What is KYC? Know Your Customer Compliance!

The Know Your Customer (KYC) process is essential for assessing customer risk and has become compliant with anti-money laundering (AML) laws. Effective KYC involves knowing your customers’ identities, financial activities, and the risks they pose.

Do you know your customers? If not done at the proper time and order, KYC Collection and verification on retail may make you face fines, penalties, and reputational damage if you assist in money laundering or terrorist financing. Most importantly, KYC protects organizations from fraud and losses due to illicit funds and transactions.

“KYC” covers the next step for a financial institution (or company).

Customer identification
Understanding the nature of the client’s business (the primary purpose is to ensure that the source of the client’s funds is legitimate)
Creating and running an effective KYC program requires the following elements:

1) Customer Identification Program (CIP)

How do you know if someone is who they say they are? For responsible entities such as financial institutions, this is more than a financial risk; it is a law.

The desired result is that the obliged entity accurately identifies the customer. A critical factor for a successful KYC Collection and verification on retail is risk assessment at each account’s institutional and procedural levels. Although the government provides guidance, it is up to individual agencies to determine the actual level of risk and the policies associated with that level of risk. The minimum requirements for opening a personal financial account are clearly defined in the CIP.

Name
Date of birth
approach
ID number

Although collecting this information at the time of account opening is sufficient, the institution must verify the account holder’s identity “within a reasonable period.” Identity verification procedures may involve paperless methods (including information provided by customers to consumer information agencies, publicly available databases, or other due diligence measures) or a combination.

This policy is difficult to follow, like other anti-money laundering compliance requirements. This must be clarified and codified to consistently guide employees, managers, and regulators.

The same policy will depend on your institution’s risk-based approach and may take into account the following factors:

Types of accounts offered by banks
How to open a bank account
Types of Identifying Information
The bank’s size, location, and customer base, including the products and services customers, use in different geographic areas.

2) Customer Research

One of the first analyzes of any institution for KYC Collection and verification on retail is to determine whether a prospect can be trusted. You need to make sure your leads are trustworthy. Customer due diligence (CDD) is integral to effective risk management and protecting yourself from threats from criminals, terrorists, and politically exposed persons (PEPs).

Know the identities and locations of your prospects and gain an in-depth understanding of your business activities. This can be as simple as finding proof of the customer’s name and address. When we authenticate or validate a prospect, we classify the risk categories and determine the customer type before digitally storing this information and supporting documents.

It is essential to follow the correct process to determine if an EDD is required besides the basic CDD. This process can be ongoing as existing customers may move into higher-risk categories over time. In this context, regularly checking on existing customers can be helpful. To determine whether an EDD is required, include, but are not limited to:

the person’s location
human occupation
transaction type
Anticipate activity patterns based on transaction type, dollar value, and frequency.
Expected payment method

You must monitor all CDDs and EDDs performed for each customer or prospect during regulatory audits.

3) Continuous monitoring

More than one customer review is required. You should have an ongoing customer follow-up program to benefit your clients and company.

Other factors to look for depending on the client and risk mitigation strategy include:

peak activity
Unusual extraterritorial or cross-border activity
Adding people to the sanctioned list
Negative media warns

If account activity is deemed unusual, you may be required to submit a Suspicious Activity Report (SAR). Regularly evaluating your account and associated risks is also considered good practice.