Know Your Customer: 3 Vital Steps To Effective KYC Compliance

Know your customer or KYC procedures are a fundamental function that enables businesses to evaluate customer risk and the essential legal requirements for anti-money laundering laws, or AML. An effective KYC process involves determining a customer's identity, the threat they might pose, and their financial activities.

It's essential to know your customers, especially if your business is a financial institution; you might be liable to fines, reputation damage, and even sanctions in some cases. Moreover, KYC is also a fundamental effort to protect your business against instances of fraud and losses that result from illegal transactions or funds. At the same time, if your organization operates in any regulated industry, it's still essential to know your customer for compliance reasons.

Even when financial transactions are not the core concern, regulated industries need restrictive measures to prevent their goods or services from being distributed to minors. For example, gambling websites must use the KYC process to prevent minors from entering the site. Therefore, this process is relevant to many types of organizations.

An effective KYC process includes these three fundamental steps.

Customer Identification Program

A customer identification program, or CIP, will enable your business to determine who your customers really are. Because identity theft is a widespread issue that affected over 650,000 consumers in 2019 alone, this step is unarguably important in your KYC process.

To accurately identify your customers, the minimum required information to collect during this step is consumer name, date of birth, physical address, and identification number. This information allows you to verify your customer effectively.

In some cases, the identity verification step can gather information by collecting documents. However, there are also non-documentary methods that compare the information given by the consumer with the consumers reporting agencies and public databases. With this, you can use both documentary and non-documentary methods. It's also important to identify the customer within a certain period of time.

Customer Due Diligence

For businesses in the financial industry, it's essential to determine whether or not you can trust a customer. Even potential customers need to be deemed trustworthy. As a result, customer due diligence, or CDD, is a vital component of risk management.

When it comes to CDD, there are three relevant levels. These levels include simplified due diligence, or SDD, which assesses the risk of terrorist funding and money laundering. This level determines whether a full CDD is necessary. In addition, basic customer due diligence, or CDD, obtains more customer information for a thorough risk assessment. Moreover, enhanced due diligence, or EDD, goes even further and collects additional information for higher-risk customers.

A few practical steps to include in this step are ascertaining the identity and location of potential customers, gaining a genuine understanding of customer business activities, and classifying their risk category. Beyond the basics, determine whether an enhanced due diligence check is necessary. Because EDD will uncover more information about potentially suspicious customers, it's often a critical precautionary step for regulated businesses and financial institutions. Furthermore, be sure to keep records of all CDD, SDD, and EDD for potential regulatory audits.

Ongoing Monitoring

Unfortunately, for businesses in the financial industry and many other types of organizations, it's not enough to check a customer once. It's critical to implement ongoing monitoring.

Ongoing monitoring functions must include oversight of financial transactions and accounts that are part of the customers' risk profile. Depending on the consumer and the risk management strategy, you can also include monitoring steps that look for spikes in activity, unusual cross-border activity, and negative media mentions.

If the account activity turns out to be suspicious, there might be a requirement to file a SAR or suspicious activity report. It's also considered best practices to ensure the account records are always up-to-date.

Beyond businesses in the financial industry, other organizations that can benefit from an effective KYC process include auditors, accountants, tax advisors, lawyers, real estate agents, gambling service providers, and other organizations and entities that retail high-value goods such as art, diamonds, and collectibles. KYC is also critical to avoid hefty fines, reputational damage, and potential sanctions that can shutter a business.

The best approach to consider when implementing an effective KYC process for your business is to look for a relevant software system. Fortunately, you can rest assured that your business remains compliant with KYC managed services, as the service will manage everything for you. This type of service is typically affordable as well. What's more, you can also opt for KYC software and manage the system without a service provider. Just as there are several benefits to using accounting software for your business, you'll find KYC software offers benefits like accuracy, efficiency, and reliability.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes