What is KYC and why is it importantWhat is KYC and why is it important
#KYC#Law#Fintech#Regulations
28.11.2023, 12:20

What is KYC (Know Your Customer) and why is it important?

One of the concerns for companies in the financial industry is the consequences of unknowingly becoming involved in financial crimes by conducting business with people involved in illegal activity. This blog post delves into the basics of KYC, why it is important for businesses (especially those in regulated industries), its key components, and how you can integrate it into your onboarding process.

What is KYC?

KYC (Know Your Customer) is a process that involves the identification and verification of customers. Organizations use KYC processes to protect themselves from interacting with clients engaged in illegal activities. Although it is commonly used by businesses offering investment and financial services, such as banks, it is also important in sectors frequently targeted by fraudsters, such as legal services or gaming operators. Simply speaking, KYC is the practice of verifying that your customer is who they claim to be.

What is the difference between AML and KYC?

Although the terms and KYC and AML are closely related they do not mean the same thing. AML (Anti-money laundering) refers to the set of procedures taken by regulated entities to prevent financial criminal activity. KYC is one of those measures and (along with other procedures) is a part of the overall AML process.

Why is KYC important?

KYC isn't just about confirming customer identity; it's a tool for businesses to lower the chances of getting tangled up in money laundering or criminal activities. According to UNODC, 2-5% of the global GDP is the estimated amount of money laundered each year, highlighting the scale of the issue. Beyond that, incorporating KYC also shields you from reputational harm - being diligent with KYC checks enhances trustworthiness in the eyes of potential customers.

When to carry out KYC checks?

Performing the KYC process is essential, particularly during customer onboarding, and it's advisable to repeat these checks regularly to uphold security. Achieving KYC compliance involves following the appropriate procedures for your company, which can vary depending on your industry. It's also a good practice to document your KYC and AML policies and procedures. What makes up the KYC process? The primary steps involve customer identification, customer due diligence, and continuous monitoring, which we will go over below.

KYC Components

Customer Identification Program

This process is used during the account setup or onboarding to confirm the authenticity of an individual's identity. It includes collecting personal details like name, date of birth, address, and identification number through official documents such as a government-issued ID, driver’s license, or passport.

Customer Due Diligence Program

Customer Due Diligence (CDD) is a more thorough examination of the customer profile which aims to gain insights into their objectives, and financial behavior. This process involves gathering data from various sources to understand the nature of clients' activities and assess the likelihood of exposing the organization to risks. The outcome of this assessment helps to determine the necessary level of monitoring.

Enhanced Customer Due Diligence

In certain instances, Enhanced Due Diligence (EDD) might be required for customers deemed at a heightened risk of engaging in money laundering or fraudulent behavior.

Continuous Monitoring

Continuous monitoring involves carrying out regular checks to detect any unusual transactions that deviate from a client's typical activity. This process also includes ensuring that all customer information is kept up-to-date (since it may change over time).
 

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KYC Components

Summary

In summary, KYC serves as a tool for companies to accurately identify their clients, and manage risks. Even if your company isn't required to follow these regulations, adopting KYC is still advisable, as it brings numerous benefits, and your industry may become regulated in the future. We hope that these insights have provided a clearer understanding of the importance of KYC. Having experience in this area, we can assist your company in correctly implementing this process and creating a seamless onboarding experience for your clients. Feel free to reach out if you have any questions.

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