It is essential for all businesses to know their customers, but it is even more so for financial institutions. Know Your Customer (KYC) is a legal framework that all financial institutions must always comply with.
In this article, we will take a look at what KYC means, which businesses need to follow the regulations, and how to be KYC compliant.
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What is KYC?
There are a variety of regulations and laws that businesses should be sure to comply with at all times, such as KYC and the GDPR. KYC stands for Know Your Customer, and is a process that financial institutions and other regulated entities use to verify the identity of their customers’ identity and assess their risk levels.
The goal of KYC is to prevent money laundering, fraud, and other illegal activities by ensuring that financial institutions know who their customers really are, to prevent people with false identities or fabricated documents from opening and using accounts. According to this survey, anywhere from 2-5% of the global GDP, or as much as $2 trillion, is laundered each year.
Technology and the internet have made it even more important to develop standards to combat online fraud and financial crime, and KYC aims to prevent business relationships from being established with people who may engage in terrorism, corruption, or money laundering, among other things.
The KYC process typically involves collecting identifiable information from customers, such as names, addresses, dates of birth, and government-issued identification documents. The institution may also perform a risk assessment to determine the level of risk associated with the customer and their transactions. Based on the risk assessment, the institution may require additional documentation or take other measures to ensure compliance with anti-money laundering regulations.
Who Needs to Be KYC-Compliant?
- Credit Unions
- Asset Management Firms
- Some FinTech (Financial Technology) Companies
- Private Lenders and Lending Platforms
Requirements of KYC
Below are the three steps that financial institutions must take in order to comply with Know Your Customer regulations. CID and CDD are both necessary for all customers, but EDD is only for if a client shows signs of being particularly risky.
Customer Identification Program
The Customer Identification Program (CIP) requires financial firms to collect four pieces of identifying information about their clients: their name, date of birth, address, and identification number.
Customer Due Diligence
Due Diligence involves (CDD) gathering all of a customer’s credentials to verify their identity as well as evaluate their risk profile for suspicious activity.
Enhanced Due Diligence
The Enhanced Due Diligence (EDD) process is used when certain customers are considered to be at a higher risk of infiltration, terrorism financing, or money laundering, and it is often necessary to collect additional information to verify them.
Financial institutions and other relevant businesses are required by law to be KYC compliant at all times and can face serious consequences for failure to comply. Consequences include fines, criminal charges, and a damaged reputation for your business.
KYC compliance can also protect banks from losing money, and it is estimated that banks could save a minimum of $12 million each year by improving their KYC/anti-money laundering systems.
To make your business KYC compliant, you will need to speak to a financial advisor or specialist on the topic. Generally, the process looks something like the following:
Understand the KYC requirements: Familiarize yourself with the KYC requirements that apply to your business. This includes the legal and regulatory framework that governs your industry, such as anti-money laundering (AML) laws, and the KYC guidelines issued by the relevant authorities.
✅ Establish a KYC policy: Develop a KYC policy that outlines the procedures for customer verification, risk assessment, and monitoring transactions for suspicious activity.
✅ Collect customer information: Collect all of the necessary information from your customers, including their name, address, date of birth, and government-issued identification document. When registering with business entities, you will need to collect additional information, such as the company’s registration documents, ownership structure, and business activities.
✅ Verify customer identities: Verify the identity of your customers using reliable sources of information, such as government databases or credit reference agencies. This may involve conducting background checks and verifying the source of their income.
✅ Monitor transactions: Monitor customer transactions on an ongoing basis to detect any suspicious or unusual activity. This includes tracking transaction patterns, assessing the risk of high-value transactions, and conducting periodic reviews of customer information.
✅ Train employees: Train your employees on the KYC policy and procedures, and ensure that they are familiar with the KYC requirements that apply to your business.
Know Your Customer is a legal framework that all financial institutions and other regulated entities must comply with to verify the identity of their customers and assess their risk levels. KYC is critical to preventing money laundering, fraud, and other illegal activities.
Financial institutions and other relevant businesses should establish a comprehensive KYC policy and be sure to comply with all KYC requirements. By being KYC compliant, financial institutions can protect themselves from financial loss, legal penalties, and reputational damage while also preventing financial crimes.