KYC document verification

3 Basic Components of KYC Regulations to Reduce Financial Crimes

Since technology is being integrated into many business sectors, it has provided many companies with endless opportunities for economic and financial growth. However, where these technologies are found to be extremely beneficial, on the other hand, there has become a drastic increase in complexities and risks of operating businesses all over the world.

Numerous institutions are facing constant pressure to recognise, evaluate, and understand their customers and partners who they’re doing business with. Particularly, to reduce global threats of financial fraud and terrorism. Well, this pressure leads these firms to execute KYC regulations to comply with AML directives.

In this KYC AML Guide, you will understand some fundamental KC regulations criteria to diminish such financial fraudulent activities.

Who Needs KYC Compliance Regulations?

Numerous financial institutions need Know Your Customer compliance regulations since these industries deal with users to open and maintain financial or bank accounts. However, these companies need to verify their customer’s identities before onboarding them. When a customer obtains regulated services, banks implement basic KYC procedures.

Thus, below is the list of financial organisations that need to comply with KYC regulations:

  • Banks
  • Credit unions
  • Fintech applications
  • Private lenders and lending platforms
  • Wealth management firms and broker-dealers


Yet, KYC regulations have become substantially complex for almost every industry that deals with finances. However, they are obliged to comply with KYC guidelines in order to detect and monitor fraudulent activities to sustain their business reputation.

3 Main Components of KYC Regulations

Executing KYC not only includes the process of verifying customers while onboarding, but it is something beyond it. There are three main components involved in the AML KYC requirements to employ a new user and diminish any possible risk in the future.

These three components involve:

   i. Customer Identification Program

The customer identification Program (CIP) is one of the most important components of Know Your Customer regulations for banking and financial firms to fight against any fraudulent activities. This program needs these financial organisations to gather user information and verify it. The data includes the customer’s name, address, ID card number, and some social security numbers.

However, this data requirement varies as per the company, type of account opening, and type of KYC regulation. The fundamental customer identification program requires these institutions to keep track of clients’ financial and transactional history and monitor any suspicious activity.

   ii. Customer Due Diligence Program

Another important component of Know Your Client regulations is the Customer Due Diligence (CDD) program. CDD is a procedure that is used by financial companies to verify users’ identities and evaluate any potential risks associated with them. This process involves a number of steps including information collected such as user identity, source of income, profession, and the purpose of bank account opening. The objective of CDD is to detect the level of risks with the client.

Generally, customer due diligence is conducted in the following steps:

  • Identify customers’ identities using trustworthy sources such as official identity documents or stored information in the database.
  • Investigate the beneficial owner of the bank account.
  • Determine the nature and objective of the client’s bank account or their relationship with the organisation.
  • Executing continuous monitoring to analyse and report anonymous activities.

Customer due diligence is a vital program of KYC regulations to prevent financial crimes such as money laundering or terrorist financing. In fact, in some regions, CDD is a regulatory requirement.

   iii. Continuous Monitoring

In order to conduct a comprehensive KYC procedure, ongoing monitoring is a vital part of it. Continuous monitoring is a process of assessing or keeping track of a client and transactions constantly to make sure that they are consistent with the anticipated financial activities. Moreover, it aims to identify if the customer is involved in any mysterious or unusual transactions.

In addition to this, the objective of ongoing monitoring is to make the financial firms aware of any changes in the user’s risk profile that may indicate a red flag of money laundering or other financial crimes.

Continuous monitoring usually involves the following activities:

    a. Transactional Monitoring

Banks and financial companies keep track of their customers’ transactions on a daily basis to recognise any unusual or anonymous activity. It involves monitoring of geographical locations, transaction patterns, and other factors.

    b. Screening

Financial firms screen users’ accounts against lists of sanctioned individuals, PEPs, and other high-risk entities to ensure any possible risk associated with them.

    c. Periodic Reviews

Banks may also conduct periodic reviews of their client’s accounts to ensure that these customers’ risk profiles remain consistent with the expected activities. This step involves updating customer information such as sources of income.

    d. Enhanced Due Diligence

If financial institutions find any risk or threat associated with the client during the onboarding procedure, they may conduct enhanced due diligence. This program includes further investigation of customer identity and other checks.

How Does KYC Process Impact Businesses?

KYC regulations are required in almost every business and organisation, especially those that deal with financial industries, account openings, and transactions. These institutions need to comply with KYC AML regulations.

These regulations impact financial businesses and their customers. Since these firms must follow the KYC compliance regulations while onboarding a new customer. These requirements aim to fight against financial crimes such as money laundering, terrorist funding, and other fraudulent activities.

Yet, in case these institutions fail to comply with these regulations, they may face huge penalties, loss of customers’ trust, and even reputational damage. With technological evolution, almost every institution needs to comply with AML and KYC regulations, and reduce such illicit practices.

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