Know Your Customer (KYC) is a customer Identification mechanism implemented by the banks as a critical first step in Anti-Money Laundering (AML) compliance. Due to the high-risk banks face from numerous transactions, they have many AML compliance requirements. But what exactly does KYC require?
As the name suggests, KYC targets customers individually and aims to assess and monitor that customer’s risk. Its focus is to:
- Establish a customer’s identity
- Ensure that customer’s money generating activities are legitimate
- Examine money laundering risks associated with that customer
Each of the above points forms the basis of a plan that formulates policies and procedures to fulfill the compliance requirements. Let’s start with customer identification and see how banks should execute the exercise.
The CIP (Customer Identification Program)
Financial institutions should know that customers are who they claim to be. Any Individual conducting financial transactions need to have identity verified. Due to the high risks associated with money laundering, CIP has been made into a law. In the US, CIP is a provision under the US Patriot Act.
How to Make a Powerful and Airtight CIP program
1. Have a Written Procedure
Your institution requires an accurate and documented process that is agreed-upon. This process should include accounts opening procedures, account verification, customer notification, screening accounts, and record keeping. A successful CIP should assess the risk associated with procedures for every account. This element should also exist at the institutional level. Another thing is that your policy should be critically reasonable and practicable.
2. Sufficient Details in Account Opening
A bank should collect fundamental information when opening a financial account. They should differentiate between a citizen and a non-citizen. For companies and businesses, proof of existence is very essential. Documents of importance here include certified articles of incorporation, business license, and other incorporation documents.
3. Identity Verification
Anyone must provide a valid ID while opening a bank account. Without which, it is not possible. Institutions should also consider identification for applicants who are not physically present. There should be online verification that adheres to CIP and institution risk policy in Fintech.
Banks should seek to have electronic identity verification. This solution is the best as it provides a substantially standard verification process. It reduces error rates, eliminates multiple accounts and cost reduction.
4. Client Account Maintenance
Banks should screen every new account against databases of known terrorist groups, money launderers, and other sanctions lists. They should notify customers about the verification of their ID information. Another crucial aspect is maintaining documentation of every customer ID. This is while they are clients and even after five years.
CIP should be subject to Due Diligence programs. There are two levels of due diligence, basic Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD). To arrive at the required level of due diligence, assess customer’s risk. An institution should look for red flags in business location, nature of occupation, pattern of activities and many others.
EDD is therefore for high-risk customers to help get a better understanding of the activities of a customer and thereby mitigate the risks tied.
Why Robust KYC and AML Systems are Important
Banks are among the most answerable stakeholders of the financial systems and also well-positioned to prevent financial crime. They should, therefore, establish a KYC and AML system with useful and reliable policies and procedures. Nevertheless, technology evolvement is rendering such systems ineffective. This is even though banks followed AML and KYC regulations.
Does it mean there is a problem with these AML and KYC regulations?
These regulations did not set a specific benchmark because they suspected banks might end creating just minimum requirements. It must be that the regulators could see beyond and gave an allowance for the emerging developments. Therefore, the regulations are okay but wanted the institutions to push their compliance boundaries and accommodate issues like technology.
For instance, the regulations did not set the documents to be provided for identity verification. Therefore, you find the types of documents for verification vary from bank to bank. Some require national Ids or passports. Others want birth certificates. The process gets even more complicated when it comes to business verification. While banks fulfill AML and KYC regulations, they still need to take care of customer experience.
Therefore, it is up to institutions to create systems that are accommodative in the context of AML/ KYC regulations, technology and businesswise. A right balance will deliver positive customer experience and effective fraud prevention. It becomes a win-win situation for everyone except criminals.
The bottom line is the cost of fraud is painful. Banks and other financial institutions should ensure that they maintain the integrity of their business. Otherwise, they risk the security of their institutions. Workable processes and well-communicated standards must be put in place and maximize on the success of fighting financial crime.
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