Anti-money laundering regulations apply to more than only the financial services sector. Businesses now need to follow certain regulatory guidelines to prevent money laundering. The term “Know Your Customer’s Customer,” or KYCC was just coined to describe such standards. Due to the rising laws and regulations being issued by international regulatory authorities, banks and other enterprises will now need to implement comprehensive Know Your Customer’s Customer safeguards.
Understanding, validating, and researching the traits and interests of your customer’s clientele is known as “knowing your customer’s customer” (KYCC). It’s seen as a step toward building a more comprehensive risk profile for your clients and an additional compliance level.
Throughout the world, firms and financial institutions are being hit with hefty fines and penalties for failing to adopt robust compliance measures. Know Your Customer’s Customer, or KYCC also complies with these laws and guidelines. Most nations currently have laws requiring firms to accurately identify their clients. Additionally, they mandate that a bank confirm the legitimacy of its customers’ actions and rule out any possibility of money laundering.
How does KYCC help in Achieving Compliance?
Due to the complexity of financial transactions and the swift advancement of technology, maintaining and monitoring the financial system is challenging. Additionally, keeping track of one’s customers independently may be difficult. Moreover, financial regulators no longer tolerate corruption or tax cheating. Faster digital verification technologies from the financial services sector are therefore required to speed up the process. The data needed to verify a customer can be acquired via KYC documents. According to a recent Nasdaq study, KYC will be the standard by 2025
By utilizing KYCC, businesses can improve the security of their compliance measures. It enables banks to confirm the legitimacy of all parties involved in their company, including their customers. Every country is strengthening its regulations against money laundering, therefore banks and other businesses are being obliged to validate the legitimacy of their customers’ operations more often.
Moreover, the benefits of KYCC go beyond simply adhering to compliance standards. It enables financial institutions to manage external risks and build sufficient barriers to money laundering and other criminal activities. In the absence of such compliance processes, a firm may risk suffering grave ramifications. When fraud or financial crimes are found in a company’s operations due to noncompliance, severe penalties, sanctions, and even the loss of the company’s reputation may follow.
Beneficial ownership requirements around the world
Brief details on customer due diligence (CDD) in other nations and continents are provided below:
United States
The Customer Due Diligence (CDD) Final Rule became fully effective in the United States on May 11, 2018; The regulation has three essential elements in particular:
(1) identifying and verifying the identities of the beneficial owners of companies opening accounts;
(2) comprehending the nature and intent of customer relationships to develop customer risk profiles; and
(3) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, maintain and update customer information.
Europe
On June 26, 2017, the fourth AML directive went into force in Europe. It includes new beneficial ownership activities. According to the Commission, “Understanding beneficial ownership of corporations is at the heart of financial crime risk reduction and prevention methods for regulated companies.”
Canada
On June 17, 2017, Canada’s new money laundering and terrorist financing regulations (PCMLTFA) went into force or became obligatory. Some adjustments include updating customer ID requirements, identifying particular customer information requirements, and bridging the AML and CTF gap (counter-terrorist financing). The following are some of the current factors that reporting companies should take into account: “Any new developments with respect to, or the impact of new technology on, their clients, business relationships, product or delivery channels, or geographic location of their activities”; as well as any risks resulting from the actions of the Canadian affiliated financial entities.
United Kingdom
- In accordance with AMLD6, UBO registries must be made publicly accessible in order to limit the transparency of information about ultimate beneficial owners and lower the risk of financial crime.
- AML screening for Person with Significant Controls (PSC) is required by regulation.
- According to AMLD6, if UBOs cannot be recognized, enterprises are required to confirm the senior-most entity within the organization and keep records of all transactions.
- Before establishing UBO relationships, customer due diligence procedures must be followed and genuine proof must be acquired.
Elements required to run an effective KYC program
A three-step KYC process is conventional and outlined in many countries’ regulations, while the specific implementation procedure is left to the financial institution. These three steps—often referred to as the “three elements of KYC”—include:
- Customer Due Diligence (CDD)
- Customer Identification Program (CIP)
- Ongoing Monitoring
Customer Due Diligence (CDD)
Establishing the customer’s identity is the initial stage in KYC procedures. Any customer, both individual and corporate, must have their identity validated as a result of this.
Identification information must be gathered and validated for each person engaged (including the named beneficial owners for corporate customers). There is room for financial institutions to use the records that are most suitable for their clients and that can be confirmed. Generally, this will comprise:
- Name, address, and date of birth
- Identity number issued by the government
- Other official identification documents (such as a passport or driving license)
A business license, articles of incorporation, partnership agreements, or financial statements are further proof documents for corporate customers. Financial institutions must also determine the ownership structure of the business and pinpoint the Ultimate Beneficial Owners (UBOs).
The proper gathering and utilization of this data is another CIP criterion. Institutions ought to be able to quickly and accurately check it. All staff members involved should follow well-documented procedures for doing this.
Customer Identification Program (CIP)
Customer Due Diligence (CDD) goes beyond verification by examining the customer’s level of trust in the financial institutions. The goal of CDD is to determine a customer’s risk level and degree of dependability.
CDD is an ongoing procedure, not merely done when onboarding a new customer. The risk profile and activity of a customer can change over time, hence CDD monitoring should be carried out regularly. For internal or governmental auditing requirements, complete CDD and EDD records must be retained. Therefore, it is up to individual financial institutions to decide the level of risk as appropriate.
Ongoing Monitoring
Financial institutions must have a mechanism in place for ongoing KYC checks and monitoring in addition to confirming the customer’s identification and initial degree of risk.
A shift in risk profile or additional investigation should be warranted by changes in the customer or behavior that are picked up by ongoing monitoring. Depending on the customer’s perceived risk and the institution’s goal, the intensity and frequency of monitoring will vary.
How to implement KYCC in your business
To do this, you must first establish a system for identifying clients. A bank or company may be able to guarantee that each customer is a real person with the aid of an effective customer identification program. This can be accomplished by incorporating online identity verification.
The majority of banks prefer to keep their identification procedures short. Additionally, they don’t want to manage and maintain a lot of data. Many KYCC service providers offer automated identity verifications and AML checks for businesses, including banks and financial institutions, for this very reason.
Through document verifications, which enable users to digitally scan their documents to authenticate their information, customers’ IDs are validated. In a matter of seconds, KYCC service providers’ document verification services evaluate a user’s documents and the information they contain. For this, OCR is employed.
Thanks to digital identity verification technology, banks can now choose the best solutions to meet compliance and regulatory requirements. Previously, businesses relied on laboriously slow and onerous manual or outmoded verification processes.
A company’s operations and industry are carefully analyzed by the KYB process for potential money-laundering schemes. You can use it to set rules and assess dubious behaviors or transactions. Corporate businesses can determine whether the company they work with is real or just a shell corporation listed on paperwork through KYB checks.
Importance of KYCC
Every financial institution is required to have the necessary policies and procedures in place to adhere to regulatory compliance. The following are ways how KYCC can help businesses:
- Ongoing Business Verification
Businesses that offer remediation services can help by routinely reviewing corporate client files to assess risks and make necessary changes to the infrastructure, executives, and beneficial owners of the company. Additionally, it requires ongoing AML monitoring for businesses.
- Smooth KYB Onboarding
Using AI-based KYCC solutions, financial institutions can profit from optimizing their company onboarding processes. By accelerating and streamlining the onboarding process for firms, these technologies may reduce overall onboarding expenditures.
- Frictionless API Integration
Businesses can use an API-integrated KYCC solution to access the data gathered from numerous reliable sources by simply providing the required information. The hassle associated with onboarding and managing corporate clients is eliminated by this API interface.
- Access to Global Business Registries
The compliance procedure is made easier by some KYCC solutions that make it straightforward to get current corporate data for business verification through international business registers.
- Remote Identification
Today, businesses are looking for automated, remote, and affordable software to carry out the necessary business regulatory inspections. Solutions for KYCC verification are designed to cut down on needless time and money spent on compliance.
Epilogue
KYCC is beginning to supplant recommendations and move toward the status quo. Businesses are expected to learn more about the clients they work with and conduct new levels of investigation and inquiry. A client’s name, surname, and photo are no longer feasible for onboarding.
High-end technology is evidently the only answer to this issue. With its advanced algorithms, Hyperverge provides a suite of solutions that can guarantee security and tranquility.
FAQs
Why is KYC important?
By law, financial institutions must perform KYC in order to verify a customer’s identification and pinpoint risk concerns. KYC procedures aid in preventing financial crimes such as identity theft, money laundering, financial fraud, financing of terrorism, and others.
What are the 3 components of KYC?
Identification document verification, face verification, document verification using utility bills, driver’s licenses, and passports as proof of address, and biometric verification are all part of the KYC process.
What is the difference between KYB and KYC?
The Know Your Customer (KYC) process, which is the most well-known and commonly used, and the Know Your Business (KYB) process are not that dissimilar. The distinction rests in the process’ intentionality and focus, with the first being on locating businesses and suppliers while the second being on identifying clients or customers.
What is CDD and CIP?
A KYC procedure entails implementing a Customer Identification Program (CIP) and practicing customer due diligence (CDD).
