KYC Compliance

KYC, short for Know Your Customer, is a mandatory control procedure that financial institutions apply to identify and verify a client’s identity and to prevent risks to or by existing and new customers. KYC plays a key role in eliminating any risks associated with criminal activities such as bribery, corruption, fraud, money laundering, terrorist financing, or other illegal financial activities. Observing KYC Compliance with the control processes implemented in the Due Diligence checklist ensures that the business has the necessary information about the customer to open an account and that the risk level of the customer is determined.

KYC compliance is required from financial services providers such as banks, payment companies, lending companies, investment companies, money transfer companies, crypto exchanges, and insurance companies. Regulators require at-risk organizations to take a risk-based approach to avoid organized crime risks. With Know Your Customer compliance, financial institutions determine the risks they may encounter in the future with the control procedures they apply before opening a new customer account.

With the development of technology, crime techniques, and risks also change. Financial institutions are required to comply with KYC regulations and Anti-Money Laundering laws to detect and prevent crime risks developed by organized crime using technology. Mandatory entities that do not observe KYC compliance or AML compliance, in general, remain vulnerable to financial crimes and are penalized by regulatory agencies. For this reason, obliged institutions must fulfill the Know Your Customer requirements.

AML is an acronym for Anti Money Laundering. Effective AML programs help ensure that illegally gained funds do not mix into the legal financial system, and thus become legitimate. AML compliance is a requirement for regulated financial institutions such as banks and money service businesses. When AML policies, procedures, training, and technology are used effectively, the financial institution can meet its compliance requirements easily, and its operations are considered legitimate

AML is an umbrella term that refers to all of the combined efforts involved in preventing money laundering, such as monitoring all transactions for suspicious activity and preventing criminals from becoming legitimate customers. KYC refers to particular checks under the AML that financial institutions have to perform in order to verify their clients’ identities. As such, KYC compliance may help prevent other types of financial crimes such as fraud.

AML compliance will require KYC compliance during onboarding and throughout the entire customer lifecycle, regular and meticulous record keeping that can be validated by audits, monitoring of financial transactions of the customers and reporting of suspicious activities to authorities, and providing training to keep employees up to date with changing policies.

KYC compliance solutions first require identifying and verifying the identity of customers. If the customer is not an individual, but a company then this means identifying and verifying the identity of the beneficent owners of the company opening account. Second, comprehending the nature and purpose of the customer to develop risk profiles, and third, upkeeping continuous monitoring to identify and report suspicious transactions while refreshing customer identity data as necessary are also required.

CIP is an acronym for Customer Identification Program. To comply with a CIP, the institution asks the customer for identifying information while conducting its own CIP process based on its risk profile. Various institutions may require different information depending on the services provided. Individuals usually can provide proof of identities such as a driver’s license or a passport, along with proof of address. A company may need to provide certified articles of incorporation, government-issued business license, or partnership agreements. Further verifying information such as financial references, financial statements or data from a consumer reporting agency or public database might be asked from either individuals or companies. KYC compliance requires verification of this information as accurate by the institution.

CDD is an acronym for Customer Due Diligence. CDD requires institutions to conduct detailed risk assessments by examining the potential types of transactions a customer will make in order to then be able to detect anomalous behavior. The institution must also identify and verify the identity of any individual who owns 25% or more of a legal entity or controls it.

Continuous Monitoring requires the institution to monitor their client’s transactions on an ongoing basis for suspicious or unusual activity. This component usually requires a risk-driven approach, and eKYC procedures along with biometric measures quicken the necessary steps in a timely manner.