In an increasingly global economy and the world going more digital every day, financial institutions and even their customers are becoming more and more vulnerable to fraudulent activities. As a way to eradicate the problem, KYC procedures have been introduced.
KYC standards were designed to protect financial institutions and their customers against illegal actions such as fraud, corruption, or money laundering.
What is KYC?
KYC stands for “Know Your Customer” and this term refers to a number of necessary actions that are needed to be taken when a customer is entering a bank, exchange, or any other financial institution.
It’s a way for an organization to ensure their customers are real, assess, and monitor risks and prevent illegal or fraudulent money from entering the economy.
These are mandatory steps both a customer and an organization have to take.
How does it work?
KYC includes several client-onboarding processes, including:
- Customer Acceptance Policy.
Providing the mandatory information such as the institution policies, terms, and conditions. - Customer Identification.
This means obtaining and verifying the customer identity information. - Risk Assessment and Management.
Assessing the risk a customer poses to the bank or financial institution. - Record Keeping and Monitoring.
It involves monitoring the transactions on an ongoing basis and looking for signs of any criminal activity.
What are the requirements?
The two mandatory requirements are proof of identity with a photo and proof of address. These are required so that the institution could establish the customer’s identity.
To prove your identity, you can provide your driving license, PAN card, University Identity card, or any other legal document with your personal information and a picture.
For proof of address, any documents with an address and the name are commonly accepted — a passport, electricity bill, credit card statement, and many others.
Why is it important?
While KYC is mandated by law for any financial institution to authorize the legitimacy of a customer’s identity and identify any risk factors, KYC procedures are beneficial because they prevent many illicit activities and keep the customers safe. KYC helps prevent:
- Identity Theft.
KYC is used to establish the legitimacy of a customer’s identity. This way many fraudulent activities are prevented — fake accounts, identity thefts from stolen or forged identity documents. - Money Laundering.
Many criminal sectors, including narcotics, smuggling, human trafficking, and many others, use fake accounts to spread out and store funds to avoid suspicion. - Financial Fraud.
KYC has been designed to prevent any financial fraud, such as applying for a loan by using fake or stolen IDs or scamming people for money.
Is it safe?
It’s natural to be wondering how the delicate and personal information you’ve entered into the system is protected. Institutions take many precautions so that your information would be safe. First of all, the information is safely kept in one server, meaning it doesn’t travel between servers. Also, all of the data you’ve entered is encrypted and stored in a separate storage space created just for your information.
What happens if I don’t go through KYC?
If you decided not to go through the KYC procedures, you would still be able to create an account but that is it.
Your account would have restrictions until you would verify your identity, meaning you couldn’t make any transactions.
It is a mandatory process for any law-compliant financial organization. Beware — if a crypto exchange doesn’t require KYC, it might be involved in fraudulent activities.
Although mandatory by law, KYC is designed to prevent any fraudulent activities within financial organizations. And while KYC might seem just like additional and unnecessary steps that are wasting your time, the procedures are here to make your financial experience as smooth and safe as possible.
