Know Your Customer (short for KYC) is a process to verify clients during onboarding or at any time while conducting business activities with financial firms. Regulatory authorities have made KYC verification obligatory for the sectors to keep terrorism funding, money laundering, and other criminal schemes at bay. By validating users during account opening or conducting greater transactions, financial firms can detect dubious activities more accurately.
The financial sector is under greater observation whether it follows KYC regulations or not. They have two options; invest in verification solutions or pay hefty fines due to non-compliance with KYC AML regulations. These laws apply almost to every firm that engages with the financial sector either to carry out transactions or to create an account.
What Does Know Your Customer Mean?
KYC is a due diligence process that is used by banks or financial firms to analyze the client’s risk and validate their identities. The procedure ensures that the individual is the one who they say they are.
Know your customer checklist requires a user to provide their verification credentials which include biometrics, ID card issued by the government, or other documents as proof of evidence. For the proof of residence, sectors usually accept utility bills from the respective client.
KYC verification is a must thing to do for all the sectors to check the client’s risk so that they could be given access to the company’s resources or declined. It is also binding to adhere to KYC/AML regulations. Financial firms are required to keep track of their clients that they are not involved in dubious activities while availing their resources.
Components of KYC Due Diligence
Each individual has the potential to harm the company and there are three components of KYC according to the risk level associated with any client. For example, an individual who make fewer transactions needs simplified due diligence when compare to the one who is on the PEPs, sanction or any of the global wanted lists.
- Customer Due Diligence: It is performed on clients that are not categorized into medium or high-risk profiles. Customer Due Diligence (short for CDD) does not basically require an in-depth screening of the individual.
- Standard Due Diligence: It is conducted to verify low-risk profiles such as public authorities. As each country has its own set of rules and regulations, so it depends on the country when to perform standard due diligence of the clients.
- Enhanced Due Diligence: It is performed on the clients that are classified as high risk by the KYC risk rating system. EDD is also conducted on the UBOs and stakeholders to ensure that they are not on any of the PEPs, global sanction, and wanted lists. Besides this, enhance due diligence is also performed to analyze the nature of any firm and the objective behind bigger transactions. Due diligence is a great bet to keep firms safe and sound by conducting additional verifications.
Who Needs KYC Online Verification?
For financial firms that deal with consumers, during the opening and maintenance of accounts, KYC is necessary. Typical client KYC verification protocols are often followed when a company onboards a new customer or when an existing client gets a regulated product.
KYC compliance online must be followed by the following financial firms:
- Credit unions and banks
- Wealth management firms
- Finance tech applications, based on the activities they are engaged in
- Private lenders as well as the lending platforms
Regulations governing Know Your Customer (KYC) have grown more important for practically any organization that deals with money. Although banks are obligated to adhere to KYC in order to prevent fraud, they simultaneously pass that responsibility on to the firms with which they deal.
Regulations governing KYC have great implications for both clients as well as financial organizations. To deal with a new customer, a financial firm is required to comply with KYC regulations. These guidelines were established to combat financial crimes including terrorism funding, money laundering, and other forms of illegal activities carried out to exploit the firm and gain malicious purposes.
Money laundering and other financial crimes such as terrorist funding frequently use anonymously created accounts. The greater focus on KYC regulations has resulted in reporting more and more dubious transactions. A risk-based strategy applied to KYC verification could reduce the likelihood of criminal activity and enhance customer satisfaction. Thus, KYC is a great choice for all businesses to enhance their security services while following KYC compliance in a proper way.