Financial frauds are damaging the reputation and operations of any enterprise. Money laundering is becoming more widespread. Criminals are seeking novel ways to cover the illegitimate sources of their money. Legislative bodies have established Know Your Customer (KYC) procedures to prevent fraud and money laundering operations. Banking institutions use KYC procedures to verify customers before opening their accounts. Illegitimate sources mainly include bribery, corruption, drug trafficking, and smuggling. Hence Know Your Customer (KYC) verification mechanisms are rapidly adopted by businesses around the world for swift customer onboarding and restricting money laundering activities.
What is Know Your Customer (KYC) Verification?
Client KYC verification is a process used by various organizations to verify authentic end-users while eliminating the risks of false identities. End users that lack a legitimate identity make it problematic for businesses to perform due diligence checks properly. That’s the reason why various organizations are adopting client KYC verification solutions for trouble-free onboarding processes to attract prosperous end-users in return. Client KYC verification helps businesses authenticate their end user’s identities through an online verification system.
KYC Client Verification Techniques
Following are the various types of KYC verification mechanisms commonly used by organizations worldwide:
Digital Document Verification
It is used to verify the end-user’s identity by authenticating his government-issued identity documents, including ID cards, passports, or driving licenses.
Video verification is one of the most effective methods to prevent false impersonations and identity fraud during KYC verification. It encourages businesses to perform seamless and quick verification of their end-users through a live video call while reducing the time and manpower.
It is used to verify the end-user by comparing his facial image against other images to ensure authenticity. The liveness detection feature identifies the face in front of the camera to verify the authentic end-user while deterring against spoof attacks and deep fakes.
KYC Laws Around the World
KYC Compliance in the US
The Financial Crime Enforcement Network (FinCEN) has set the following provisions and policies:
- KYC inspection is compulsory for customer onboarding
- Customers should be given a risk rank
- Enhanced due diligence checks must be executed against high-risk customers.
- Non-compliance will result in heavy penalties
KYC Compliance in the UK
The UK is following the regulations of the money laundering act of 2018. According to the law:
- The UK will observe the rules of the United Nations to fulfill the requirements of national security and international policy.
- Organizations should implement due diligence measures on all corporations to establish national security and fulfill the requirements of international security standards.
KYC Compliance in the EU
The EU is observing the 6th anti-money laundering directive. Following are principles of 6AMLD:
- It is primarily focused on Regtech organizations
- The economic restrictions are elevated to five million.
- The directive has minimized the transaction limit for all states of the EU.
Advantages Of KYC Verification
KYC checks ensure the transparency of the transactions between the business and the customer. Following are the major benefits of using KYC:
- KYC builds trust among customers and businesses.
- It secures client’s sensitive information from unapproved access. It recovers the reputation of the businesses affected by data breaches or identity fraud.
- Securing the concerns of the investor at each cost.
- The primary focus of KYC is to prevent money laundering, terrorist funding, bribery, and corruption.
- Preventing the scammers to conduct fraudulent Initial Coin Offering (ICO’s) on cryptocurrency platforms.
- Manual KYC verification procedures are of high cost, integrating an automated KYC verification mechanism will reduce costs and labor required for manual verification.
- Online KYC verification is a time and cost-effective alternative against the manual verification process.
- It will help businesses to comply with the constantly changing requirements of regulatory authorities.
- KYC verification ensures quick customer onboarding.
- Automated online KYC verification ensures a seamless authentication process for customers anywhere in the world.
Elements Of KYC Process
There are three major kinds of KYC procedures that are executed as per the degree of risk associated with each entity. For instance, high-risk entities such as PEP’s require more extensive KYC inspection due to their involvement in corruption and bribery activities compared to usual customers.
Customer Due Diligence Analysis
Customer due diligence measures KYC checks are implemented during the initial phases of the customer onboarding. It evaluates the possible risks associated with each customer. The customer due diligence process doesn’t require comprehensive screening as customers are not classified into high or medium-risk profiles.
Standard Due Diligence Analysis
Standard due diligence screening is used to analyze the risks associated with businesses before establishing a relationship with them. These businesses are categorized into medium or low-risk customers. Each country has its legal requirements, highlighting when to implement a standard due diligence process.
Enhanced Due Diligence Analysis
Apart from HDD and CDD, high-risk entities are subjected to in-depth screening to analyze their involvement in bribery, corruption, or money laundering efforts. Enhanced due diligence is the main measure for businesses to prevent risks by implementing additional checks to defend their organization against money laundering efforts.