How well do you know your customer? Well, this is what every enterprise should figure out before associating ties with business prospects. Know Your Customer (KYC) is not only a corporate responsibility but also a regulatory obligation for financial institutions. It plays a key role in identifying illicit criminals with fake identities when they try to onboard with a business.
Lack of KYC verification measures allows fraudsters to carry out nefarious acts like money laundering to make black money which is later used in other criminal acts. To address prevalent problems faced by financial businesses, regulatory bodies ensure strict enforcement of KYC compliance.
What is meant by KYC Compliance?
KYC compliance is a mechanism to make sure financial entities keep intact secure customer onboarding and Anti Money Laundering (AML). When it comes to banks, they have to deal with a lot of monetary operations regularly. This makes it increasingly important for them to conduct KYC verification of every customer who opens an account or does transactions using their platform.
KYC compliance is also applicable to financial entities not regulated by a central banking authority such as:
A Non-Banking Financial Institution (NBFI)
Virtual Asset Service Providers (VASPs)
Since these entities fall under the legal financial system, they have to follow KYC regulations to meet compliance standards.
KYC Compliance – What is Required?
For a bank or financial business, a KYC compliance policy should take into account certain due diligence procedures to identify who their customers are and what kind of risk they pose. Here are some measures/practices that businesses take to prepare for KYC compliance.
Customer Acceptance Policy
To ensure KYC/AML compliance, banks usually create a set of rules known as customer acceptance policy. It lists all the KYC due diligence requirements that a customer must fulfill to open an account and get onboard. Some of which are:
Customers with a fictitious name or unknown identity are unacceptable
The actual beneficiary’s identity must be verified
Additional due diligence should be applied to beneficiaries associating frequent ties with new customers or transacting frequent large transactions
Once a customer comes to a business to open an account, they undergo a series of checks for identity verification. Since KYC authentication is part of the financial institution’s larger AML program, it follows a risk-based approach towards customer identification. The risk model is based on KYC verification laws such as the US Patriot Act, and the UK Proceeds of Crimes Act. Once the customer is checked against all possible parameters, they are given a risk rating that is attached to their profile for future verifications.
Customer Identification Process
KYC compliance requires businesses to develop an identification process for their potential customers. One important requirement for a Customer Identification Program (CIP) is acquiring the identity information of the end-user. Details such as name, address, date of birth, and an identification number are the basic elements required to carry out a CIP.
A CIP is not only limited to obtaining personally identifiable information of the customer but is concerned with verifying how accurate are the details provided. Financial businesses usually perform KYC verification in light of AML obligations that help address overall risk in verifying the customer identity.
Extended Due Diligence
Last but not the least comes ongoing monitoring of customers. Under AML/KYC regulations, financial organizations first do a risk assessment of the customer, after which they decide whether there is a need to perform Enhanced Due Diligence (EDD) or not. If the customer is a Politically Exposed Person (PEP) or has their name placed on a sanction list, they pose a greater threat of money laundering due to their past activity and the current position they hold. This makes it necessary for businesses to keep an eye on their transactional behavior using ongoing monitoring.
KYC Verification – Is There a Quick Way?
Definitely. Since KYC verification plays a crucial part in making a business platform secure from financial crime, service providers are offering automated solutions to meet KYC compliance. These often come with state-of-the-art tools to identify users based on KYC laws to meet regulatory compliance.