Starting from the end of the 20th century, the Know Your Customer KYC compliance concept was first introduced in South Africa. In the early 2000s, technological advancements in the world had a significant effect on KYC compliance procedures. Widespread use of the internet and the COVID-19 pandemic resulted in the digital revolution that transformed the business world. People started preferring online transactions instead of paying physical visits. That opened the door for fraudsters to use the technology for the performance of their illegal activities. KYC compliance with the use of sophisticated data analysis tools and techniques helps organizations combat fraud, forgeries, and other criminal activities. This blog will explore the key featured questions about KYC compliance.
FAQ# 1 What is KYC Compliance?
KYC compliance is a set of procedures that are performed by all businesses before starting a transaction with their customers. This is essential for the execution of the customer due diligence program. Being an obligatory regulation for all financial and non-financial organizations, KYC compliance is beneficial for businesses to streamline their operations and enhance customer behavior.
FAQ# 2 How Does the KYC Compliance Process Work?
The KYC compliance process identifies the customers of a business and verifies their identities according to the regulatory requirements. The following main steps are included in the whole process.
- Data Collection
Firstly, customers are asked to provide some basic information about themselves. This information contains the name, address, date of birth, and identity card number of the user. This data is saved at the back end for verification purposes.
- Identity Documents submission
Customers are guided to submit a range of documents for the verification of their identities. These documents may include Identity cards, passports, driving licenses or other educational or legal documents depending on the nature of the business.
- Document Verification
Submitted documents are examined for their authenticity confirmation according to KYC compliance standards. Different checks are applied to detect any forged, photoshopped or illegal documents.
- Identity Verification
Data provided by the customers is cross-checked with the data extracted from the verified documents. Biometric and video checks are also applied to verify the identity of customers
- Risk Assessment
The provided information is compared with the lists provided by government and law enforcement agencies to identify the individuals suspected of identity theft, corruption, or other illegal activities. Politically exposed persons (PEP) and other high-risk profiles are marked red flags and are recommended for enhanced due diligence.
- Ongoing Monitoring
Customer profiles are monitored for anti-money laundering (AML) regulations regularly. Any changes in the customer profile, transaction pattern or behavior is monitored continuously.
FAQ# 3 How Important Is KYC Compliance For Banks?
KYC compliance is mandatory for all banks and financial institutions that deal with high-value transactions. KYC checks work as a security shield for banks against identity theft, fraud, money laundering, and other criminal activities. This process ensures that the financial activities run interference by banks are legitimate and secure. As KYC requirements are legal for banks and financial institutions, non-compliance with KYC regulations can lead to severe penalties or fines. This process is not only integral for new customer onboarding but also for the entire duration of the customer-bank relationship. The frequency of KYC checks depends upon the risk factor associated with the customer profile. The KYC compliance process can be divided into the following three major steps.
- Framing o PreRequisites
A prerequisite criteria is used to define an ideal customer profile, and sufficient information is collected about the prospective customer.
- Identification And Customer Due Diligence
This step involves the verification of identity through the authentication of documents and biometric technologies. Risk factors associated with prospective customers are analyzed and high-risk profiles are identified.
- Ongoing Monitoring
Periodic checks are performed to inform the risk status of a customer’s profile by monitoring transactional activities.
FAQ# 4 What Does KYC AML Compliance Mean?
KYC compliance works under the recommendations of the Financial Action Task Force (FATF), which is enforced by the Anti-Money Laundering Directives (AMLD). These recommendations provide a foundation or structure for countries to fight against money laundering and terrorism financing.
Hence, KYC compliance is a process that is a part of AML regulations that requires businesses to verify the identities of their customers to avoid any financial or reputational loss.
FAQ# 5 What are KYC Compliance Laws?
Compliance with KYC laws is a part of AML regulations under the directions of FATF recommendations. Here are some of the KYC laws that are implemented worldwide:
- Banking Secrecy Act (BSA) of the USA
- Anti-money laundering Act (AMLA) of France
- The Money Laundering Act – 2017 (MLA) of UK
KYC compliance is vital for all financial and non-financial institutions to oblige the regulations provided by AML and counter-terrorism funding(CTF) laws. It helps organizations to identify and verify their customers not only on the onboarding time but throughout their relationship span, regularly. Being a part of AML compliance, it protects organizations against identity theft, fraud, and other illegal activities. It also helps banks and other financial institutions to evaluate and monitor the risks that are associated with their prospective customers.