A company’s Know Your Customer (KYC) process involves identifying its clients before they become a customer or join the business. Businesses use KYC verification to learn more about their clients and determine whether they are a good fit for the company. This process also reveals whether any customers have ever been or are currently involved in criminal activity.
Initially, laws related to KYC Compliance were imposed only on the financial sector of the evolution in technology; these laws were gradually implemented in other sectors as well. In some cases, it is known as Know Your Business (KYB), Know Your Patient (KYP), etc.
There are three points that help businesses while gathering information from customers, using a risk-based approach:
- Identify the end-user, who they tell they are
- Identify the customers’ source of income
- Customers’ ongoing monitoring
What is KYC Compliance?
KYC compliance is an affirmative duty of all financial and non-financial organizations. Organizations with KYC compliance develop identification processes for the customers and verify their customers according to the regulatory guidelines on a regular basis. KYC compliance helps organizations keep away from the penalties and mitigate financial crimes.
KYC Compliance Process
KYC compliance vary from nation to nation but some requirements are common in all, below:
- Develops identification processes for the customers
- Businesses identify customers using their identity documents
- Maintains the customer’s risk profiles
- If required, take measures by AML compliance
Steps of KYC Compliance Framework
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Customer Identification Program (CIP)
Knowing your customers is crucial, but how can businesses be sure that someone is who they claim to be? Identity theft is extensive, in 2017 over 16.7 million American residents have to face huge losses, a total of 16.8 billion USD.
CIP ordered in America that any person who is involved in monetary transactions has to verify their identity. Customer identification provides guidance to organizations to measure risk factors.
To onboard any individual, the minimum requirements that businesses require by the Customer Identification Program (CIP):
- Name
- Date of Birth
- Residential Address
- Identification Number
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Customer Due Diligence (CDD)
For any organization, their first analysis is to figure out whether the customer is trustworthy or not. CDD is too effective and protects your organization against terrorists, cybercriminals, and others who might cause any risk.
There are three levels of due diligence:
Basic Customer Due Diligence: To verify the identity of customers and assess the risk associated with them, CDD acquired information for all customers associated with the organization. A thorough screening is not necessary for this stage.
Standard Due Diligence (SDD): SDD scenario encompasses low-risk illicit activities, such as money laundering and terrorist funding, without the requirement of full Customer Due Diligence (CDD). Companies classify clients according to their level of risk at this phase.
Enhanced Due Diligence (EDD): High-risk customers undergo a thorough screening process in order to verify or investigate their involvement in illicit activities, such as money laundering or corruption, unlike Basic Customer Due Diligence and Standard Customer Due Diligence.
Beyond basic CDD, it’s necessary to simply perform the right processes to determine whether or not EDD is important. This could be an ongoing procedure, as current customers have the potential to convert into the high-risk category over time. In this way, conducting recurrent due diligence assessments on existing customers can be supportive. Here are some points that must be useful to acquire whether businesses require EDD screening or not.
- The locality of the user
- Source of income
- User’s payment method
- User’s pattern of performed activities
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Continuous Monitoring
For KYC compliance, it is not ample to check your customer only once. Businesses must have a system to monitor your customers’ transactions and other activities on a regular basis, in order to keep updated their profiles with the latest information.
Industries need to know about KYC Compliance
Businesses regulate KYC compliance rules in order to distinguish industries. Worldwide there are some of the industries that must need to incorporate KYC compliance:
- Large corporations, small and medium-sized businesses, and independent business owners
- Financial Organizations (Banks, insurance companies, etc.)
- Real Estate industry
- Financial Technology (NFTs, Crypto, online payments, etc.)
- Healthcare industry and many more.
Key Takeaways
As banks and other financial organizations shift their daily operations to provide services online. It is becoming way easier for identity thieves, hackers, and other criminals who cause online breaches, to perform their illicit activities. This is because specialists in the financial industry feel the need to regulate such protocols, that keep their organizations safe by getting fraud. Businesses use KYC compliance in both ways, it not only protects customers’ financial stability, but it also protects financial services from getting ill-use.
Financial institutions and banks now implement KYC compliance programs to maintain consistency with their customers and prevent financial extortion.
