What is a KYC (Know Your Customer) process?
Know Your Customer (KYC) refers to the process of verifying the identity of customers for business purposes and to assess and monitor risks for new and potential customers. A well performed KYC check protects your organization from fraud and losses. For the regulated businesses, such as the financial industry, it’s furthermore designed to serve as an Anti-Money Laundering (AML) measure.
KYC verification includes knowing the identity of a customer, what potential risk(s) he/she may pose, and the financial activities tied to the person in question. An efficient Know Your Customer (KYC) process is built on three fundamental steps, and in the following order:
- Customer Identification Program (CIP) is a set of actions to identify a customer and to verify her/his identity by using reliable, independent source documents, data or information.
- Customer Due Diligence (CDD) is a program run to determine if a potential client is trustworthy. CDD is a critical element of mitigating risks and protecting yourself against criminals, terrorists, and Politically Exposed Persons (PEPs) who might present a risk. This process usually involves screening of international sanction- and watchlists.
- Ongoing monitoring is needed to mitigate risk on an ongoing basis between a company and its client with the purpose of having an oversight of financial transactions and accounts based on thresholds developed as part of a customer’s risk profile. The program may monitor spikes in activities, out of area or unusual cross-border activities, inclusion of people on sanction lists and adverse media mentions.
All KYC documents (records) generated on each customer throughout the process need be stored in a safe and compliant manner in case of regulatory audit.
KYC Compliance is crucial to avoid huge fines, sanctions and reputational damage
Having the right Know Your Customer procedure in place is absolutely essential to minimize risk for customers, and for regulated entities it’s more than a financial risk – it’s also a legal requirement due to existing Anti-Money Laundering (AML) laws. Initially, these regulations were imposed only on the financial institutions but now the non-financial industry, virtual assets dealers, fintech and even non-profit organizations are liable to oblige. If you by definition don’t know your customers, and do business with a money launderer or terrorist, you could face possible fines, sanctions, and reputational damage.
An important component of a KYC check includes a fundamental question – can you trust a potential client? This makes it a critical element of managing your risks and eliminating potential threats. From vetting third parties to ensuring that key documents and information has been both collected and securely stored.
Electronic KYC Verification (eKYC) has become the new and efficient norm
A KYC process that is fully digital is the inevitable and welcomed future, and Electronic Know Your Customer (eKYC) is already the gold standard.
There are many reasons why eKYC will soon prevail, including the fact that it allows for a faster KYC process. Onboarding new clients and customers can be painstakingly slow, especially if you want to ensure compliance with AML protection and use a solid Customer Identification Program (CIP). The faster eKYC processes take care of this problem by unifying different, often nonlinear processes, into automatized workflows.
In addition to this, there are many benefits to eKYC as a solution. Among other things, it can automatically check for errors, which improves accuracy while ensuring that the process runs smoothly. As regulations constantly change and systems need to correspondingly change, compliance is also easier with eKYC workflows as it’s often as simple as updating a ruleset. This adaptability to an ever-changing landscape saves both time and money.
There still might be situations, such as outdated legislations or hard-to-change legacy requirements, where digital techniques can’t be used for KYC. However, these are the exceptions and are on their way out; full digital KYC is the future and companies that fight it, will find themselves on the losing side.
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