In our recent blog on KYC (Know Your Customer) we talked about the KYC Process. It included four steps. Today, we shall explain the first step which is Customer Acceptance Policy in KYC.
What is Customer Acceptance Policy in KYC?
A customer acceptance policy ensures that the regulated entity is not accepting any suspicious customers. It refers to the procedure by which a financial institution decides customer acceptance. This policy sets the standard for customers to follow before the provides them with its services. In other words, Customer Acceptance Policy (CAP) decides for a specific person or entity to be the client.
A well-defined Customer Acceptance Policy helps firms to mitigate financial crimes such as Money Laundering and Terrorist Funding. Additionally, CAP establishes robust criteria to stop criminals from entering the financial stream. Furthermore, FATF (Financial Action Task Force) mostly defines the guidelines for making policies for each entity in the USA. So, it is mandatory for firms in the USA to devise the CAP as per the updated guidelines of FATF.
Steps of Customer Acceptance Policy in KYC
Mainly, the Customer Acceptance Policy includes three basic steps:
1. Customer Identity Verification
Firstly, in Customer Identity Verification the data of customer profiles, identity-related documents, and PEP is collected. Vitally, it is the most important step of the Customer Acceptance Policy in KYC. Because the customer’s identity will determine whether a customer is a PEP (Politically Exposed Person) or not.
2. Assessment of Risk Profile
Secondly, the Risk Profile of the customer is checked and if the customer is highly risky, then a Red Flag is raised. Dynamic Risk Assessment is carried out and the customer is verified for his previous criminal activities (if any). In case of a previous criminal record or being on the sanction list, the bank or financial institution refuses to provide services to the customer. Then, a report is filed to law enforcement and regulatory authorities to alert them against possible crime.
3. Determining the eligibility requirements
Via Customer Due Diligence, the eligibility of the customer is confirmed for further action. In case the customer is not risky and legally viable for the firm, he is onboarded easily. Hence, the overall Customer Acceptance Policy in KYC also includes ongoing due diligence as an imperative step.
Customer Acceptance Policy in KYC & Money Laundering
Crucially, the Customer Acceptance Policy in KYC combats Money Laundering at the very beginning. Mainly, it acts as an initial stage filter against criminals and helps entities in the detection of risks at the earliest possible. In this way, real customers can feel safe and trust their system for staying compliant.
Since Customer Acceptance is the first element of KYC, it creates the baseline for further steps. Overall, CAP is the first line of defense against money laundering. Customers are screened and assessed for their own financial safety. Once, the system is crime-free, customers will have trust as their identities shall be protected.
Final Thoughts
Well before the Customer Onboarding process is executed, Customer Acceptance Policy in KYC is crucial for firms. It is due to the fact that criminals can penetrate the system through any loophole and pollute the finances. Moreover, regular Ongoing Monitoring is imperative to closely watch over any suspicious transaction. Lastly, to ensure effective compliance, the policy must be kept updated with the latest developments in KYC AML.
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CRS stands for Common Reporting Standard which entails a process of information collection and reporting requirements. Financial Institutions like banks participate in CRS to help fighting the Money Laundering an Tax Evasion.
It is a process that assesses the customer's risk profile in order to make the decision to serve that customer or not. Since financial institutions are at a serious threat of their system being misused by Money Launderers and Fraudsters, so Customer Acceptance Policy in KYC is an imperative part in KYC Process.