Historically, KYC Elements originated almost 53 years ago. In 1970, the U.S. passed its first Bank Secrecy Act (BSA) against Money Laundering. Notably, on September 11, 2001 (9/11 terrorist attacks), further, additions were made to this act. Also, in 2008, the Act was edited due to the global financial crisis where Money Laundering topped the previous trends.
The above-mentioned historic information is just a glimpse of KYC being needed. However, the KYC process is still under review for further improvements by the regulatory authorities. Since the inception of KYC as a mandatory requirement, it has had some founding principles. Today’s article discusses the 4 Key Elements of KYC policy in detail.
Key Elements of KYC Policy
Firstly, it is to be noted that there are 4 Key Elements of KYC policy. These elements are also called the 4 pillars of KYC. These include:
- Customer Acceptance Policy
It is the basic document that defines the initial relationship between the customer and the entity e.g. bank.
- Customer Identification Procedure
It includes ID Card Verification, Face Verification, Document Verification (Utility Bills and etc.), and Biometric Verification.
- Risk Management: Continually, it is a process to identify, analyze, evaluate & mitigate risks associated with Money Laundering.
- Ongoing Monitoring: Regularly, updating and carrying out the check and balance on the ongoing activities of transactions is called Ongoing Monitoring.
Overall these elements of KYC policy are imperative while devising an AML compliance regulatory framework.
Customer Acceptance Policy (CAP)
Mostly, it is considered the basic step toward any compliance activity. This is to protect the customer’s right to privacy up to a certain level. Once, the threat of Money Laundering and Terrorism is raised then Customers are obliged to sign the CAP before hiring any financial service. Now, all the KYC Elements have become necessary to follow everywhere. Visibly, the CAP is more stringent in banks than in other entities. According to a bank’s KYC model, an ideal CAP must have the following guidelines:
- Outrightly, no account shall be opened for anonymous/fictitious names or shell companies
- Also, the True Beneficiary Owner shall declare his true identity in accounts. Actually, this is other than his individual account and his beneficiary ownership shall be declared for the company accounts.
- The name of the business entity must be different from any banned name.
Customer Identification Procedure (CIP)
First, banks and other financial institutions require to collect information to comply with Anti-Money Laundering regulations and prevent Fincrime. Secondly, the CIP or Customer Identification Procedure shall have the following postulates:
- It should identify and verify the customer’s identity through embedded technologies and procedures.
- It should have various stages to ensure a fool-proof identification and verification process.
- Especially, banks are obligated to identify the information to establish the true identity of the customer sufficiently.
- It should have Customer Due Diligence and in case of a high-risk customer Enhanced Due Diligence.
Risk Management in Key KYC Elements
Evidently, financial crimes including Money Laundering are on the rise. Consequently, banks are using risk-based approaches to mitigate the Fincrime risks. Consistent with the Dynamic Risk Assessment, banks now adopt risk management procedures.
Mainly, there are three risk-based customers that require Risk management as a part of Key KYC Elements. Risk Scoring defines their risk category. Periodically, the customers are reviewed based on the risk score and category.
- Low-Risk Customers: Risk Review is done once in 10 years
- Medium-Risk Customers: Risk Review is done once in 8 years
- High-Risk Customers: Risk Review is done once in 2 years
Also, Enhance Due Diligence is done for High-Risk Customers and Red Flags are raised in case of any suspicious transactions. Furthermore, the Risk Review is done by refreshing the customer’s KYC details through an updated KYC process. Hence, the existing database of the customer is updated through a KYC verification process.
Ongoing Monitoring
Likewise, Ongoing Monitoring means continuously monitoring and updating the procedure against the Money Laundering threat. It is done by updating KYC and refreshing the KYC data of customers. Undeniably, the trends in Money Laundering change, and customers can pose risks to the system as years pass on. Because of the outdated system and technology, the need for Ongoing Monitoring becomes greater.
By far, Ongoing Monitoring is considered the most sensitive and time-consuming part of 4 Key KYC Elements.
- Based on the background information about the customer the monitoring system works to keep checks on the ongoing activities.
- It includes bank transactions, sources of funds, suspicious activity, and other financial trails.
- Semiannually, the transaction turnover in the account of the customer is reviewed during ongoing monitoring.
Importance of KYC Elements
Although, every bank and financial institution has its own KYC procedure but compliance with regulatory requirements remains the same. Basically, the motive of each KYC and AML compliance program is to mitigate the Money Laundering and fin crime threat. So, a stepwise approach as mentioned above is necessary in this case. Also, systematic review, transaction monitoring, and other associated activities are at the heart of any financial compliance system.
Therefore, these 4 Key Elements of KYC are mandatory for every KYC and AML policy to adopt. However, any system can revise the system or enhance by adding internal measures. For example, the Reserve Bank of India (RBI) was among the first banks to advise the KYC procedures to be made mandatory. Likewise, they issued KYC guidelines for bank account opening and compliance programs for the Banking Regulation Act of 1949. Since then the system has been advancing and updated regularly.
Final Thoughts
Conclusively, KYC Elements are mandatory for a robust KYC AML guide and system. Moreover, combating Money Laundering and Financial Fraud is a responsibility of everyone. So, to do this getting KYC done and following the AML regulations is necessary. This enables the regulatory authorities to make the financial system safe and trustworthy for the customers in the longer run.
