KYC Compliance: Preventing Money Laundering & Terrorist Financing

KYC stands for Know Your Customer. KYC compliance is used in the financial sector to prevent fraud,  identity theft, account takeovers, money laundering, and terrorist financing. Kyc is mandatory to use in banks and other economic sectors to verify the identity of customers during the onboarding process. KYC compliance is used in banks for the following purposes: 

  • To verify the customer’s identity 
  • To monitor and keep records of customer behavior, transaction history
  • To assess the risk associated with the customer

Why is KYC Important in Banks?

KYC is important in banks and other financial sectors. If a bank inaccurately verifies a customer and the customer goes on to commit fraud or any other illegal act, it will be considered a bank’s failure. So here, KYC compliance comes into the picture. After onboarding the customer, KYC compliance provides monitoring of transactions and accounts to ensure that the customer is not involved in illicit activities and that transactions are legal. KYC compliance allows banks and other financial sectors to comply with anti-money laundering (AML) regulations to prevent fraud, terrorist financing, and money laundering.

KYC Compliance 

To comply with KYC compliance, customer IDs should be verified, transactions monitored, records kept, and risk factors assessed. To fulfil the criteria, the following three steps must be applied:

Customer Identification Program (CIP)

Before an account is set up, the customer’s identity should be verified to prevent future losses. For this purpose, the customers provide their information, such as:

  • Name 
  • Date of birth 
  • Address 

After that, the bank asks the customer to provide a government-issued document like a license, passport, etc, The document will then be verified against government databases to confirm the ID of the person and the details provided by the customer. Sometimes, banks can ask customers to provide their selfies to check if the person who provided the information is physically present. These steps verify and establish the customer’s identity.

Customer due diligence (CDD)

Customer due diligence is the second most crucial step in KYC compliance. The customer’s due diligence process can be standard or enhanced. It can be chosen depending on the customer’s risk level, for instance, enhanced due diligence is used for high-risk customers. In customer due diligence, banks need to know and verify the customer’s identity, source of income, and location. By verifying the information, banks can keep a record of it. And from this information, banks and other financial sectors can verify the risk associated with the customers. The records of customer due diligence (CDD) and enhanced due diligence (EDD) are essential parts of KYC compliance. Banks can onboard the customer or reject the application by assessing the risk level.

Ongoing Monitoring 

KYC regulation is a part of the onboarding process, but to ensure AML compliance, a complete record should be maintained by monitoring throughout the process. Monitoring transactions and other customer activities helps assess and update customer risk profiles. If any suspicious activity or unusual behavior is found, it will be reported to the relevant authorities.

Who Needs KYC Compliance?

Any financial sector, directly or indirectly, deals with customers while opening and maintaining an account and needs KYC compliance. KYC compliance applies when a new customer is onboarded, or an existing customer has access to products and services.

Financial sectors that must comply with KYC regulations are 

  • Banks 
  • Credit unions 
  • Human resource that
  • Health care 
  • Educational departments 
  • Lenders 
  • Investment firms
  • Insurance companies 

 A KYC system improves customer experience while limiting fraud, money laundering, and other criminal activities by assuring regulatory compliance.

What’s the Difference Between AML and KYC?

Anti-money laundering (AML) is a framework of rules and regulations to prevent money laundering or other financial crimes. While KYC is an extension of AML used by financial institutions to verify customers’ identities and keep track of their transactions and activities, 

KYC compliance allows financial institutions to comply with anti-money laundering (AML) regulations. Regulatory authorities make KYC regulations themselves according to the requirements. At the same time, anti-money laundering (AML) regulations vary by jurisdiction or country.

Conclusion 

The KYC process verifies a customer’s identity and assesses risk factors associated with a customer profile. All financial institutions or banks must comply with KYC compliance to prevent terrorist financing, money laundering, or other financial crimes.

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