Know Your Customer

Know Your Customer (KYC): An Engaging Guide towards Credible Compliance

“Know Your Customer, Know Your Risk!”

This phrase defines the boundaries where the due diligence of clients works to mitigate potential risks. Today, the Financial world is facing increased threats of fraud, money laundering & Terrorism Financing more than ever before. So, customers need deep awareness of Know Your Customer (KYC) and how it is related to security and compliance.

This editorial is a foundation for authentic and updated knowledge about KYC and concept building. After explaining the basic term of KYC, we will discuss its importance and proceed further to create a concrete knowledge base.

What is KYC (Know Your Customer)?

A standard definition of KYC is as follows:
“Know Your Customer (KYC) is an approach applied by Financial Institutions (FIs) and other regulated entities for Customer Identification. It is a standardized and regulated compliance approach to verify the true identity of customers. Mainly, the purpose of KYC is to prevent Money Laundering, Terrorism Financing, and Fraud.”

Simply, an approach to KYC includes three steps:

  • Establishing the Customer’s Identity
  • Understanding the customer’s activities and ensuring legitimate funding
  • Risk Assessment of Money Laundering and other Fincrime.

Importance of KYC (Know Your Customer)

Primarily, the effectiveness of the KYC Process depends upon its ability to support the Anti-Fincrime approach. Globally, the threat of Money Laundering is rising exponentially. Basically, Money Launderers hide their illicit money through unrecorded channels. Hence, the true identity of the customer is key to combat Money laundering.

KYC defines the compliance guidelines which are intensified as the threat increases. KYC (Know Your Customer) is becoming increasingly important and Stringent than ever.

Although, Banks and other financial institutions are regulating KYC globally. However, there is still a large gap between the regulation and implementation of KYC. Notably, regulators and firms are facing numerous challenges due to the economic crisis in implementing KYC. Thus, building a Risk-free financial ambiance is required with an uncompromising KYC Process.

(Know Your Customer) KYC Process: Foundation of Transparency

Firstly, KYC is an ongoing process because of the continuous threats of Financial Crimes. Mainly there are 4 pillars of KYC that entail the process of KYC:

  1. Customer Acceptance Policy
  2. Customer Identification Procedures
  3. Risk Management
  4. Ongoing Monitoring

4 Pillars of KYC

KYC Requirements

Likewise, there are some KYC Requirements that customers need to fulfill while onboarding. Following are some of the generic KYC requirements:

  • Proof of Identity
  • Proof of Address
  • Identity Card Verification
  • Facial Verification
  • Biometric Verification
  • Document Verification

KYC Requirements

Apart from these, there can be other requirements based on the risk factors involved.

Types of KYC

When Money Laundering became a common yet illegal practice, KYC (Know Your Customer) became more popular. Governments and regulators started refining and making their own ways to implement strong KYC. Therefore, several types of KYC were formulated in order to tighten the grip on Money Laundering. But these types of KYC have their own pros and cons.

Document-Based KYC

Physical Documents are scanned, checked, and saved in the network to identify a customer. Passport, Driver’s license, and tax record are used for Documented KYC.

Digital KYC

When the KYC process is handled online, the ID verification also becomes digitized. This includes the submission of the digital photo ID of the customer’s identification documents.

Video KYC

Notably, it is one of the latest KYC approaches. Customers can now verify their Identity through online video recording via smartphones. Many banks and FIs now offer Video KYC through their Smartphone Applications. Mainly, Artificial Intelligence is used for Video KYC.

KYC In-Person

As the name suggests, In-person KYC (Know Your Customer) requires the customer to physically appear and confirm his identity. In-Person KYC is required where the risk of forging identity is posed.

Biometric KYC

Undeniably, Biometric KYC is the most trending identification methodology today. Using Facial Recognition, Fingerprint, and Voice Recognition, biometrics is an evolution of the KYC process.

KYC Regulated Industries

As we know, KYC (Know Your Customer) is applicable everywhere now. Gradually, it is becoming one of the basic requirements in every walk of life. Specifically, a few highly vulnerable industries require regulatory compliance. Mostly, a KYC Entity has notable traits that differ from regular industries. Following are a few KYC Regulated Industries:

  • Financial Institutions and Financial Services
  • Banks
  • Government Agencies and Public Sector
  • Money Services Businesses
  • Non-Profit Organizations
  • Retail & E-Commerce
  • Transportation & Logistics
  • Healthcare
  • Real Estate
  • Telecommunication

KYC Use Cases

Talking about the Use cases of KYC, we should know that the prime concern to use KYC is Financial Crime prevention. Also, KYC ensures a better insight into customer trends, and firms can make better marketing strategies. Following are the 8 main areas where KYC is applicable:

Anti-Money Laundering (AML) Compliance

Typically, KYC is used for the prevention of Money Laundering being of high utility for the MLROs. Since AML Compliance requires transaction monitoring and verification of identities, KYC (Know Your Customer) is of high importance here.

Customer Due Diligence (CDD)

Similarly, KYC is used for assessing the risks posed by a customer and for the regulatory requirements.

Fraud Prevention

KYC is also used in the prevention of Financial Fraud, Online Fraud, and Scams. It directly helps in the detection and prevention of fraudulent transactions and ensures a fraud-free and secure system.

Regulatory Compliance

Mostly, international firms are required to comply with the regulations such as USA Patriot Act, the EU’s 4th AMLD, and Bank Secrecy Act.

Customer Centric Decision Making

As (KYC) Know Your Customer keeps the firm’s management informed about the trends and preferences of customers. Hence, this knowledge helps in gaining a competitive edge over competitors through early and informed decision-making.

Regulatory Framework of KYC (Know Your Customer)

Mainly, the Regulatory bodies for KYC include FinCEN, FATF, OFAC, and FCA. Apart from these, every country now has its own regulatory body to ensure KYC compliance. For instance, in China CBIRC and PBC regulate the KYC and AML regulations. Similarly, Russia has the FFMS and Bank of Russia for regulating the KYC and AML.

Closing Thoughts

Conclusively, KYC (Know Your Customer) is an important concept in today’s world. Compliance with KYC is important for secure and legal transactions and for preventing FinCrime. Since the rise in money laundering and terrorist activities, KYC’s importance has visibly increased.

Even third-world countries have realized the importance of eKYC for seamless and secure transactions. Finally, we provide comprehensive knowledge to everyone with the KYC AML Guide for better understanding.

Frequently Asked Questions

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