As we move deeper towards digitization in the financial world, customer authenticity has become a significant factor. This is the reason verifying customer identity through KYC (Know Your Customer) has become vital. 

KYC compliance helps banks understand their clients better, lower financial risk and help reduce the possibilities of fraud, and enhance customer relationships. Moreover, KYC also allows institutions to comprehend customers’ financial activities and ensure the legitimacy of the transactions.

In this article, we are going to take an in-depth look at the KYC process and explore the steps of successful KYC verification, as well as the fundamental parts of KYC compliance.

What Is KYC?

The term KYC, also called “Know Your Customer,” refers to the procedure of confirming a customer’s identity. This process ensures customers provide accurate personally identifiable information (PII) and helps banks better understand customers’ previous financial behavior with other institutions or monetary service providers.

This verification procedure aids in preventing the services of the financial institution from being utilized for identity theft, money laundering, or the funding of criminal enterprises. Furthermore, KYC ensures businesses are compliant and that clients with questionable financial histories are not permitted to open accounts at banks or other financial institutions.

What Is KYC Compliance?

When a person applies to open an account, a bank’s system does a KYC inquiry. Customers must confirm their identification through this verification procedure to have a seamless transaction process.

The consumer must present specific verification documents that attest to their identity and financial standing as part of this process. By identifying any potential danger of financial crimes, this identity verification method helps banks and other financial institutions take the required action in accordance with the risk profile.

Checklist For KYC Verification

The KYC verification procedures help financial institutions weed out forgeries of all kinds, including fake ID cards and utility paperwork. Every bank and financial institution has a different customer verification process; some call for the physical submission of documents, while others demand online identity verification. As a result, the identity verification documents vary across geographies.

A successful KYC verification checklist is comprised of the following three parts:

• Customer identification program (CIP)
• Customer due diligence (CDD)
• Ongoing transaction monitoring

1. CIP (Customer Identification Program)

The FATF (Financial Action Task Force) has approved the most recent KYC compliance, making a CIP necessary for all banks and financial organizations to implement against their customers. This tool aids these financial institutions in identifying their clients and in keeping track of their financial transactions. 

The customer identification program generally occurs during customer onboarding for businesses and individuals. FATF has given the go-ahead to conduct CIPs. However, it is up to the banks and other financial institutions to choose the amount of verification and the types of proof documents they would need from their clients.

Section 326 of the USA PATRIOT Act recommends the following for CIP procedure:

• A written document of the program.
• Identifying information such as customer name, address, and date of birth.
• Identity verification processes.
• Recordkeeping.

2. CDD (Customer Due Diligence)

All clients are required to present compulsory details to financial institutions, known as “customer due diligence.” It is done to undertake a financial activity analysis that specifies additional potential risks associated with the clients. Based on the customer’s risk profile, there are three types of Customer Due Diligence framework: simplified (for low-risk clients), standard (for medium-risk customers), and enhanced (for high-risk clients).

Customer Due Diligence Final Rule asks financial institutes to set up and maintain policies which will entertain the following:

• Verify and identify customer credentials.
• Identify the profitable proprietors of a new company.
• Create a client risk profile depending on the business.
• Carry out monitoring to track and report dubious transactions.
• Executed customer risk assessments and updated their information regularly.

3. Continuous Customer Monitoring 

This kind of monitoring continues tracking a customer’s financial records until the customer’s account is suspended. The financial establishment may monitor any sudden boost in offshore transactions by continuously monitoring the customer account. They can also keep a tab on credits into the account by unidentified parties and hasty withdrawals of large sums.

Continuous Customer Monitoring policy must include the following:

• Put in place a standardized system to spot financial risks constantly.
• Maintain a high scrutiny level even when high-risk customers are operating legally.
• Monitor unusual transactions either from or to the customer’s account.

Various KYC Verification Types:

• In-Person KYC: This type of verification requires a person to submit identity documents physically to a bank or financial institution. The organization may also ask for signatures to complete the in-person KYC process.
• Electronic KYC: When a person submits their identity data online, and the financial organizations authenticate them digitally, it is called the electronic KYC procedure.
  This process is usually much faster and more convenient for both parties. In some cases, electronic KYC includes a video authentication where the customer has to face the camera through which the organization captures facial images of the person.

Final Words

Most financial institutions are on the verge of taking their services online, and the importance of KYC procedures has become apparent in such circumstances.

Successfully sailing through KYC processes improves the relationship between customers and financial institutions and prevents fraud. In addition, it will lead to better economic development for everyone.