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Business Reputational Risk in the KYC Age

With the proliferation of online reviews and social media, reputation – even on an anecdotal level – is becoming more valuable for organizations.
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Can you imagine your life without online shopping? It’s hard to deny the convenience. And, more importantly, the opportunity to research and read reviews. Reading peer reviews and a company’s reputation helps the decision-making process in making a purchase. And with the proliferation of online reviews and social media, reputation – even on an anecdotal level – is becoming more valuable for organizations.

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As Gloria Origgi, an Italian philosopher and tenured senior researcher at the French National Center for Scientific Research, stated in her latest book, Reputation: What It Is and Why It Matters (2017), “[f]rom the ‘information age’, we are moving towards the ‘reputation age’, in which information will have value only if it is already filtered, evaluated and commented upon by others.”

In the context of due diligence/know-your-customer (KYC), this has interesting implications. Every business owner knows that reputation is paramount. It can lead to great success and, equally, great failure. Many businesses are built on reputation. But as time goes on, and industries react to the heightened KYC environment, every business should prepare for a moment when something goes sideways - with the current speed of information, bad news can spread quickly. As Benjamin Franklin said, “It takes many good deeds to build a good reputation, and only one bad one to lose it.”

This reputational risk is inherent when operating a business. It comes from the inevitable risk tied to relying on partners, both internal and external. From internal colleagues to third party suppliers and vendors, business today is built on working with and relying on others. It is unavoidable and should act as a constant reminder that proper due diligence protection is necessary.

Traditionally, financial institutions were the focus of KYC legislation. But the focus is now broadening to more organizations and organizations are executing KYC due diligence investigations to minimize their risk. There is a growing fear of doing business with an illicit group or individual and more organizations are employing a risk-based approach to relationships with anyone.

As I learned many times in law school, it’s difficult to “un-ring the bell.” Meaning, once a business becomes associated with a negative reputation, it may be difficult to change the perception of consumers. Consider the report by FindLaw which states that millennials place a lot of trust in online reviews. The report goes on to state that the millennial generation “trust strangers with the experience of using a product instead of trying it out for themselves before purchase. This behavior extends to service-based industries as well, where millennials want to see reviews before they make a decision.”

If, as Origgi stated, “reputation has become a central pillar of collective intelligence today,” then businesses need to pay attention. Vetting third parties and implementing a consistent and repeatable due diligence process should be an integral process.

Effective due diligence involves a detailed investigation of business, financial, legal and other records to create a complete account of a person or organization’s history. It identifies issues that could potentially impact their relationship with a business – such as whether they have ever been convicted of a crime or have other adverse filings, where they own property and more.

Can basic search tools be enough to find these documents? What about the legal documents that can’t be found online? Effective investigation requires both rigorous automated search tools and personal interaction with information specialists skilled in the nuances of search and information retrieval. Experienced researchers know how specific jurisdictions record their information and how to find it. Avoid unwelcome surprises. Know whom you’re doing business with, protect your reputation, and go forward with confidence.

To learn more about a document and due diligence service that will help protect you and your business, click here.

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