Technological innovation has helped companies worldwide to grow, but it has also enabled fraudsters to commit Money Laundering (ML) and terrorism financing. According to United Nations statistics, the global GDP has around 2%-5% of funds that are laundered annually. This has perplexed lawmakers, and legislators want to introduce stringent regulations to discourage monetary fraud worldwide. Financial institutions must follow the latest KYC compliance to discourage bad actors from exploiting the mainstream system. This will not only streamline the onboarding process but also ensure a positive experience for new customers. The following sections highlight the importance of implementing KYC compliance for financial firms around the globe.
KYC Process: A Summary
Know your customer solutions are a part of Customer Due Diligence (CDD) systems which urge financial businesses to validate user identities. This is important to calculate risk associated with the profiles of onboarding customers and discourage high-risk entities.
Financial firms must verify identity for new customers during the onboarding process to comply with KYC & AML regulatory obligations. Know your customer solution has various phases that change according to the risk associated with the consumers’ profile. The basic KYC process validates clients’ full names, ages, addresses, and other data for in-depth identity verification. The name of know your customer service changes according to its purpose, such as Know Your Merchant (KYM), KYB & Know Your Employee (KYE). In this scenario, KYC is still widely used around the world.
Bank Secrecy Act (BSA) & KYC in Financial Industry
Know your customer services became prevalent in financial firms when the USA introduced BSA in 1970. The purpose was to discourage drug trafficking by monitoring financial exchanges. In 2001, BSA also established AML regulations to deter money laundering worldwide.
Using KYC Compliance Program
Performing know your customer solutions is not a one-time activity but an ongoing process. This is important for comprehensive identity validation of user credentials. The first step is to develop a Customer Identification Program (CIP). The next phase is to calculate risk and generate a score. In the case of low-risk entities, executing basic KYC is sufficient, but in the scenario of high-risk parties, enhanced KYC plays an important role. The following sections go into more detail regarding CIP & CDD systems.
Customer Identification Program (CIP)
CIP is the first phase in following KYC compliance systems. This is about following the requirements from global regulatory bodies that apply to the concerned businesses. CIP protocols are consistent around the world.
For instance, in the USA, CIP demands that experts must validate all financial exchanges through comprehensive ID verification of the user making the transaction.
CIP systems stress the risk assessment of financial firms’ client and business accounts. After this, the system generates a risk score for all the onboarding clients. In this light, KYC solutions play an important role in risk mitigation. This plays a critical role as the firms can either perform CDD or Enhanced Due Diligence (EDD). In other words, the CIP system gathers user data and verifies it in real time. After completion, the consumer receives a risk score, and professionals can easily decide about CDD/EDD regimes depending on the rating.
Customer Due Diligence (CDD)
CDD is the procedure of examining user data according to KYC compliance. In this second phase, the system gathers basic user data, which is as follows:
- Full name
- Date of Birth (DoB)
The information as mentioned above plays a vital role in identity verification of customer data. The consumer receives a risk score according to the credentials. The rating depends upon the following factors:
- Financial Credibility
- AML screening of the user
In case the user is present on PEP or other lists, the customer profile has high risk. In this case, experts must perform enhanced due diligence to fight the threat.
Enhanced Due Diligence (EDD)
In the context of high-risk clients, financial firms & other businesses must follow stringent measures according to the KYC & AML protocols. This is known as executing enhanced due diligence. It performs an in-depth examination of user identity, monetary status and income. EDD procedure gathers the following data from user documents:
- Consumer’s job
- Monetary exchange patterns
- Abnormal transactions
The system collects the above information according to the know your customer & anti-money laundering checks. Hence, the importance of following KYC compliance measures cannot be neglected.
When financial businesses follow KYC compliance, experts can streamline the onboarding process to attract genuine clients worldwide. Fortunately, the innovative service can integrate easily with websites & online portals. After the completion of API integration, the KYC procedure begins. The state-of-the-art solution validates the credentials of existing customers as well as new clients.
Professionals can team up with a verified vendor to follow KYC compliance programs. In this light, businesses can perform ID authentications in real-time and offer a better onboarding experience for consumers.