What Is KYC And Why Is It Important?
/KYC means Know Your Client, and it’s a vital series of checks that verifies that a client is who they say they are. Businesses initiate KYC processes during the onboarding phase and maintain them throughout the lifetime of the relationship.
With increasing globalization, financial crime and fraud are on the rise. Financial institutions are especially at risk – potentially facing fines, sanctions, and reputational damage if they are found to be dealing with clients involved in money laundering or financing terrorists.
Why Is KYC Important For Businesses?
KYC is a process that ensures a business is compliant with AML (Anti Money Laundering) and ATF (Anti Terrorist Financing) laws, but KYC is not just for compliance with the law.
Effective KYC practices also safeguard businesses from fraud and the losses that result from dubious transactions and illegal funds.
Banking institutions, credit companies, insurance agencies, and many other institutions require documents and information from their clients for KYC purposes. This is to make sure that they are not involved in money laundering, terrorist funding or corruption, and to analyze their financial activities to determine their client’s risk profile.
The Key Elements Of KYC
KYC processes enable businesses to establish their customer’s identity, understand the nature of the client’s activities (and whether the funds are legitimate), and monitoring the client's activities to accurately assess the risk the customer presents with regards to money laundering.
There are three elements of an effective KYC program: CIP (Customer Identification Program), CDD (Customer Due Diligence), and continual monitoring.
The Customer Identification Program (CIP)
In the US, CIP has been provisioned in the Patriot Act and its purpose is to limit terrorism funding, money laundering, corruption, and other financial crimes.
CIP mandates that all individuals conducting financial transactions must have their identity verified. The CIP provides guidance, however, the onus is on individual institutions to accurately assess the client’s risk and determine the appropriate policy.
The CIP dictates that the minimum requirements to open individual finance accounts are the client’s name, date of birth, address, and identification number. Other non-documentary methods for verifying a client’s identity include information gleaned from other due diligence measures, such as searching public databases, consumer reporting agencies, lists of sanctions, and lists of Politically Exposed Persons (PEPs).
Customer Due Diligence (CDD)
Customer Due Diligence is a crucial process in managing risk, and it is a critical step to protect institutions from financial crime and fraud.
Once the risk profile of the customer is determined, there are three levels of due diligence: Simplified Due Diligence (SDD), Basic Customer Due Diligence (BDD), and Enhanced Due Diligence (EDD).
Simplified Due Diligence is performed when a client falls in the lowest risk category and has a low-value account – a full CDD is not necessary.
Basic Customer Due Diligence is the process of collecting information of all customers to verify their identity and assess risks.
Enhanced Due Diligence is for high-risk customers. EDD’s purpose is to collect additional information to provide deeper insights into the customer’s activities in order to reduce the potential risk.
Continuous Monitoring
Although customers have been thoroughly screened during the onboarding or first interaction phase, continuous monitoring of a customer’s activities is a key element of KYC and insures against fraud in the future. Financial transactions and accounts are monitored on an ongoing basis to provide oversight.
Things to monitor include spikes in activity, unusual or cross-border activity, inclusions on sanctions lists, and negative media publicity.
Reviewing accounts and risk profiles periodically, making sure that all the information is up to date, and adjusting risk levels in accordance with the type and size of transactions also aligns with best practices.
Electronic KYC Verification
Digital identity verification solutions are becoming increasingly popular, with many institutions making use of electronic or automated identity verification programs to collect customer information quickly and accurately.
This process may include customers uploading personal documents like a citizenship certificate, a national ID, a passport, and even a selfie.
Electronic KYC verification automates the time-consuming process of verifying customers, which expedites the onboarding process. Electronic KYC systems are also able to be quickly adapted to ever-changing AML and ATF regulations.
Digital verification solutions also eliminate human error, human resources costs, and optimize workflow so that data can be analyzed and monitored efficiently – which improves the relationships between the business and their clients.
However, electronic KYB systems don’t only benefit institutions like insurance agencies, banks, and credit companies; they benefit customers as well. When the entire KYC process is streamlined and automated, it is a smoother and more convenient experience for customers and they are less likely to abandon the process.
