It’s time to Revolutionize KYC in this Digital Age
What is KYC and Why is it important?
Know Your Customer (also known as know your client or KYC) involves the set of processes used by organisations to assess various risks prior to and throughout any business relationship with a customer.
These risks can range from internal business management risks right through to regulatory risks for which firms need to demonstrate they have measures in place. Robust KYC processes can help a firm effectively identify and assess risks such as credit-worthiness and product suitability for example — is this customer likely to be able to repay the money we lend them and is this product right for them — helping to ensure that firms manage their business operational risks.
KYC is also a crucial part of ensuring that firms fulfil their wider regulatory obligations in areas such as anti-money laundering and countering terrorism financing..
Despite the increasing emphasis on KYC in many industries, some companies may still fail to realize the importance of KYC processes and that KYC is a mandatory requirement for the identification and verification of clients’ information. Moreover, governments and regulatory authorities around the world are tightening controls and imposing tougher enforcement measures for those who fail to comply with local regulations. With high profile terrorist attacks and corruption scandals hitting the headlines across the globe, it seems highly likely that regulatory scrutiny in these areas is increasingly a fact of life for many businesses.
This rapidly evolving regulatory landscape can make it difficult for companies to keep up and comply with new and increasingly complex KYC requirements.
How does KYC work?
It’s fair to say that for many firms, KYC is viewed as a repetitive and tedious administrative process, that is resource-intensive and detracts from day-to-day business operations. For many firms, KYC processes are still highly manual with significant headcount requirements, incurring costs and labour constraints when these resources could be better deployed on more high value compliance tasks.
For the client, this means time and effort spent in filling out a number of forms, physically dispatching them, along with their personal documents and waiting to be granted access to the services they require. Meanwhile, businesses expense a substantial amount of manpower to verify the clients’ submissions and at the same time incur extra costs related to the creation, preservation and destruction of paper-based records.
This can be a minefield for many companies as they try to balance their KYC requirements with increasingly stringent and punitive data protection regulations, such as 2017’s introduction of General Data Protection Regulation (GDPR) in Europe. For firms not able to evidence that they are collecting and storing personal data of their clients properly, the fines can be as much as €20 million or 4% of turnover. This is another powerful reason why firms can no longer afford to skimp on how they handle their clients’ information.
Fortunately help is at hand in the shape of automated e-KYC solutions. Put simply, they allow prospective or existing clients to upload their personal information and identification documents into a secure system. , This information is then screened against international databases to identify potential high risk clients such as politically exposed persons (PEP), those under sanctions, or suspected of terrorist links or under suspicious of fraudulent activities.
Once screened, the e-KYC solution generates a risk score on the individual or corporation which allows businesses or companies to focus their efforts and resources on evaluating those deemed to be a higher risk. This not only creates significant business efficiencies but also streamlines the onboarding process, enhancing the overall client experience. All this information is securely stored in the provider’s system, including the processes of evaluation and the decisions made by the company — providing an efficient and effective audit trail which helps simplify firms’ regulatory submissions.
KYC in the age of digital assets
The changing regulatory landscape is being particularly felt in the burgeoning world of digital assets. Evolution of digital technology is already having a significant impact on the financial industry and this has not escaped the attention of regulators. Indeed, the Financial Action Task Force (FATF)’s announcement in October 2018 that it is to publish revised guidance for virtual assets by June 2019 helps to set a level playing field for regulators around the globe with a set of high level principles and guidance for virtual asset regulation.
The announcement clearly signalled FATF’s commitment to ensuring those involved in so-called “wild west” of virtual assets are not immune to global anti-money laundering (AML) and countering terrorism funding (CTF) standards and to cracking down on the “shopping around” for friendly regulatory environments by virtual asset providers.
It is a welcome move for anyone interested in seeing the virtual assets industry flourish globally and for regulatory inclusion to be a part of that.
What’s important now is to help organizations across the ecosystem to figure out how these principles will translate into specific regulations and what measures will need to be put in place as a result.
The pseudo-anonymous nature of digital assets and current lack of coherent regulation create compliance challenges. A privacy preserving yet compliant solution is needed and this is where organisations like Cynopsis Solutions and traceto.io are leading the way in attempting to address that challenge with e-KYC solutions.
e-KYC and its advantages
There is an opportunity to adopt a smarter approach to KYC by leveraging decentralized digital technology (also known as blockchain technology), thus making the whole process:
- Paperless — Previously mandatory paperwork would be significantly cut down with the emergence of eKYC. Procedures would be streamlined and online, preserving not just the environment but time and resources as well.
- Consent based — Access upon third party requests is only granted with consent from the original owner of this information. This addresses privacy and data security issues. Furthermore, data is protected by a private key and stored in its encrypted form.
- Instantaneous — eKYC allows real-time access to and storage of information.
- Immutable — All executed transactions are recorded on a digital ledger, making them immutable, providing an enduring audit trail for regulatory checks.
- Regulatory friendly — eKYC records are transparent and can be accessed and audited by the regulators.
An automated KYC solution can help companies to easily and efficiently comply with their regulatory obligations and manage business risk. . By adhering to an effective KYC service, it would help create a secure and trustworthy environment to enable businesses to operate ahead of regulations and compliance with the rules.
ABOUT TRACETO.IO
traceto.io is a decentralised Know Your Customer (KYC) network that provides an inclusive KYC solution to cryptocurrency and blockchain product companies by fusing Smart Contract and Artificial Intelligence technologies. Leveraging on over 5 decades of experience in Compliance and RegTech, traceto.io’s vision is to bridge the gap between the real and virtual world KYC processes.
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