KYC or its acronym Know Your Customer refers to the procedure of verifying the identity of the customers either before or after they start doing business with an institution, in compliance with local laws and regulatory requirements. KYC has become a vital part of customer onboarding for banks and other financial institutions in order to detect and prevent money laundering and frauds.
It is a fundamental practice to protect an organization from frauds and sanctions, and reputational damage that can be caused by illegal transactions and money laundering related to crimes such as acts of terrorism.
KYC Process and Compliance
The Know Your Customer process involves identifying and verifying the identity of a client by applying a series of controls to make sure that the person is not involved with illegal activities. While Know Your Customer procedure procedure is traditionally done in person in a commercial store, eKYC (electronic Know Your Customer) process has become quite popular to do the same remotely.
The KYC procedure has the following elements.
- Customer Due Diligence This is to make sure that your existing and potential customers are trustworthy, and don’t pose any risks to your organization. CDD or Customer Due Diligence involves ascertaining the location and identity of a customer, assessing their risk profiles as well as factoring in the type, amount and pattern of their transactions among other things.
- Customer Identification Program CIP or Customer Identification Program mandates that a person’s name, date of birth, address and identification number are the minimum requirements to open an individual financial account. The institution then needs to perform the identity verification by using various approaches such as document verification and biometric identification. The exact nature of this, however, differs based on the type of account, size and location of the institution and types of identifying info out there.
- Ongoing Monitoring Based on thresholds developed as part of a customer’s risk profile, ongoing monitoring involves monitoring customers taking different factors into account such as out of area activities and unusual spikes.
Benefits of Know Your Customer Process
When it comes to financial transactions, the KYC process comes with a bevy of benefits.
- It establishes the trustworthiness of customers by providing transparency to monetary transactions.
- It helps in protecting an institution from legal and tax related issues.
- It plays a vital role in fighting criminal activities and money laundering related to bribery and corruption.