When financial organizations need to onboard someone new, whether a customer or a partner entity, it is mandatory for them to perform Know Your Customer (KYC) checks. These checks come with two benefits: (i) Identifies fake customers who have the only intention to harm (ii) Preventing the company from financial crime and complying with Anti Money Laundering (AML) obligations that are set by regulatory watchdogs. On the contrary, if bad actors become successful in establishing business relations by using doctored IDs and or other sophisticated deceitful ways, the corporation is at significant risk.
These illicit figures will then launder money using the business platform to carry out further heinous crimes such as drug and human trafficking, and terrorism financing. Recommendations by the Financial Action Task Force – the global financial watchdog – lists guidelines to prevent such activities and direct businesses to incorporate KYC due diligence in their customer onboarding procedures.
KYC Verification – What Does it Mean?
KYC or Know Your Customer verification is the process in which a business’ customers are identifying and verifying. This is essential to make sure they do not have a criminal background and are legitimate end-users. In the process, original government-base user documents are submitting by the customer. From which identity information is extracting and screen for verification. Some of these documents are passports, a national ID. A driver’s license, or any other official ID with the user’s photo on it. The KYC process incorporates a Customer Identification Program also known as the CIP that collects essential information on the user’s end to initiate the verification procedure.
The Significance of Complying with KYC Standards
When we talk about financial businesses, there exist some regulatory responsibilities which they must fulfill. One important obligation is KYC compliance that is applicable not only to banks and companies operating by a central banking authority but also to Non-banking Financial Institutions (NBFIs), Virtual Assets Service Providers (VASPs), and insurance firms that are part of the financial market. These entities are required to either create an in-house KYC/AML compliance program or hire a KYC service provider that does the job for them. Below are listed some requirements for KYC compliance:
- Develop a Customer Identification Program to acquire user details
- Carry out customer verification using their genuine IDs
- Maintain risk profiles of customers through a risk assessment approach
- Ensure in-house compliance of AML/KYC obligations
KYC Due Diligence – Three Stages of Scrutiny
Business entities that are KYC-compliant take significant measures to perform due diligence of customers. Often called KYC due diligence, it is use to understand and determine the amount of risk a certain customer poses to a business. Which is essential to plan for further verification and screening of the customer.
Simplified Due Diligence (SDD)
When the customer is particularly someone with low risk, Simplified Due Diligence is the way to go. These KYC checks can work without conducting a comprehensive screening of the customer through AML background checks.
Customer Due Diligence (CDD)
Customer Due Diligence is based on a set of standard practices that is using to verify the user. These types of customers are usually categorizing as either medium or low risk. That determines the type of due diligence requirements they need to fulfill. CDD requirements vary with changes in jurisdictions.
Enhanced Due Diligence (EDD)
This type of KYC due diligence is case-specific. These are usually done for a customer who is either a Politically Exposed Person, associate with an international organization. Enhanced Due Diligence incorporates AML screening checks that look for possible criminal and political background against the customer. EDD checks also include ongoing monitoring of the customers which means that each time they perform large transactions. The details are checking against financial crime parameters.
Digital KYC is the Road to Glory
Today, businesses are on the verge of financial crime every day. A digital KYC solution allows organizations to automate the KYC process by providing them with robust tools needed for verification. This way, they can breeze through user onboarding keeping intact compliance regulations. Automated KYC software comes with the utility of document verification and facial recognition that makes the customer identification.