U.S. Under Section 307 of the Tariff Act of 1930.

Under this Act, companies must find clear and convincing evidence that goods are not made with forced labor, which is one of the significant purposes of Supplier Due Diligence.

Know Your Supplier (KYS) service ensures supply chain transparency and enables businesses to comply with ESG regulations. 

Role of Real-Time UBO Verification and Sanction Screening  in Supply Chain Risk Mitigation

Apart from compliance with UFLPA law, businesses must perform supplier due diligence to mitigate the risk of financial crimes, such as money laundering. Suppliers are not just logistic partners; they are also business entities that may have complex ownership structures, including more than one Ultimate Beneficial Owner (UBOs). It requires proper UBO screening, which is part of the Know Your Supplier solution. 

Sanctions screening is another crucial aspect of the KYS process. Companies must ensure their suppliers are not based in, owned by, or linked to sanctioned individuals, entities, or jurisdictions. For example, a supplier registered in a sanctioned region, or whose UBO is on a sanctions list, could trigger serious regulatory consequences, including enforcement actions, financial loss, and reputational damage.

Businesses often face a poor reputation for not doing effective supplier due diligence. Once, Norway’s Government Pension Fund Global excluded Walmart stock from its investment portfolio for its violation of ESG regulations, which resulted in ineffective supplier verification. 

“Norway’s Government Pension Fund Global excluded Walmart’s stock from its investment portfolio more than a decade ago, the fund’s ethics council cited reports of employee abuse, safety violations, worker intimidation, unpaid overtime, and numerous other issues at the retailer’s suppliers.”

Source: RETAILDIVE

Walmart could have secured its reputation with an effective Know Your Supplier process, which allows it to uncover hidden risks and ensure transparency for better risk management. 

As hidden risks associated with potential supplies can result in legal, financial, and reputational fallouts. It mandates integrating an efficient Know Your Supplier (KYS) process.

Know Your Supplier Checklist

The Know Your Supplier (KYS) checklist is a structured set of steps that enable businesses to verify, assess, and monitor third parties before and during business relationships. Here are the key components of the KYS checklist: 

• Identification of the supplier’s full name, business registration details, and ownership structure.
• Verification of license, Tax ID numbers, and operational proofs, including websites, physical address, and other references. 
• Review of production standards to check environmental compatibility , human rights and the health and safety standards of suppliers. 
• Risk evaluation is done by screening against sanction lists, politically exposed persons (PEPs), regulatory enforcement, warnings, and adverse media. 
• Checking  against Director’s Fitness and Probity
  
• Check suppliers’ operational effectiveness for compliance with  Uyghur Forced Labor Prevention Act (UFLPA), which mandates supply chain due diligence. 
• Periodic reviews and updates for ongoing monitoring 

All the KYS checklist components contribute to the supplier’s transparency and help mitigate fraud and reputational damage, which are results of a lack of supplier due diligence. 

Benefits of Using KYS for Businesses 

By using Know Your Supplier (KYS), businesses can reduce their exposure to risk associated with third-party suppliers. It enables companies to overcome financial crimes and fraud. An effective supplier verification system not only strengthens compliance but also contributes to business reputation. It ensures transparency and trust across the supply chain. Additionally, with reliable verification methods, businesses can ensure their trustworthiness for clients and investors, as well as for great business opportunities. Not only this, KYS allows companies to manage risk and acquire a competitive edge in the market and supply chain industry.

A strong KYS solution enables organizations to:

• Map supply chains thoroughly for risk management 
• Inspect production standards and detect violations. 
• Conduct UBO and sanctions screening on the part of suppliers.
• Monitor supplier behavior continuously.
• Ensure compliance with AML and supply chain regulations. 
• Promotes appropriate supplier selection by considering legal, social, and environmental criteria.

It especially empowers compliance with Supply Chain Due Diligence parameters.