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Know Your Employee (KYE)

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Your company’s employees are its greatest asset, but can also be its biggest weakness. You know how important it is to vet your customers, vendors, and business partners thoroughly, but do you realize how crucial it is to perform thorough background checks on every staff member before hiring them?

Risk management is vital to your company’s success, and Know Your Employee practices are critical for protecting your assets, reputation, financial position, and operations. Keep reading to learn all about “Know Your Employee” processes, compliance requirements, risk management, insider threats, employee onboarding, workplace security, and how KYE differs from Know Your Customer practices.

What is Know Your Employee (KYE)?

Know Your Employee is a systematic process where employers verify candidates’ identities and backgrounds before hiring them as employees. The purposes of KYE during employee onboarding are HR compliance, preventing theft and fraud, and minimizing insider threats.

Know Your Employee practices are essential for all types of businesses, but they are even more critical in the financial, technology, and medical industries, where the assets, safety, and well-being of others are in your hands.

Why is KYE Important?

Employee verification before hiring is essential for many reasons. The crucial aspects of running your business depend on employees you can trust. One way to ensure you are hiring the right kind of people is through background checks. Some of the ways Know Your Employee helps you are:

  • Detecting ID theft.
  • Protecting your company data and network
  • Ensuring employees are who they say they are.
  • Verifying the employee’s qualifications, education, and background.
  • Protecting your customers’, partners’, and vendors’ sensitive information.
  • Complying with government or industry rules and regulations.
  • Avoiding lawsuits.
  • Protecting your company’s finances.
  • Avoiding unintentional discrimination.
  • Reduces the costs of hiring someone unqualified.
  • Start the employee journey off right by building trust.

When to Use Know Your Employee

Know Your Employee is used during the hiring process to verify identities and qualifications and assess risk. However, the process can also be used at other times to ensure workplace safety and security.

  • Auditing: If the company must submit to regular audits (government or otherwise), the process is an ideal time to collect documentation and run background checks on specific departments involved in the internal or external audit.
  • Onboarding: If you collected information before hiring the individual, a KYE check can verify that the information they provided before being hired matches the information they gave for the background check. This second verification may reveal discrepancies that indicate fraud or deceit. Either way, it will give you a better idea of their character.
  • Continuous Fraud Detection: Your company may set up periodic checkpoints where everyone submits to a new background check, providing personal details. You evaluate their role with a specific focus on detecting scams, skimming, theft, etc. You can also conduct ongoing monitoring and a system of checks and balances to ensure everyone’s integrity.

The Role of Employee Verification

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Employee verification is an essential component of any company’s risk management program. Before hiring anyone, a quick background check can tell you whether they have a history of money laundering, fraud, theft, deceit, or other criminal activities. Employees can damage your reputation, lead to financial losses, and incur government penalties if you are out of compliance through their actions.

The Financial Action Task Force (FATF) requires KYE practices for some industries and types of businesses. This agency sets the standards for preventing money laundering, anti-terrorism, and fraud. KYE applies to new hires and is also used to verify existing employees.

KYE and Compliance Requirements

The U.S. government requires many industries, especially banking and insurance, to comply with anti-money laundering programs like Know Your Customer (KYC), Know Your Business (KYB), and Know Your Employee. The challenge lies with the ever-changing laws, rapidly evolving industry standards, and internal policies. Additionally, companies must adhere to HR compliance standards to protect employees and the company and stay out of legal trouble. KYE compliance regulations require a thorough and effective strategy to verify employees’ identities before hiring them. Workplace compliance is one of the many responsibilities of your HR team.

Risk Management and Insider Threats

The purpose of Know Your Employee is twofold. Risk is essential to running a business, but you don’t need to take unnecessary risks by hiring people who could damage the company and cause problems. KYE is designed to help you manage risk and feel more confident in hiring the right people for the job. Internal risk management is the number one reason to use KYE.

Since 2018, insider threats have increased by 47%, and more than 60% of data breaches were caused by employee incompetence or negligence. Those significant statistics tell a grim story. One that could be changed with thorough background checks for every existing and new staff member. Insider threat detection is the second aspect of Know Your Employee practices.

Integrating KYE into the Employee Onboarding Process

Creating corporate security policies that include KYP practices in your onboarding process and throughout is key to making Know Your Employee work. During the information collection phase, some of the items you will need to obtain are as follows:

  • Employment History
  • References From Previous Employers and Others
  • ID (Driver’s License) to Verify
  • Complete Background Check - Based on Risk Assessment
  • Professional License (if applicable)
  • Academic Qualifications (school transcript, grades, etc.)
  • Credit Check
  • Comprehensive Questionnaire

Along with the list above, some companies choose to check known offenders and sanction lists to ensure their potential new employees, relatives, and associates are not on those lists.

Ensuring Workplace Security and Culture

Ensuring a safe, happy, motivated workforce is challenging. One way to make it easier is to conduct employee due diligence with every new hire. You must assess whether each new candidate is a threat to the company, other employees, or company assets. Verifying the identity and background of everyone who works for you will set the tone for a better, more secure work culture. Your existing employees who have undergone the background screening will trust that they are safe because everyone else must pass the same security process. It’s your job to keep your employees safe, and KYE helps to do that.

Difference Between KYE and KYC (Know Your Customer)

Know Your Employee is a process meant to verify the identity and background of your current and new employees. On the other hand, Know Your Customer (KYC) is a process to verify the identity of individuals, businesses, clients, or partners you do business with.

KYE focuses on verifying the identity and background of your employees to ensure they don’t pose a financial or other type of risk to the company. KYE is used during the hiring process and throughout their employment. It may include verifying the potential employee’s ID, checking their criminal background, education, and associates for any possible threats.

KYC focuses on verifying the identity of clients, customers, and partners (businesses and individuals) to prevent money laundering, terrorism financing, and theft. KYC is used before the relationship is established and includes ongoing monitoring throughout the partnership’s life cycle. It may consist of verifying a person’s ID, monitoring transactions, and checking sanction lists.

Know Your Employee Verification Process

To be successful in your Know Your Employee efforts, you must institute several key elements. The process includes collecting information, verification, background checks, risk assessment, and ongoing monitoring. A typical KYE process is organized as follows:

  • Identity Verification: Identity verification is the most important aspect of KYE, and it is accomplished by collecting the person’s full name, date of birth, address, and social security number. Most companies also require the candidate to provide a copy of their driver’s license. Some also require biometric verification or additional documents to verify the person’s identity completely.
  • Employment Authorization: Employee authorization ensures that the person has provided accurate information and is authorized to work in this country. It may include obtaining copies of the employee’s passport, driver’s license, or social security card. As the verifying entity, it’s your job to ensure that these documents are valid and not forged.
  • Background Checks: A thorough background check will reveal many interesting details about the person, including their criminal history, credit status, employment history, arrest records, email accounts, phone numbers, relatives, bankruptcies, court records, professional licenses, education, and more. This step can help to verify the information they provided and fill in any blanks.
  • Authenticate Credentials: Another crucial step is verifying the validity of the person’s credentials. You can do this by contacting the college they attended and verifying grades, degrees, and graduation. Contact the licensing agency to confirm if the person has special licenses or certificates. Request official transcripts to ensure authenticity.
  • Verify Work History: Contact the person’s previous employers and references to establish whether they actually worked there, their performance record, and why they left. References can provide many details about the person’s behavior, personality, and how they get along with others in a workplace setting.
  • Ongoing Verification: Know Your Employee is not a one-time process; it involves ongoing monitoring and frequent re-checks to ensure nothing has changed or was missed during the initial verification. Each employee’s work performance should be reviewed regularly. If any high-risk incidents occur (theft, cybercrime, fraud, etc.), you should re-verify every employee to determine where the threat came from.
  • Data Security: Your company’s data is a valuable asset, not only to you but also to insiders and outside threats. Proactively establish strict access control practices so that only “need to know” employees have access to sensitive data, hardware, or software. Install monitoring devices to shadow all network activity to trace back any incidents.
  • Employee Training & Communication: Train all employees on KYE practices and communicate openly about the purpose and processes. Explain what will trigger re-verification and how to comply throughout the employee life cycle.
  • Security Measures: Don’t trust that your company will be safe even though you vet everyone using ironclad KYE practices. Institute robust security measures and checks and balances so that no employee has too much power, especially in financial roles. Monitor employee activities, implement secure access controls, and conduct regular audits to ensure everything is as it should be. Only provide access to information related to the employee’s role and responsibility.
  • Role Accountability: From the onboarding process on, ensure that the employee fully understands their role and holds them accountable for their performance. Let them take ownership of their role or department and support them to ensure their success.
  • Open Communication: Communicate openly and frequently with employees and get to know them. Establish a positive relationship from day one and provide a comfortable, secure work environment. Encourage them to come to you with any questions, concerns, or suggestions. Frequently discuss their job performance, professional goals, and work-life balance. The happier and more motivated your people are, the better they will perform, and you will help to reduce the chance of illegal activity.
  • Transparency and Ethics: Keep all your Know Your Employee practices transparent and ethical. Do everything above board and tell everyone how and why you do it. You want to remain compliant while also protecting your company.
  • Keep Records Up to Date: Regularly review and update employee records as things change.

The Challenges of a KYE Process

During the employee onboarding process, human resources (HR) will collect various types of documentation from the employee, such as an I-9 form, social security card, and driver’s license or other kind of photo ID. After obtaining the documents, HR must verify that the information and the documents are valid. Some challenges to this process include:

  • Poor Image Quality: If the copy is of poor quality, the HR person may have difficulty reading the required details and may have to ask for a new copy, wasting time and causing frustration.
  • Detecting Fraud: Detecting fraud or forged documents can be incredibly difficult, especially to an untrained eye. Some are very sophisticated these days.
  • Keeping Sensitive Data: Although compliance regulations require that companies delete photo IDs after verification, not all do, which puts the company and employees in jeopardy. The company may be fined for being out of compliance, but if they experience a data breach, the employee’s information could be leaked on the dark web, and they could become the victim of identity theft.

Consequences of Non-Compliance with KYE Guidelines

Some industries are required to follow strict KYE guidelines and properly vet each and every employee. Failure to process new hires and existing staff in a consistent, thorough manner could result in the following consequences:

  • Fines/Penalties: If the governing entity learns about the non-compliance, it could impose steep fines or other penalties on your company. They could decide to monitor your company for a year to ensure strict compliance. Living under the microscope may pose additional challenges.
  • Lost Assets: Insider theft and fraud could lead to the loss of significant financial assets, which may cost more than replacing the missing funds or equipment.
  • Reputational Damage: If you fail to vet your employees and one of them commits a crime, it can damage your reputation and credibility with your customers. This could lead to significant sales losses. Many companies don’t survive after a data breach. Establish a solid KYE practice today to ensure the trust of your vendors, customers, and partners.
  • Legal Problems: Your employees represent you and the company. You could be held legally accountable for anything your employees do. That could mean lawsuits, prison, fines, and other severe penalties.

How EntityCheck Can Help with KYE Checks

The more you know about a potential employee, the better. It’s your job to determine whether your new executive has a history of engaging in illegal activities or ties with nefarious criminals. KYE is part of your risk management strategy, and EntityCheck can help with it.

EntityCheck’s primary goal is to collect business data, providing you with everything you need to know to assess and mitigate risk to make better decisions. Our reports include details about employees and executives, their education, employment history, address, phone, and emails to help you fill in the blanks. KYE is only one aspect of risk management. Our reports also fuel your KYB and KYC efforts with tremendous amounts of data.

The information you can find in an EntityCheck background report includes the following:

Secretary of State Filings

The Secretary of State is the state repository for business filings, including Articles of Incorporation, annual reports, changes in ownership, and business entity type designations. An EntityCheck report can show all that information.

UCC Filings

UCC filings, or UCC-1 filings, are public notices filed with the Secretary of State that declare a creditor has a legal claim on assets. UCC filings help establish priority for payouts if the debtor files for bankruptcy or experiences other financial difficulties. These filings are used for various assets like equipment, vehicles, inventory, accounts receivable, and real estate. EntityCheck provides you with the following information on UCC filings:

  • Filing Details
  • Business Details
  • Classifications
  • Scores
  • Addresses
  • Creditor Details

Professional Licenses

Many industries, like real estate, dentistry, nursing, teaching, hairdressers, appraisers, electricians, etc., require professional licenses before doing business. Individuals must undergo the proper training and testing before earning these licenses. Professional licenses are credentials that verify a specific skill or level of knowledge in the chosen field. Governments issue these permits or licenses after the person has passed the final exam and paid the fee. These licenses let the public know that the individual or business is qualified to perform the services required and meet government standards. EntityCheck license information will show:

  • First Name
  • Middle Initial
  • Last Name
  • State
  • License Type
  • License State
  • Issue Date
  • Expiration Date
  • Last Known Status
  • Licensees
  • License Categories
  • License Types
  • Businesses
  • Business Owner(s)
  • Address
  • Phone

Court Records

Many court records are public and readily available for review. They contain a wealth of information about people, companies, and any related legal issues. You can generally find information on lawsuits against the company, bankruptcies, liens, judgments, and federal dockets, which can fill in many blanks about a business or its owners. Some of the court record information you will find with EntityCheck includes:

  • Case Number
  • First Name
  • Last Name
  • State
  • Bankruptcies
  • Debtor Info
  • Creditor Info
  • Court Info
  • Attorney Info
  • Trust Info
  • Federal Docket Details

Trademarks

A trademark is a legally protected sign, word, phrase, design, or symbol owned by a specific brand or product. It differentiates it from all others, prevents unfair competition, and ensures consumer protection. The purpose is so that consumers can quickly and easily identify a brand through its products or services. Trademarks protect intellectual property so that no one can duplicate them without permission. A few trademark examples are the Nike “swoosh,” the phrase “Just Do It,” and Coca-Cola. A trademark can even be a specific color or sound. EntityCheck provides the following information on trademarks:

  • Serial Number
  • Registration Number
  • Individual’s Name
  • Mark

Employees, Agents, and Officers

A company is built on the people who own and run it. Finding out all you can about a company’s officers, employees, and agents can help you determine whether or not the business is viable and worth partnering with. Since KYB is centered on company beneficiaries, this section is critical. Some of the employees/agents/officers’ information you can find with EntityCheck includes:

  • Employee Details
  • Education

Patents

A patent is a government-granted legal right to an invention. A patent protects the invention from anyone else producing it, selling it, or using it for a period of “usually” 20 years. Patents are forms of intellectual property granting the holder exclusivity over their invention. Patents protect investments and protect products from being copied. EntityCheck provides the following information about patents:

  • Patent Number
  • Publication Number
  • Application Number
  • PCT Number
  • Internal Registration Number
  • Assignor Name
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