Know Your Customer: How It Works and Processes

What is KYC?

When a customer registers for the onboarding procedure, background checks are conducted as part of the Know Your Customer policy. It is a risk assessment process that companies use to confirm a client's identification and adhere to legal requirements.

Additionally, there is a business version of the normal KYC procedures. Corporate KYC is used by companies to confirm firms before a deal is signed. Similar to normal KYC, corporate KYC assists in spotting phoney businesses and serves as a barrier to money laundering and terrorism financing. Corporate KYC is also known as KYB in some commercial contexts (Know Your Business).

KYC's significance

For businesses

Companies or financial institutions design their KYC compliance, which includes all of the necessary steps to authenticate their clients. Additionally, KYC aids banks in risk assessment, monitoring, and management. A company can stop a cyberattack once it can confirm that the customer is actually who they say they are. Additionally, it aids in the prevention of money laundering, the funding of terrorism, and other illicit financial activities.

ID, facial, document, and biometric verification are typically part of a KYC procedure. Since it is their obligation to ensure KYC compliance, all banks are required to adhere to anti-money laundering and other requirements. Additionally, the KYC procedure aids businesses in avoiding reputational harm and monetary fines imposed by regulators. Background checks assist in reducing fraudulent activities because the financial industry is constantly vulnerable to financial frauds, crimes, and attacks.

For customers

Trust is a crucial component of doing business with someone for clients and customers. Customers are reassured that banks value security and safety when robust KYC procedures are followed by businesses and banks. Protecting sensitive customer information, funds, etc. from a cyberattack is the goal of the KYC procedure. The KYC procedure serves as a kind of quality assurance for the client that their money and personal information are secure with the relevant bank.

Additionally, a customer aids a bank or business in verifying that they are who they say they are by supplying the required KYC documentation. In this manner, the bank can expedite the client onboarding process. It implies that obtaining loans, opening accounts or funding takes less time.

What is the KYC Process?

Two essential elements are required for banks and businesses to carry out a good KYC process:

Customer Identification Program (CIP)

Obtaining and validating a customer's personally identifiable information is part of the initial KYC procedure (PII). The Customer Identification Program is the name of this initial stage (CIP). The CIP aims to reduce money laundering, terrorism financing, corruption, and other unlawful acts. Since inaccurate or inadequate ID verification might have serious consequences, CIP is essential for a thorough KYC procedure.

However, there is no universal CIP procedure that any financial institution can apply because there are no clear-cut KYC criteria. The CIP provides general guidelines, but it is up to businesses to choose which PII to request in accordance with their own policies

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Companies typically request the following PII from their clients:

• full name of the client

• their birth year

• their location

The client may be required to present official documents like a driver's licence, ID card, passport, etc. after providing these details.

Customer Due Diligence:

Companies and banks need to decide whether they can trust a potential customer. A key component of risk management and protecting the bank from potential assaults is customer due diligence (CDD).

Each of CDD's three levels is built to handle clients according to their risk tolerance.

Due Diligence Simplified (SDD)

For clients with modest risks of potential money laundering or terrorism funding and no need for a comprehensive CDD, financial institutions utilise SDD.

Elementary Customer Due Diligence (CDD)

It is used by banks to cover the fundamental information needed for customer identification and verification.

Superior Due Diligence (EDD)

EDD is specifically utilised for clients who are more at risk. Getting more information is required. The banks subsequently make use of this data to comprehend client fund behaviour and get ready for potential risks.

KYC Rules Internationally

Australia

In order to keep track of all financial activities within the nation, the Australian government established the Australian Transaction Reports and Analysis Centre (AUSTRAC) in 1989. In Australia, the centre also oversees customer identification requirements.

Canada

The Financial Transaction and Reports Analysis Centre of Canada (FINTRAC) was founded in Canada in 200 as the country's financial intelligence division. The division changed its rules in June 2016 to ensure compliance with AML and KYC standards and to determine the identity of specific clients.

India

The Reserve Bank of India published its KYC regulations for the nation in 2002.

Italy

The KYC criteria were established in 2007 by Banca d'Italia. It outlined the guidelines that all financial institutions doing business on Italian soil must adhere to.

UK

The UK's KYC laws are governed by the Money Laundering Regulations 2017, which were established by the Financial Conduct Authority (FCA).

USA

In accordance with the USA Patriot Act of 2001, the Secretary of the Treasury was required to complete KYC standards before October 26, 2002. It mandated KYC for all US banks. A customer identification programme must be satisfied by all the procedures that adhered to the rules.

Europe

The EU's KYC Due Diligence laws are governed by two anti-money laundering directives. On July 9, 2018, they released its Fifth Anti-Money Laundering Directive (5AMLD), which went into force on January 10, 2020. Contrarily, the union released the 6AMLD draught in late 2018 and it will go into force in June.

Conclusion:

Understanding KYC is one thing, but adhering to these rules is a different challenge. There are just too many intricate phrases that can be easily manipulated. But KYC verification software can assist you in streamlining the KYC procedure.

You can undertake electronic KYC (KYC) and online identification with the help of extremely accurate AI-based identification solutions. With a KYC solution banks can quickly create their KYC process and carry out the laborious PII collection, customer identification, and verification steps.

With the aid of highly sophisticated machine learning and artificial intelligence, it can validate a customer's identification documents using online public data, such as residence records, bills, and other documents.