KYC launching procedures regulations have been strengthened in recent years as fraud and criminal cunning have increased. To protect themselves and avoid regulatory penalties, financial institutions must now more than ever make sure that this is being followed.
Identity verification is known as the “Know Your Customer” (KYC) process. This occurs throughout the customer relationship and is essential to prevent financial crimes like fraud and money laundering. Fortunately, KYC regulations are in place in the majority of nations. However, how can KYC procedures be implemented effectively? The best practice for financial institutions is to take a three-step approach to this.
Many nations have laws and regulations in place to enforce and control KYC verification. The Financial Action Task Force (FATF) first proposed them in the 1990s, and the Patriot Act of 2001 marked the start of the most current implementations in the US. Over 190 nations follow FATF recommendations for KYC in total.
The three steps to establishing a KYC procedure and implementing KYC
A three-step KYC process is typical and outlined in many nations’ rules, while the specific implementation procedure is left to the financial institution. These three steps—often referred to as the “three pillars of KYC”—include:
- Program for Customer Identification (CIP)
- Due diligence on the customer (CDD)
- ongoing surveillance
Program for Customer Identification (CIP)
Establishing that the customer is who they say they are in the first stage of KYC procedures. Any consumer, whether they are an individual or a business, must have their identification validated as a result.
Identity information must be gathered and validated for each person engaged (including the designated beneficial owners for corporate customers). Financial institutions have the option to utilize the papers that are best suitable for their consumers and that can be confirmed. Typically, this will comprise
- born on [date]
- Identity number issued by the government
- other official identification documents (such as passport or driving license)
A business license, articles of incorporation, partnership agreements, or financial statements are further proof documents for corporate clients. Financial institutions must also determine the ownership structure of the business and pinpoint the Ultimate Beneficial Owners (UBOs).
The proper gathering and utilization of this data is another CIP criterion. Institutions ought to be able to quickly and accurately check it. All staff members involved should follow well-documented procedures for doing this.
Due diligence on the customer (CDD)
Customer Due Diligence (CDD) goes beyond verification by examining the customer’s level of confidence in the financial institutions. The goal of CDD is to determine a customer’s risk tolerance and degree of dependability.
The CDD has three tiers. Every consumer undergoes fundamental due diligence to determine their level of risk. This may entail gathering more data, determining the customer’s location, and identifying the kinds of patterns of transactions. Due diligence must be done on every person who has been recognized as a UBO for corporate clients.
Due Diligence Simplified (SDD). SDD may be utilized for clients and accounts that are thought to be at very low risk. With this, CDD’s comprehensive checks are not necessary.
Superior Due Diligence (EDD). The EDD approach, on the other hand, involves significantly more study for a customer who is deemed to be at higher risk. This could entail asking consumers for further information, conducting extra research on accounts and transactions, or checking with authorities or other public sources.
Regulators outline the necessity of performing EDD but do not provide specific instructions. Therefore, it is up to individual financial institutions to decide on the right amount of risk.
KYC goes beyond simply screening new clients while they are being onboarded. Naturally, this is significant because it will reveal the customer’s name and initial level of risk. Financial institutions must also implement a mechanism for continuing KYC verification and supervision.
A shift in risk profile or additional investigation should be warranted by changes in the customer or behavior that are picked up by ongoing monitoring. Depending on the customer’s perceived risk and the institution’s goal, the intensity and frequency of monitoring will vary.
Monitoring should consider the following factors:
- types, frequency, and amounts of customer transactions
- Customer or transaction location changes
- inclusion on penalty lists or politically exposed persons (PEP) lists
- negative media attention
- Financial institutions should have established procedures in place to manage continual monitoring, just like CIP and CDD. This should appropriately involve voicing concerns about any suspicious behavior.
Contact a provider of KYC services.
The KYC standards and the typical three-step process give KYC a solid foundation. To fully implement, however, there are a lot more specific technological processes like KYC compliances, face verification, and KYC standards required. For this, best practices and technologies can be established with the aid of a KYC service provider. Additionally, they’ll make sure you keep up with evolving regulations and adhere to the most recent rules in other nations.
As a pioneer in the field of identity verification, IDnow has created KYC and AML solutions. These are fully functional and adhere to laws in a growing number of nations.
AutoIt, for example, provides full compliance automated onboarding using video, biometrics, and identity verification. Regarding whether verification should need manual intervention or be entirely automated, regulations vary between nations. AutoIdent, on the other hand, permits both and complies fully in a number of jurisdictions, including the UK, Europe, and the UAE.
But KYC and AML are more than just following the rules. Financial institutions seek to guarantee that the solutions they deploy offer a dependable and satisfying user experience. Customers don’t want to be delayed or inconvenienced by this; they just want to see that banks take security seriously and perform the necessary procedures.
The initial interaction with a financial institution and its brand is provided via onboarding and KYC, and it should be positive.
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