Global business expansion got assistance from technological advancement, giving criminals the means to finance terrorism and money laundering. Approximately 2% to 5% of the global GDP is said to be laundered annually, according to statistics from the UN. This has baffled policymakers, and they want to enact strict restrictions to deter financial fraud around the world. To stop dishonest actors from abusing the established system, financial institutions must adhere to the most recent “Know Your Customer” compliance. As a result, the onboarding procedure streamlines and new clients get a great experience. The inclusion of KYC compliance in practice for financial firms worldwide is highlighted in the following sections.
Know Your Customer Process – An Overview
Customer Due Diligence (CDD) systems, which demand that financial firms verify user identities, include know your customer solutions. It is crucial to specify the hazard associated with client onboarding profiles and deter high-risk businesses.
To adhere to KYC and AML regulatory requirements, financial institutions must confirm new customers’ identities during the onboarding process. Be aware that the phases of your client solution vary depending on the risk involved with the consumer’s profile.
The fundamental KYC procedure verifies clients’ full names, ages, addresses, and other information to thoroughly confirm their identities. Know Your Customer Service is also known as KYM (Know Your Merchant), KYB (Know Your Business), and KYE (Know Your Employee). In this situation, KYC is still a practice that is common everywhere.
KYC and the Bank Secrecy Act (BSA) in Financial Sector
After the USA implemented BSA in 1970, know-your-customer services became commonplace in financial organizations. The objective was to deter drug trafficking by thoroughly monitoring financial transactions. BSA also introduced AML rules in 2001 to prevent money laundering everywhere.
KYC Compliance Program Utilization
Implementing the Know Your Customer (KYC) compliance process is a continuous effort rather than a one-time task. For thorough identity validation of user credentials, this is crucial. A Customer Identification Program (CIP) is a must as the initial step. The risk calculation and score generation process come next. Basic KYC procedures are sufficient for low-risk businesses but expanded online KYC procedures are crucial for high-risk parties. More information about CIP & CDD systems is provided in the following sections.
Customer Identification Program (CIP)
The first stage of the KYC compliance system is known as CIP. It involves adhering to the rules set forth by international regulatory organizations for the firms in question. Worldwide, CIP protocols are uniform.
For instance, in the USA, CIP mandates that professionals check all financial transactions by thoroughly verifying the user’s ID.
The risk evaluation of client and business accounts at financial institutions is emphasized by CIP systems. The algorithm then generates a risk score for each client prior to their onboarding. In this regard, KYC solutions are crucial for risk reduction. This is important because the companies can either conduct CDD or Enhanced Due Diligence (EDD). To put it another way, the CIP system collects user data and instantly verifies it. Following completion, the customer gets a risk score, and experts can quickly choose CDD/EDD treatments according to the assessment.
Customer Due Diligence (CDD)
Examining user data in line with KYC compliance is the process known as CDD. The system asks for the following basic user details during this second phase:
- Full name
- Address
- Age
- Date of Birth (DoB)
The above-given data is essential for confirming the identity of consumer data. Moreover, consumers receive a risk score based on their credentials. The following variables affect the rating:
- Country
- Financial Reputation
- Screening of User’s AML
If the user is on PEP or other lists, the consumer profile considers it high risk. Professionals need to take greater caution in order to counter the hazard in this circumstance.
Enhanced Due Diligence (EDD)
Financial institutions and other organizations must adhere to strict KYC & AML rules when dealing with high-risk clientele. It does a thorough analysis of user identity, financial situation, and income. From user papers, the EDD method collects the following information:
- Consumer’s job
- Financial exchange patterns
- Abnormal transactions
- Location
In know your customer and anti-money laundering checks, the system gathers the aforementioned data. Therefore, it is crucial to adhere to KYC compliance guidelines.
Final Remarks
When financial companies adhere to KYC compliance, professionals may speed up the onboarding procedure to draw in real customers from around the world. Fortunately, the cutting-edge solution is simple to integrate with websites and online portals. The KYC process starts after completing the API integration. The cutting-edge system verifies the credentials of both new and returning customers. Professionals that want to adhere to KYC compliance solution can work with a verified vendor. In light of this, organizations may carry out ID authentications in real-time and provide customers with a better onboarding experience.
