Know Your Customer (or Know Your Client) identification is one of the first and most important components of the ongoing fight against financial crime and money laundering. Global anti-money laundering (AML) and countering financing of terrorism (CFT) directives have placed tremendous pressure on financial institutions to follow stringent verification and onboarding processes in their organizations.
Know Your Customer (KYC) refers to the need for businesses to understand who their customers are as well as the financial activities they are involved with. There are also consequences if businesses fail to implement the correct procedures for customer identification and record maintenance. In 2021, the HMRC issued fines totaling more than £23-million to businesses who ignored or failed to adequately comply with AML regulations, including neglecting to conduct proper risk assessments, controls and customer due diligence measures like KYC.
What Is KYC?
Know Your Customer or KYC refers to the measures businesses must put in place to verify the identities of customers before as well as during their relationship. Most banking, credit and insurance companies require that customers provide accurate and detailed personal information used to establish their identities. This information is also used by companies to determine the compliance risk assessments required by their organization and ensure that customers are not involved in financial crimes (such as money laundering or corruption) or have been placed on sanctions lists.
KYC policies not only protect the economy and the industry at large from harmful money laundering practices but protects financial institutions from compliance penalties, reputational damage and potential criminal liability that may occur as a result of financial crime.
The KYC Process
KYC usually forms part of a larger and more robust AML framework within a financial institution and may involve the following steps:
KYC starts with basic information about customers, including names, addresses, dates of birth, identification numbers and, in some instances, biometrics. The institution must verify the identity of the customer within a reasonable time.
Once data is collected, companies may start the verification process by comparing customer information to depositories of information such as:
- Global sanctions and watch lists
- Politically Exposed Persons (PEP) lists
- Criminal registries of participants involved in bribery and corruption
- Lists of high-risk jurisdictions
Once the information has been collected, a risk assessment can be done to determine the likelihood of an individual becoming involved in financial crime. This assessment will assist banks with evaluating and monitoring their account activity to detect transactions that seem unusual or suspicious. Customers that present a higher risk may be subject to more intensive evaluation and monitoring measures.
Most institutions take a risk-based approach to KYC, depending on the types of accounts offered by the business, the types of identifying information available, the company’s size, location and customer base, as well as the type of products and services used by customers.
A Brief Explanation of Corporate KYC
It’s worth mentioning that just as individual customers and accounts require identification and monitoring, corporate accounts are also subject to KYC procedures. The requirements are slightly different, including monitoring transaction volumes and amounts. These are sometimes called Know Your Business (KYB).
The process is slightly different, and steps may include:
- Collecting and verifying company information, including register numbers, company name, address, key management personnel and other data points.
- Analyzing ownership structure and percentages to determine which entities or natural persons have a direct or indirect ownership stake in the organization or may benefit from transactions.
- Identifying UBOs (Ultimate Beneficial Owners) and calculating management controls and total ownership stakes of any natural person involved in the transaction.
- Performing AML/KYC checks on individuals and entities involved.
Innovation In KYC
KYC compliance requires time and resources. The growing number of companies doing business offshore and from multiple locations has led to an increasing number of global transactions, which in turn led to increasingly complex and stringent regulations. Manual KYC processes are no longer adequate for the task at hand, and companies may be inadvertently exposed to risk. Technological advances can bridge the gaps and reduce operational disruption considerably, including:
Automated KYC solutions are essential to the success of an AML framework. These tools accelerate the entire KYC process and automate the ongoing monitoring and screening of customers, eliminating human error and enabling much faster customer due diligence. By integrating databases (including sanction, PEP and whitelists) with algorithmic analyses, companies can reduce false-positive AML alerts and improve their remediation process considerably. As the AML/CFT risk landscape changes constantly, automated KYC tools can assist companies as they adapt to legislative or corporate policy changes, with minimal disruption and friction to customers.
Know Your User Processes
While KYC processes focus on regulatory needs, it can be challenging to apply to a tech-focused financial landscape. New fintech tools, payment methods and blockchain financial (binance) services require a different approach. Know-Your-User (KYU) processes call for enriched compliance data reflective of the new environment but with the reduced friction that digital-first companies promise their customers. This may include biometric data, such as fingerprint analysis and facial recognition technology.
As companies continually collect vast amounts of digital data from their customers, it has become impossible to analyze information and spot trends manually. Machine learning systems powered by artificial intelligence algorithms can utilize predictive analytics to determine the possible future behavior of customers, enabling businesses to refine their risk assessments. Machine learning can be used to automate ongoing transaction monitoring, quickly identifying when customers diverge from expected behaviors and accelerating false positive remediation through digital data deployments.
The Know Your Customer process is not a once-off exercise. Companies need to deploy an ongoing monitoring program that oversees customer transactions and changes in ownership or accounts to remain truly compliant. Any spikes in activity, unusual cross-border transactions or inclusion of a person or entity found on a sanctions list may trigger the need to file a Suspicious Activity Report (SAR) or to conduct an investigation into a customer. It is important for every organisation to do their due diligence, not just for the sake of their own brand and reputation but also for the financial sector at large. Fortunately, there are tools that can assist your organisation in the implementation and maintenance of a seamless, frictionless KYC process. Speak to sanctions.io about your requirements, or sign up for a free demo today.