KYC (know your customer/client) is a way of identifying and verifying the customer before participating in any kind of business endeavor. KYC compliance is a requirement of law to fight crimes in financial institutions as illegal financial activities are increasing at a tremendous rate. According to the Office of Drugs and Crime in UNO, the total amount of laundered money is equivalent to 2-5% of the total GDP of the world, annually. This is why global regulatory bodies are growing restless in implementing stringent KYC compliance to cease criminal ventures.
History of KYC
Although businesses in the financial sector have been carrying out the KYC process for a long time, ever since the evolution in technology and increase in e-commerce and fintech, the need for KYC regulatory laws have risen. KYC regulations are not only a requirement for financial institutions but must also be implemented by various businesses.
The system of KYC started in 1970 when the US passed the Bank Secrecy Act (BSA). This act stated that all the businesses and financial institutions are required to identify all their customers by collecting their personal information and verifying it. This act emerged due to the increase in drug trafficking and money laundering through Columbia in the USA. The regulations for AML were developed on the basis of BSA in 2001 and implemented in 2003.
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The main global regulatory bodies that oversee the KYC and AML compliance and give nations recommendations for improvement are:
- FATF(Financial Action Task Force)- USA regulatory body
- FinCEN(Financial Crime enforcement)- USA regulatory body
- FINTRAC(Financial Transactions and Report Analysis Center)- Canadian regulatory body
- Europol- European union regulatory body
- FINMA- Swiss regulatory body
What is KYC Compliance Process
Carrying out KYC compliances is a lengthy process that is done in over different steps. However, there are automated KYC solutions available to verify the person’s identity and perform AML software through AI software. This process includes gathering personal information of the client and to monitor the risks attached to the customer. Here are the steps of carrying out KYC compliances:
- CIP (Customer Identification Program)
This step works according to the regulatory requirement that applies according to the mode of your business or type of industry. CIP requirement is the same in almost all the regions. The basic requirement for this regulation is to go through an in-depth verification process of all the people making any financial transactions.
This step also includes a risk assessment of the people or businesses that are dealing with financial institutes. First, financial institutions or businesses are required to define their ability to accept a certain level of risky profile. Then they are asked to allocate a risk rating to all their clients. This helps to create risk brackets and highlight the risk factors related to the clients falling under the curtain bracket.
- CDD (Customer Due Diligence)
This process includes collecting personal information of the client to carry out KYC screening for identity verification. Personal information of the client can be gathered through either a manual process or a real-time process. Following is the information gathered for due diligence of the customer:
- Date of birth, etc.
The client is assigned a risk rating after the verification process. If it is found that the client is related to any money laundering or fraudulent activity then enhanced due diligence is carried out as the risk is high.
- EDD (Enhanced Due Diligence)
These are more stringent KYC and AML screening for the high-risk profile. This requires a detailed investigation of the person’s identity, financial assets, and income. It also collects information like the occupation, business of the customer, location, or transactions.
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