Know Your Employee (KYE) Explained

You should know your customers, but what about your employees? We dive into the process of Know Your Employee (KYE), pinpointing the key challenges of identifying individuals and specific background checks that are vital before the hiring and onboarding stage.

Building a trusted, motivating work environment isn’t an easy task. For managers, that means finding the right people who can contribute to the success of the whole organization. Questions regarding an employee’s potential contributions to the organization, optimal departmental fit, and strengths are crucial factors. But this isn’t enough to actually assess your employees. 

Assessing whether an employee poses any potential threat to the company is essential. That’s why a robust Know Your Employee (KYE) process is a huge part of the company’s corporate security system. It involves verifying the identity and background of potential employees through different KYE measures, which we’re going to discuss in more detail. 

What is Know Your Employee (KYE)?

Know Your Employee (KYE) is a process designed for businesses to verify the identities and backgrounds of current staff and potential hires. It involves the procedures a company employs during hiring, onboarding, and throughout an employee’s tenure to verify their identity and ensure accuracy in their claims. 

A proper KYE process includes:

  • Acquiring accurate employee information
  • Verifying documents and credentials
  • Conducting background checks
  • Updating employee records
  • Communicating with employees
  • Implementing additional security measures

KYE’s goal is to confirm the authenticity of employees and mitigate risks associated with past criminal activities. This process also helps to ensure the person’s suitability for their role within the organization. While KYE is a legal requirement for regulated entities, such as financial institutions, its advantages extend to other industries. 

For example, KYE can help the company build better relationships with its staff. This includes aligning different roles with precise personal strengths and creating an overall comfortable work environment in order to boost employee satisfaction while minimizing the risk of misconduct.

A graphical depiction of the Know Your Employee (KYE) process, illustrating the steps necessary for maintaining compliance.

Know Your Employee is similar to other security protocols, such as Know Your Customer (KYC) or Know Your Business (KYB), which are both vital steps in the company’s Anti-Money Laundering (AML) program and efforts to prevent fraud or financial crime.

When is KYE Used?

Companies use the KYE measures during the hiring process to verify employee identities, qualifications, and backgrounds, including personal information. However, this isn’t the only scenario where Know Your Employee might be beneficial for a company. 

Use cases of when KYE is implemented include:

  • At the time of conducting audits and collecting documentation. Record-keeping is essential for the company to manage data collected from the KYE checks properly. By systematically recording these processes, organizations demonstrate their commitment to KYE compliance, ensuring their preparation for internal and external audits. 
  • During the employee’s first onboarding stage. Companies use KYE to detect discrepancies between the information provided by the employee during their onboarding and the data they submitted during their KYC check, which is vital for both compliance and ensuring trust in the organization. The company can decide how it wants to conduct the initial ID verification check, as it all depends on the operating industry and risk tolerance. 
  • As part of the company’s continuous fraud detection system. KYE processes should be part of the company’s continuous approach to identify and prevent fraud. This includes internal employee scams, such as skimming, where employees take extra money from a deposit or fail to register a sale on purpose. Monitoring transactions or conducting reverification in high-risk scenarios, for example, if the employee’s credentials were compromised, are essential in KYE compliance.

For these use cases in particular, employing an AI-powered identity verification software can streamline various aspects of the KYE process, including collecting and verifying employee data, conducting background checks or verifying their ID documents. 

Why is it Important to Implement KYE?

When new hires are onboarded, they automatically gain access to various information and systems, including internal information, such as trade secrets or financial data. Implementing the KYE process is important because it helps gather necessary information about the potential risks an employee may bring to the company.

Without KYE, there is a higher chance of employees abusing their privileges or sharing information with unauthorized third parties. Know Your Employee means that businesses can find out potential risks that the person can pose before hiring them. 

For example, finding out if they: 

  • Used false information in their resume, such as education or work history.
  • Used stolen data to commit fraud, such as someone else’s TIN or SSN.
  • Had a criminal record that makes them an unacceptable candidate for certain roles.

KYE is particularly useful to uncover if the potential employee isn’t involved in money laundering. Inadequate KYE procedures and precautions can lead to employee fraud and money laundering, resulting in substantial losses for the business. 

What are the Key Steps of KYE?

To ensure a safe onboarding process for employees, companies should include the following steps in their KYE process:

  • Verification. This means verifying the identity of the person and collecting essential data, such as their full name, date of birth, address, and SSN. Certain methods, such as document verification or biometric verification help automate the process. To complete the background check, compiling additional details, such as their references or work history is essential. 
  • Authorization. This stage consists of authenticating and confirming that the person has submitted valid documentation for employment and is authorized to work in a certain country. The employee should have a valid passport, driver’s license, or social security card. In the meantime, the company is responsible for ensuring that the documents aren’t forged.
  • Additional checks. This step involves verifying that the employee possesses the required qualifications for the job, confirming their professional background through certification documents. Additional checks on criminal, employment, and credit history can be beneficial as well to better evaluate if the employee is suitable for the organization in terms of their job responsibilities and performance objectives.

Companies usually implement KYE measures before making a job offer. However, a more comprehensive KYE approach should mirror the principle of ongoing monitoring in AML compliance rather than being a one-time event. That means the KYE process needs to assess an employee’s risk throughout their entire employment cycle.

The Meaning of KYE in AML Compliance

Financial institutions are legally mandated to adopt AML processes to ensure compliance and prevent illegal activity on their platforms. In this context, a key element for AML is the Know Your Employee process. Using the same principle, KYE helps companies identify potential risks posed by employees who are involved in the company’s decision-making processes or even financial transactions. 

A visual representation of KYE in terms of its relation to AML compliance,  highlighting the significance of both processes.

An AML compliance program is a system full of AML-related measures that assist financial companies, and other entities regulated by the government, such as money services businesses (MSBs) or insurance companies, in identifying suspicious activities related to crimes like money laundering. 

KYE Process Examples for Anti-Money Laundering

As part of their anti-money laundering compliance program, companies use several KYE procedures, including:

  • Ensuring qualifications. Businesses should verify that employees meet role prerequisites by requesting official documents. Conducting reference checks is part of the KYE process and helps verify the employee’s information while gaining insights into their work ethic, reliability, and interpersonal skills observed by past colleagues. 
  • Implementing security measures. Companies should restrict employee access to relevant information, monitor activity, and communicate security expectations. Such internal security protocols are critical for safeguarding the company’s operations and reputation.
  • Fostering manager-employee relationships. Organizations should maintain regular communication to discuss responsibilities, work environment or career goal, reducing misconduct risk. This part of KYE compliance helps build a culture of trust with a balanced, respected environment in the organization.

To have a robust AML program means that the company must implement a risk-based approach — another crucial element requiring institutions to tailor processes according to their unique risk profile. Similarly, to conduct a thorough AML risk assessment within the KYE process, companies should evaluate the risk of employees engaging in money laundering.

The Main Benefits of Integrating Know Your Employee

Policies and procedures like Know Your Employee not only help companies in complying with AML laws but also establish the organization’s culture of trust, setting a positive note on showing that security is one of the company’s top priorities. 

A data-driven graph showing the key benefits that a robust and compliant KYE process brings to a company.

That said, some of the most important Know Your Employee benefits consist of:

  • Improved workplace culture. With proper background checks and security practices like KYE, companies can retain their top talent more easily, produce better business outcomes, and keep their employees engaged. 
  • Reduced employee fraud. By verifying identities, screening transactions, and using other KYE measures, companies can limit the chances for employees to exploit the companies for their own fraudulent purposes, such as stealing assets or physical property. 
  • Minimized chances of corporate losses. Fraudulent employees pose challenges in terms of putting them in danger of risking market value and reputation. Onboarding a person who’s impersonating others or accepting forged documents can lead to non-compliance with KYE, which can automatically result in legal expenses, revenue loss, and overall harm to the company’s financial health. 
  • Streamlined, user-friendly onboarding. One of the best things about KYE is that by using RegTech solutions and automated KYC software, companies can build a fully remote employee onboarding process, enabling remote hiring. This flexibility enables employees to work remotely, allowing companies to gather necessary data digitally for assessing employee risk.

So, it’s safe to say that trusted identities among your company mean verifying all parties — clients, employees, business partners, etc. 

At iDenfy, we can help you customize your KYE process through both individual and corporate identity verification checks, as well as other fraud prevention tools, such as Address Verification or AML Screening

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