KYC: The Process and How it works

What is KYC?
Know Your Customer or KYC is a vital customer identification tool that companies and financial institutions use during the customer onboarding process. Since its inception, KYC has become a significant tool to fight financial crimes and cyberattacks. Countering the financing of terrorism (CFT) and anti-money laundering (AML) define and constantly update their guidelines to fight financial crimes.
Financial institutions must follow these guidelines to prevent fraud attacks, safeguard customer data, and avoid penalties. These institutions use KYC as a measure to meet those guidelines. KYC is a process where institutions verify a customer’s identity using their identity documents.
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What is KYC?

Know Your Customer involves running background checks when a customer signs up for the onboarding process. It is a risk assessment procedure that businesses conduct to verify a client’s identity and meet regulatory compliance.

There is a corporate KYC as well that is an extension of standard KYC policies. Companies use corporate KYC to verify businesses during the deal signing. Like standard KYC, corporate KYC helps identify fake companies, and it acts as a shield against terrorist financing and money laundering. Sometimes, businesses also refer to corporate KYC as KYB (Know Your Business).

The importance of KYC

For companies

Financial institutions or companies create their KYC procedures that contain all the vital actions to verify their clients. On top of it, KYC helps banks assess, monitor, and resolve any risks. Once a business can verify that their customer is genuinely who they claim to be, they can prevent a cyberattack. It also helps them prevent terrorist funding, money laundering, or any other illegal financial racket.

Generally, a KYC process involves ID, facial, document, and biometric verification. All banks must fulfill anti-money laundering and KYC regulations as the KYC compliance responsibility rests with them. The KYC process also helps companies avoid financial penalties that regulators impose as well as reputational damage. Since the financial sector is always at risk of financial frauds, crimes, and attacks, background checks help mitigate fraudulent activities.

For clients

For clients and customers, trust is a vital part of doing business with someone. When banks and businesses conduct a thorough KYC process, it assures the customers that banks value security and safety. The purpose of the KYC process is to protect sensitive customer data, funds, etc., from a cyberattack. The KYC process is a sort of quality-assurance about the respective bank for the client that their funds and personal information are safe.

Also, by providing the necessary document for KYC, a client helps the bank or a company ascertain that they are who they claim to be. This way, the bank can clear the onboarding process and serve the client faster. It means there is less delay in getting loans or finances or opening an account.

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What is KYC Process?

For banks and companies to conduct a proper KYC process, they need two primary components:

Customer Identification Program (CIP)

The initial KYC process involves acquiring and verifying a customer’s Personally Identifiable Information (PII). This initial phase is known as the Customer Identification Program (CIP). CIP is aimed at limiting corruption, terrorist funding, money laundering, and other illegal activities. Improper or incorrect ID verification can lead to serious issues; hence, CIP is vital for a thorough KYC process.

But since there are no concrete KYC guidelines, there is no single CIP process that every financial institution can use. The CIP gives general instructions, but the companies need to decide which PII they would ask according to their policy.

Companies generally ask their clients for PII that include:

Once the client provides these details, they might have to produce official documents like Driver’s License, ID card, Passport, etc.

Customer Due Diligence (CDD)

Banks and companies must determine if they trust a probable client. Customer Due Diligence (CDD) plays a crucial part in risk management and safeguarding the bank against potential attacks.

There are three levels of CDD where each level is designed to handle clients based on their risk levels.

Simplified Due Diligence (SDD)

Financial institutions use SDD for clients with low risks of potential terrorist funding or money laundering and no need for full CDD.

Basic Customer Due Diligence (CDD)

Banks use it for covering basic details required for customer identification and verification.

Enhanced Due Diligence (EDD)

EDD is specifically used for higher-risk clients. It involves obtaining additional information. The banks then use this information to understand the client’s fund activity and prepare for any risk.

KYC Regulations Around the World

Australia

The Australian government formed the Australian Transaction Reports and Analysis Centre (AUSTRAC) in 1989 to monitor all the country’s financial transactions. The center also directs client identification requirements in Australia.

Canada 

Canada established its Financial Transaction and Reports Analysis Centre of Canada (FINTRAC) in 200 as its financial intelligence unit. In June 2016, the unit updated its regulations to ascertain individual client’s identities and ensuring AML and KYC regulations compliance. 

India

In 2002, the Reserve Bank of India introduced its KYC guidelines for the country.

Italy

The Banca d’Italia set the KYC requirements in 2007. It explained the requirements that all financial institutions operating in the Italian territory must follow.

United Kingdom

The Financial Conduct Authority (FCA) demarcated the Money Laundering Regulations 2017 to govern the KYC regulations in the UK.

United States of America

The Secretary of the Treasury had to finalize KYC regulations before October 26, 2002, in line with the USA Patriot Act of 2001. It made KYC compulsory for all US banks. All the processes that followed the regulations must satisfy a customer identification program.

European Union

The EU has two anti-money laundering directives that govern the union’s KYC regulations. They published their Fifth Anti-Money Laundering Directive (5AMLD) on July 9, 2018, and came into effect on January 10, 2020. On the other hand, the union published the draft for 6AMLD in late 2018 and will come into effect in June 2021.

How iDenfy can simplify the KYC Process

Understanding KYC is one thing but complying with these regulations is another task. There are too many complicated terms with open grounds for manipulations. But iDenfy can help you simplify the KYC process.

iDenfy has designed highly accurate AI-based identification tools that can help you conduct electronic KYC (KYC) and online identification. With iDenfy, banks can devise their KYC process and conduct the time-consuming PII gathering process, customer identification, and verification within minutes.

Equipped with highly-advanced machine learning and artificial intelligence, iDenfy can verify a customer’s ID documents using available public data online like residential papers, bills, etc. iDenfy keeps learning while collecting essential data points that eventually helps the tool itself to perform better.

Several companies worldwide have used iDenfy and its ID verification services to run their KYC process and reach complete compliance.

Verify customers identity within 15 seconds. Schedule a free identity verification demo here.

💡Key facts

  • In 2017 alone there were 16.7 million victims of identity fraud, a record high that followed a previous record the year before, according to 2018 Identity Fraud: Fraud Enters a New Era of Complexity from Javelin Strategy & Research.
  • Complex identity fraud schemes have been on rising, making it more difficult to manage and prevent. 2017 alone accounted for $16,8 bln. loss due to fraudulently identity cases.
  • Online fraud risk has reached unprecedented volumes causing real challenges for digital growth.
 
This post was updated on March 22, 2021, to reflect the latest insights.