What does Nature of intended business relationship actually mean?

"You almost feel like saying: just speak plain English."

That comment was made at an AMLA conference earlier this year when the concept of the nature of the intended business relationship was brought up. And, to be honest, it's hard not to smile.

Even among professionals who work with anti-money laundering and compliance every day, it's one of those terms that tends to raise eyebrows. Not because the task itself is necessarily complicated, but because the wording is.

If you've ever found yourself thinking, "What exactly is it that I'm expected to do?", you're certainly not alone. The good news is that the task is actually much more straightforward than many people think.

When you strip away the legal jargon

In short, the nature of the intended business relationship is about understanding the business relationship you are about to establish. You should be able to explain how the customer is expected to use your services, where the customer's funds come from, and whether the customer's activities make logical sense in relation to the level of risk you have assessed.

When you strip the wording back to its core, it really comes down to one simple question:

Have you understood the business relationship you are about to establish?

The purpose of the overall KYC process is not simply to complete a checklist. Its purpose is to enable you to identify when something doesn't add up – and you can only do that if you first have a good understanding of what a normal business relationship should look like.

So, it's not about carrying out a financial audit of your customer or knowing every single transaction they will ever make. It's about understanding your customer well enough to assess whether what they are telling you makes sense.

How does the customer generate income? Where do their funds come from? What type of activities do you expect them to carry out? And does all of that align with the service you are providing? If the answers make sense (and you can document your assessment), then you have, in practice, fulfilled the requirement.

The purpose tells you why and the nature of the intended business relationship tells you how.

One area where many organisations get confused is the difference between the customer's purpose and the nature of the intended business relationship.

The purpose is relatively straightforward. Why does the customer want to establish a business relationship with you, and what service are they looking for?

The nature of the intended business relationship goes a step further. Here, the objective is to understand what the relationship is expected to look like in practice. What characterises the customer's business? How does it generate income? Where do the funds come from, and does all of this align with the customer's activities and the service they require?

You could say that the purpose explains why the customer is knocking on your door, while the nature of the intended business relationship helps you understand what's happening on the other side of the door.

Myth: There is a checklist of the "right" questions

One of the most common misconceptions is that there is a definitive list of questions and that, if you simply ask the right five or ten questions, the job is done. In reality, that's rarely the case.

The information that is relevant for a local audit client is not necessarily the same as the information you would need from a property investor or a company operating across several countries. As a result, the questions you ask will naturally vary.

What matters is not whether every customer is asked exactly the same questions. What matters is whether you collect enough information to understand the business relationship and carry out a risk-based assessment.

Myth: You need to know every detail of the customer's finances

Another common misconception is that the nature of the intended business relationship requires you to know every detail of a customer's finances. That isn't the objective.

You don't need to account for every pound or predict every future transaction. But you do need to understand the overall picture.

For example, if a customer is seeking assistance with setting up a new business, it is relevant to understand how the business is expected to generate income and where its initial capital comes from. Likewise, if a customer is looking for assistance with the purchase of an investment property, it is natural to understand how the purchase will be financed and whether that fits with the customer's financial circumstances.

So, the goal isn't to know everything. It's to know enough.

Practical examples

Imagine a new client approaches your accountancy firm. They run a small construction business and are looking for help with accounting and bookkeeping. In that situation, it would be natural to understand the company's activities, where its revenue comes from, and how it normally receives payments from customers. You don't need to know every single invoice – but you should be able to assess whether the company's finances and activities present a coherent picture.

The same applies to a bookkeeper taking on a new client. If the customer states that the business provides consultancy services in Denmark, but the majority of incoming payments are received from a number of overseas accounts, that isn't necessarily a problem. However, it is something that should prompt further curiosity. The purpose isn't to be suspicious of the customer, but to understand why the flow of funds looks the way it does.

It's about being able to explain your assessment

When supervisory authorities ask questions about your Know Your Customer (KYC) procedures, it is rarely because they expect you to have a crystal ball. What they want to see is that you have made the right considerations:

• That you understand who your customer is.

• That you have assessed whether the customer's activities, finances and the requested service fit together logically.

• And that you can document why you reached that conclusion.

That is, in essence, what the nature of the intended business relationship is all about.

A requirement that will become even more important

The upcoming European AML rules are moving in the same direction. There will be greater emphasis on ensuring that businesses understand the customer's purpose, expected activities, source of funds and occupation or business activities as part of the Know Your Customer (KYC) process.

That doesn't change the fundamental task. On the contrary, it reinforces that good compliance is not about collecting as much information as possible. It's about collecting the information that enables you to understand your customer and assess the level of risk.

Perhaps the nature of the intended business relationship isn't such a mysterious concept after all. Perhaps it could just as easily be called:

"Have you understood your customer?"

And that's a question that most businesses already know the answer to. They simply need to remember to document it.

If there's one thing to take away from this article, it's this: the nature of the intended business relationship isn't about asking as many questions as possible – it's about asking the right ones. Not to tick more boxes, but to understand the customer you are choosing to enter into a business relationship with.