Customer Identification Procedure

How is the Customer Identification Procedure in KYC Conducted?

While following the KYC compliance regulations, companies are mandated to execute Customer Identification Procedures in order to verify the identity of their customers. This process is conducted to determine whether the user is being truthful about their identity, documents, and the business they are involved in.

In many cases, individuals consider both terms: KYC and CIP as related terms and are often used substitutable. Yet, they are quite different from one another. Therefore, it is essential to understand the difference between the two terms and how the customer identification procedure in KYC is done in financial sectors to make these companies compliant.

What are Customer Identification Procedures?

Customer identification procedures, also known as customer identification programs or CIPs, are the regulatory measures that financial organisations and other businesses are obliged to follow in order to verify their customers’ identities. CIP is one of the steps of the Know Your Customer procedure. The purpose of this process is to prevent financial crimes such as money laundering or identity theft.

CIPs involve gathering and verification of user information including customer name, home address, date of birth, ID card, and other information. This data is acquired by financial companies to assess the risk level associated with the client and keep track of their transactional activities.

However, the customer identification procedure in KYC varies as per the type of customer, risk levels, and the firm they are connected with. For instance, if a customer submits an application to a banking firm for a personal account opening, the CIP would be different from the individual who applied for a business account opening.

In several regions, some banking industries may also need to verify the identity of the beneficial owner, who owns or manages the business where the customer works. Well, CIP is one of the vital elements of the KYC regulatory framework to fight against financial crimes. It helps businesses to keep track of any illicit financial activities and assess the risk levels of onboarded customers. Customer identification procedures also allow financial firms to maintain their market repute and sustain trust in their clients.

How does CIP Differ from KYC?

Although the Customer Identification Procedures and Know Your Customer process are related to each other, both concepts are pretty distinct. These both procedures are conducted in the domain of anti-money laundering and counter-terrorism financing compliance.

Well, KYC is a broader concept that involves a wide range of processes. This framework is explicitly designed to prevent fin-crimes such as money laundering or financing terrorism. On the other hand, the customer identification process is one of the steps of the KYC procedure that is used to verify the identity of new customers before onboarding them. Nonetheless, KYC not only involved CIP, but Customer Due Diligence (CDD), continuous monitoring, and risk assessment as well. The main objective of implementing KYC guidelines in financial businesses is to make them compliant with the AML and CFT regulations.

Requirements for Customer Identification Procedure in KYC

In order to remain compliant with the KYC regulations, financial organisations need to follow and maintain applicable customer identification procedures to verify the identity of the customer. However, the current requirements for CIP were modified according to the laws of the USA Patriot Act. It required banks, insurance companies, and other financial institutions to execute proper and in-depth customer identification processes as per the size and industry of the business.

However, the CIP procedures for banks and other financial organisations involve five simple steps to identify and verify customer identification for successful onboarding.

   i. Gathering of User Information

The customer needs to provide personal information such as their name, address, date of birth, and taxpayer ID number. Other than this, the user also needs to provide a government-issued ID card number along with a photo for identity proof.

   ii. Verification of Collected Data

Once the user information has been collected by the bank or any financial firm, it is verified to verify the identity of the customer. Yet, in online platforms or digital KYC, the customer identity is verified through video interaction or by comparing the provided document with the information on the database.

   iii. Comparison with Government Database

In order to make sure that the client is not included in the sanctions list, has connections with PEPs, or is involved in any suspicious activities, this information is further investigated by comparing the data with the information available in the database of the government agency.

   iv. Documentation Process

However, during the customer identification procedure, the documentation process is necessary for keeping and maintaining records of the obtained information. This process involves identifying the data, details of each provided document for identity verification, description of methods, and results of the procedures. Not only this, but it also involves a description of the resolving measures taken for substantive disparity during the customer identification process.

   v. Data Record Keeping

Once the customer data is acquired and verified, financial companies record this data for at least the next five years after the client closed his account or any service. After five years, the account is permanently closed or suspended.

Final Words

Getting compliant with customer identification procedures in KYC is not mandatory for every industry. However, several challenges are emerging since transactions have shifted towards digital platforms. While operating in an electronic environment, financial organisations must not depend on the customers wholly. They must conduct some additional processes to verify customer identity during the onboarding journey.

However, CIP is one of the steps of KYC frameworks which needs to be fulfilled before employing a new customer. Therefore, if you hold any financial firm, it is crucial to verify your user identity to prevent any fraudulent activities in the future.

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