Financial crime is a trillion-dollar industry that affects the most vulnerable and marginalized among us. Criminal actors are constantly on the lookout for ways to exploit loopholes in the system to launder dirty money and use it to fund their illicit activities. That’s why the pressure is on legitimate financial institutions to find effective and innovative ways to prevent money laundering, financial fraud, terrorist financing, and other financial crimes from occurring. One of the most important components of any anti-money laundering process is KYC, or Know Your Customer.
What is KYC?
Financial institutions have the responsibility of making sure that the money flowing through their business is not being used for illegal wrongdoing. KYC or Know Your Customer is a set of regulations that financial entities use to verify the identities of their clients and ascertain any fraud risks that they may pose if any. It is built upon the premise that knowing your customers by verifying their identity, assessing their potential risks, and reviewing their financial activities can help financial institutions from unwittingly becoming accessories to bribery, fraud, money laundering, terrorist financing, and other financial crimes. In many countries, KYC processes and other enhanced due diligence measures are mandated by regulators and covered by legislation to help governments flag suspicious activity and mitigate the aforementioned illicit activities.
How Does KYC work?
KYC compliance is initiated when a customer begins a business relationship with a financial institution. Here’s how it works:
Customer Identification
During the customer identification stage, the customer must submit certain requirements to the financial institution so that the latter can form a reasonable belief that they are who they say they are. This happens during the customer onboarding process.
Minimum requirements to open an individual financial account can vary from organization to organization. Generally speaking, these include personally identifiable information such as the client’s full name, date of birth, address, and identification number.
In addition to reviewing the identifying documents submitted by the customer, the financial institution may also refer to non-documentary methods such as comparing information provided by the client to public databases and consumer reporting agencies to further verify their identity.
Customer Due Diligence
Customer due diligence is crucial to any Anti-Money Laundering (AML) and Know Your Customer initiative. Simply put, it is the process of performing background checks on prospective customers to verify their identity and ensure that they are not on any prohibited lists. This protects the financial institution’s business ecosystem from criminals, terrorists, politically exposed persons (PEPs), and other individuals who may present additional risks before they can be onboarded.
Risk Scoring
Some financial institutions that make use of advanced Know Your Customer platforms may integrate risk scoring as part of their KYC process. Risk scoring modules allow financial institutions to foresee the risk that the prospective client would pose to their business once they are onboarded as a customer. This technology makes use of globally accepted risk models, although the financial institution may deploy their own parameters or use a risk model that has been customized for their purposes.
Continuous Monitoring
Another feature of some advanced KYC platforms is the ability to continuously monitor customer accounts for any changes made to their profile. Monitoring may be triggered by an alert or an event set by the financial institution, such as a suspicious transaction, or it may deploy periodically on a schedule. Re-review may also be activated by any changes made to the risk score or rule value of the customer. This allows for a 360-degree view of the client throughout the duration of their business relationship with the institution.
How Do Customers Benefit from KYC?
The KYC process is clearly very important to financial institutions who need them to stay compliant with laws and regulatory bodies, protect themselves from liability, and maintain their reputation. However, as guidelines become more stringent and complex, AML processes including KYC can quickly become a hindrance during onboarding. Customers nowadays expect speedy and convenient interactions. They may abandon their attempts at signing up for financial services if the process is onerous or takes up too much of their valuable time.
By adopting new anti-fraud and anti-money laundering platforms that incorporate KYC, efforts to digitize compliance can go a long way towards easing bottlenecks during the onboarding process. In addition to making transactions faster and smoother for services like credit approval and cash flow management, these platforms can automate the process of detecting and responding to financial crime with real-time monitoring, analytics, artificial intelligence, and machine learning. This immediately benefits customers and minimizes criminal activities that directly affect them from occurring, such as identity theft, fraud, and money laundering, among others.
Using data to your advantage to combat financial crime can be one of the best decisions that you can make for your financial institution. Going digital with your anti-money laundering efforts allows you to get to know your customers better, detect and act against illicit activities early, and reduce the time and effort expended by investigators, allowing you to focus on only the riskiest cases.
