“Know Your Customer,” often known as KYC, is a process for verifying a client’s identification before or during transactions with banks or any other financial sector. Whether it is terrorism financing or money laundering, all fraud schemes can be thwarted by complying with KYC rules.
When it comes to Know Your Customer laws, financial institutions are held to increasingly stringent standards. They will have to pay more to follow KYC compliance or face stiff penalties. These rules apply to nearly any business, platform, or organization that deals with a financial company to open an account or conduct transactions.
Difference Between KYC and AML
The basic difference between the two is that AML is a framework of regulations that all financial institutions are required to follow to prevent themselves from money laundering cases while the KYC process is a key part of AML, in which the client’s identity is verified.
The financial sector is required to develop its own Know Your Customer program but as the Anti Money Laundering legislation can vary from country to country, the financial sector must develop KYC according to the country’s AML standards.
KYC in Banking
KYC or “Know Your Customer”, is a standard due diligence procedure that any financial or other businesses use to authenticate a client’s identity and analyze the risk profiles if any. The e-KYC solution is a great choice to verify that the individual is actually who they say they are.
Clients must give credentials that establish their real identity as part of the KYC compliance. ID cards, facial features, documents, or biometrics, are all examples of verification credentials. Utility bills are just an example of valid proof of address documents.
KYC is a crucial step in identifying a customer’s risk and ability to meet the institution’s standards for using its services. Anti-Money Laundering (AML) legislation is also a legal obligation. Financial organizations must guarantee that their customers are not involved in any illegal activities.
Why Perform KYC
KYC compliance is a legal requirement for financial organizations to validate the identity of a client and check risk indicators. Whether it is identity theft, money laundering, or other financial crimes can all be avoided through KYC measures. Noncompliance can result in severe consequences.
To combat money laundering, KYC standards were implemented in the 1990s. As part of the Patriot Act, the United States enacted tighter KYC laws in the aftermath of the 9/11 attacks. These improvements had been planned before 9/11, but again the terror acts provided the impetus for them to be implemented.
Financial institutions must comply with two things under Title III of the Patriot Act to meet the increased KYC compliance: the CIP and CDD. KYC verification is used to counteract identity theft and financial fraud.
- Identity Theft: Know Your Customer is a great bet to check the identity of a customer. Identity verification helps prevent identity theft that could arise from stolen or forged documents.
- Financial Fraud: Know Your Customer is a great solution to avoid fraudulent activities whether it is terrorism financing, money laundering, or any other financial fraud.
Who Needs KYC
Know your Customer is the requirement of any financial institution during customer onboarding or opening and maintaining the account of a client. Standard KYC protocols are applied when any customer is onboarded or when the customer acquires a regulated service or a product. Here are the financial institutions that require to follow KYC compliance:
- Credit unions
- Banks
- Broker dealers and wealth management firms
- Private lenders as well as lending platforms
- Fintech applications depend on the activities they are engaged in.
Any business that interacts with money, requires to stay KYC compliant strictly. The banks need digital KYC solutions to avoid fraud, they pass down this requirement to other institutions as well with whom they are dealing or doing business.
What Triggers KYC
Know Your Customer can be triggered by:
- Unusual transactions
- Change in the nature of the customer’s business
- Change in the occupation of the customer
- Addition of any new parties in the account
For instance, due to due diligence, the bank may ask the client for huge transactions, international transactions, or any interaction with off-shore financial companies. If they are found to be high-risk profiles, they are asked for more details about those transactions and are monitored periodically.
To wrap up, KYC services are essential for clients as well as financial sectors. KYC compliance with a risk-based approach can help the financial institution to avoid fraud and improve customer experience.
