KYC’s full form is Know Your Customer. Keeping global perspective in mind, elements of KYC include establishing the customer’s identity, understanding the customer’s occupation to verify sources of funds, and evaluating associated money laundering risks. The authorities across the globe have mandated all banks, financial institutions, and other organizations to authenticate the identity and address of their customers.
KYC check is mandatory to access financial instruments, and it’s a periodical process. The three steps of a KYC compliance framework comprise customer identification, customer due diligence (CDD), and enhanced due diligence (EDD).
Importance of KYC
The idea behind KYC regulations is to prevent criminal networks from using banks for their money-laundering schemes. Additionally, it gives banks the knowledge they need to better serve their clients and manage their risks by getting to know them and their financial operations. Background checks on consumers are crucial since the banking sector has a high risk of financial fraud and money laundering. This can significantly reduce potential fraud.
Furthermore, it streamlines the onboarding process, which makes it simpler to monitor customer behaviour based on their risk profile, and helps decrease the risk associated with money laundering.
What are the KYC documents required for customer verification?
KYC verification across the world requires access to one of these government-issued identity documents containing updated addresses:
- a valid passport,
- a valid driving license,
- a voter’s card,
- and customer data accessed from CKYC, Centralized KYC database
What is Customer Due Diligence in the KYC process?
Customer Due Diligence (CDD) means carrying out background checks and other assessments to mitigate risk before onboarding. Banks, financial institutions, and other organizations must implement CDD measures when new business relationships, irregular transactions, and inadequate documentation.
Optimizing KYC-related activities and extraneous follow-up with customers would save time on customer-sourcing channels. Customers get a seamless and light-touch KYC onboarding experience, with an in-app flow enabling them to capture self-picture and upload KYC documents.
How does KYC optimize the banking process?
The extant KYC and Anti-money Laundering (AML) systems of the banking industry, financial services, e-commerce, and cryptocurrency are insufficient to precisely identify legitimate activities from legitimate transactions. Criminals can access the financial system by creating a complex chain of accounts and transfers, making it difficult to trace the ultimate beneficiary of funds.
AML vs. KYC
AML program attempts to prevent money launderings like suspected transactions, criminals becoming customers, and terror financing. KYC means customer identification and evaluation and ensuring they understand associated risks with onboarding. Meticulous compliance with KYC helps prevent money laundering and fraud.
Regulator necessitates banks and FIs to investigate every alert generated by the AML system, which is a challenging task. With the advancement of technology, FinTech has opened up new possibilities to combat money laundering.
Four popular eKYC models used around the world are:
- The UK model of enhanced vs. simplified due diligence,
- Swedish and Indian models of the digital identification process,
- the German model of video verification,
- and the Hong Kong model of identity authentication
Usage of modern technology could rationalize the KYC process. Biometric recognition optimizes prospect identification processes. The application of Artificial Intelligence could facilitate customer all processes diligently, and robotic automation of the KYC process would ensure better compliance.
The role of KYC
- Prevent fraud and spam
Digital KYC can help prevent fraud and spam by understanding the onboarding process thoroughly, collecting relevant data, using third-party identity verification services, improving authenticity checks, applying common KYC tests to prevent identity frauds, 2-factor authentication, secured payment methods, and combating against chargebacks.
- Counter-terrorist financing and money launderings using digital KYC
New technologies, innovative methods, and processes, usage of FinTech solutions; digital solutions based on artificial intelligence and machine learning, overcoming challenges due to legacy AML/CFT (counter-terrorist financing measure) systems, adoption of innovative AML/CFT technologies, and formulation of risk management policy using advanced technology could help mitigate rising threats from ML and CFT.
- Prevent Fraud in eCommerce
Trust plays a crucial role in shopping decisions on e-commerce platforms throughout the customer journey. Seamless customer verification processes help shopper engagement and simultaneously permit retailers to prevent frauds. EKYC prevents fake reviews for businesses and helps eCommerce sales via fraud management platforms like Riskified, enhanced trust, and social verification to transform the customer’s journey.
KYC for BNPL
Buy-now-pay-later (BNPL) has been gaining popularity, where first-time buyers have to complete KYC formalities on the service provider’s platform to avail of it. BNPL providers use data analytics to understand buyers’ purchase behavior and evaluate creditworthiness. These platforms track social media activity to assess buyers’ creditworthiness.
- Prevent Money Laundering in Cryptocurrency
Classification of cryptocurrency exchanges in the US as Money Service Businesses (MSBs) subjected them to fulfill KYC and AML guidelines. Many countries are in the process of formulating cryptocurrency regulations. KYC implementation would enhance customer transparency and trust, act as a tool for AML and other frauds or scams, mitigate legal risk, provide stability to the crypto market, and help establish the trail of transactions on the decentralized blockchain.
Fraudsters and criminal elements use crypto to transact funds fraudulently. The relatively anonymous nature of cryptocurrency transactions makes money laundering possible. Risks could be classified as sources of funds, suspected transactions, risks within regulated and unregulated geographies, and transaction amount and its frequency. Using blockchain technology and formulating stringent regulations helps prevent ML risk.
Improving KYC data management and collection using blockchain
Blockchain technology has the potential to provide wide-ranging, global solutions for managing consumer KYC data. Blockchain provides solutions for front-end or back-end design and engineering costs, regulatory uncertainty, data security and privacy, universally managed, a shared platform for data management, and monopoly on data & processes.
KYC/AML in Banks & Fintechs
Banks and other financial institutions need to identify their customers in order to prevent any suspicious activities from taking place. KYC is essential to the banking sector as it helps them monitor risks and prevent illegal activities such as money laundering.
Therefore, banks have the responsibility of ensuring that all KYC and AML regulations are being taken care of. Failure to comply with these laws might lead to fines and penalties.
KYC also helps reduce the risk of cybercrime for fintech companies as it establishes customer identity and therefore helps in avoiding any risks involved with potential fraudsters.
As the banking and financial services sector are at high risk of financial fraud, KYC and AML regulations thus make it easier to prevent such activities from happening.
The AML/KYC revolution brought on by AI and ML
Artificial Intelligence provides a different dimension to KYC/AML compliance. AI is a collection of technologies that can automate workflows and analyze complex data. It would provide enhanced due diligence and help identify beneficial ownership, transaction monitoring, managing dynamic regulations, and enhanced customer onboarding and document management automation.
Large customer bases in the banking industry help AI to get more insights into customer behavioral patterns. Machine learning uses algorithms to learn new information from the data it collects. Therefore, AI can predict likely frauds in the banking industry based on past criminal activities, frauds, and terror financing activities.
eKYC or video-based KYC
Video-based KYC establishes customer identity through biometric data captured from videos. It eliminates the physical presence of customers at the time of account opening. Video or eKYC would be cost-effective, convenient, prompt, and is a future-ready process. E-KYC means verifying the customer’s identity and address is done digitally.
This is a complete guide to the KYC and AML processes that banks, financial institutions, and other organizations follow. Clients get insights into manual KYC, online KYC, AMC/KYC compliance, the benefits of the KYC/AML process, the differences between AML and KYC, the use of AI, KYC in e-commerce & cryptocurrency, and video-based KYC. The processes have evolved to meet the dynamic requirements of AML/KYC compliance. The ultimate objective is to mitigate the risk of frauds, criminal activities, and terror funding activities.
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