Is your consumer a real person or a scammer attempting to open an account for nefarious purposes? This is what every business needs to find out before they onboard new prospects. The Know Your Customer process, better known as KYC is a compulsory check that businesses perform to identify and verify potential clients. This is also a regulatory obligation set forth by global watchdogs for financial institutions so that bad actors don’t get the better of them. KYC verification plays an important role in spotting criminal figures by screening them against sanction lists based on the level of risk they possess.
In the absence of KYC checks, identity thieves can link unlawful relationships to businesses and exploit them to launder money, which can lead to additional financial crimes. Hence, KYC compliance is a must for financial organizations that have a regular influx of money on a daily basis such as banks and insurance firms.
KYC Compliance – Whom Does it Apply to?
KYC compliance is necessary to ensure proper implementation of safe customer onboarding procedures and Anti Money Laundering (AML) obligations. When we talk about banks, KYC is one thing that cannot be neglected. Doing so can leave the banking entity in non-compliance costs as well as negative media attention. Therefore, it is essential that every banking entity performs customer identification and due diligence procedures that make KYC compliance easy to fulfill.
All businesses in the financial sector, whether they are governed by a central banking body or not, are directed to perform KYC verification of their potential clients. Some of these entities not regulated by a state bank are:
- Non-banking financial companies (NBFCs)
- Insurance corporations
- Credit unions and crypto exchange platforms
- Firms that issue loans and mortgages
- Payment platforms and service providers
Because all these entities are part of the legal financial sector, they are required to follow KYC compliance rules and regulations.
Pillars of Know Your Customer
Before a bank or financial institution creates KYC compliance policies and procedures, they take into consideration state-of-the-art due diligence rules published by regulatory bodies. This helps in assessing the total amount of risk a specific customer represents towards the corporate entity. A risk-based approach helps in meeting AML compliance as well as conforming to KYC laws.
A Policy for Accepting Customers
A customer acceptance policy is usually a set of rules that banks define to admit new prospects to their organization. This policy is built in the light of AML and CFT (Countering the Financing of Terrorism) criteria. So that no fraudster is able to establish ties with legal banking entities. Some KYC due diligence requirements for the policy are stated below:
- Clients bearing a pseudo name or impersonating as someone else are not allowed to open accounts
- Before an end-user or entity is granted access to business services, the ultimate beneficial owners must be properly identified and verified
- In case the customer is a high-risk individual or entity, enhanced due diligence and background checks are necessary. In order to screen them against any possible fraudulent suspicion.
Assessing the Possible Risk
Before customers actually open accounts with a business, they must undergo some kind of risk assessment that is a mandatory part of the Know Your Customer verification. The in-house AML program a financial entity runs must be based on customer identification policies that conform with global regulations. Laws like the UK Proceeds of Crime Act and the Patriot Act of the US. These are state guidelines for businesses to follow during customer onboarding procedures. The risk rating given to a certain customer defines the type of screening that must be performed on the end-user.
Enhanced Due Diligence
Enhanced due diligence is the most important part for an organization for any kind of suspicious activity. Due to advanced technology, it is quite difficult for every company to maintain a record of each individual manually. Criminals continuously trying to find new ways for identity theft as well. This needs to be controlled for a business as soon as possible. Enhanced Due Diligence compliance assists many financial sectors very smartly, as well as efficiently.
