What is Know Your Customer KYC and Whats Its Importance in Finance?

To comply with international regulations against money laundering and terrorist financing, reinforced Know Your Customer procedures must be implemented in the first stage of any business relationship when enrolling a new customer. The Know Your Client (KYC) process helps against money laundering and prevents the financing of terrorist activities. It is a mandatory process required by many countries to ensure that the customers are actually who they are claiming to be. KYC in the banking sector requires bankers and advisors to identify their customers, beneficial owners of businesses, and the nature and purpose of customer relationships. Banks must also review customer accounts for suspicious and illegal activity and maintain and ensure the accuracy of the customer accounts.

The burden is shared by the customer, who must respond to each request for KYC information or risk delays to their transactions. This is especially true for global and multi-banked corporates who can receive large volumes of individual KYC requests from each of their different banks, putting strain on their business relationships. KYC checks are done through an independent and reliable source of documents, data, or information.

Checking PEP Lists

A good KYC policy or process can help financial institutions better understand their customers and their financial practices, making it easier to assess, manage and mitigate risk to the organisation. This is while opening and managing client accounts, according to FINRA Rule 2090. They also have to be aware of each customer’s profile and keep records of it. As well as https://www.xcritical.in/ identify any individuals who are authorized to act on their behalf. The practices fall within the more comprehensive anti-money laundering (AML) policy of a bank or any other financial institution. KYC compliance also plays a critical role in real-time, cross-border payments, facilitating greater levels of trust, transparency and collaboration, while mitigating risk.

  • If you identify that a customer is listed as a PEP, your company can then undertake additional or enhanced due diligence, backed by documented audit trails to ensure ongoing KYC compliance.
  • KRAs and intermediaries were instructed to integrate their systems to facilitate the seamless exchange of documents to enable verification of “attributes within the risk management framework”, Sebi said.
  • However, the advent of modern solutions, including automated KYC processes and collaboration with third-party providers, promises to alleviate these difficulties.
  • The KYC process in the UK typically involves collecting and verifying customer information, such as name, address, and date of birth.
  • KYC is important both for the identification, and the security of customers within the financial services.

A number of countries and economic regions oversee financial anti-money laundering agencies or regulators that overview financial transactions to prevent tax evasion, terrorism financing, and other anti-social activities. All the agencies are a part of the Global Financial Action Task Force (FATF), which overviews financial transactions globally. CDD is a process in which all of a customer’s credentials are collected to verify their identity and evaluate their risk profile for suspicious account activity.

By implementing a robust KYC process, organizations can comply with regulatory requirements, mitigate risks, protect customers, and make informed decisions. It is an essential component of maintaining a secure and transparent financial system. The Customer Identification Program (CIP) forms the first line of defence in the KYC process. It requires financial institutions to collect, record, and verify basic identification information from customers before establishing a financial relationship. This ensures compliance with the Money Laundering Regulations (MLR) and helps prevent financial fraud, terrorism financing, and money laundering.

Know Your Client (KYC): What It Means, Compliance Requirements

Although banks and regulators have indicated a willingness to move towards standardised KYC requirements and align internal processes, there is still a way to go. A number of initiatives, both global and local, aimed at improving the process on a global scale have come and gone. Overcoming these challenges requires a proactive and collaborative approach to cultivate change. In the aftermath of the COVID-19 pandemic, the Australian Transactions Reports and Analysis Center (AUSTRAC) amended the country’s KYC/AML regulations to suit the situation. For identity verification, AUSTRAC allowed the use of electronic copies of government-issued ID documents as alternative proof. In case that does not work, institutions must use video KYC for identity verification, according to AUSTRAC.

To assess client risk, other risk assessments, and to comply with anti-money laundering (AML) rules, Know Your Customer (KYC) procedures are essential and a legal requirement. Knowing a customer’s identity, their financial activity, and the risk they pose are necessary for effective KYC. In an increasingly global economy, financial institutions are more vulnerable to illicit criminal activities.

Submission of Documents

In 2016, the Financial Crimes Enforcement Network (FinCEN) updated KYC requirements once again. This update aimed to address the fact that KYC did not explicitly require banks to identify stakeholders and beneficiaries of businesses with accounts at their institutions. https://www.xcritical.in/blog/what-is-compliance-for-brokers/ The issue was that a business could appear outwardly legitimate while sheltering potentially bad actors and completing financial transactions for them. The 2016 update introduced Know Your Business (KYB) to address this gap in the regulations.

It includes the names of the company’s directors, business addresses, national insurance or social security numbers, company numbers, and so on. This information is supplemented with publically-available information about the entity from open sources, such as names and addresses, registration numbers, stock exchange listings and annual reports. EDD is conducted for clients presenting a higher risk profile due to factors like their geographic location, occupation, or involvement in industries susceptible to financial crimes. EDD involves conducting more in-depth investigations to gather additional information, ensuring a higher level of scrutiny. These client-onboarding processes help prevent and identify money laundering, terrorism financing, and other illegal corruption schemes. An applicant or potential user of financial services is required to submit documents for the verification of their identity and residence status.

But they also need to be quick, so you can verify the company’s identity – along with the individual contacts – and satisfy your KYC customer acceptance policy before the business opportunity is missed. KYC compliance isn’t just about the identity verification of customers, but the verification of companies as well. In today’s global economy, organisations need to be certain that the companies they do business with – and the individuals within them – are indeed what and who they say they are. The initial guidelines were drafted in 1970 when the U.S. passed the Bank Secrecy Act (BSA) to prevent money laundering. Notable additions came years later, after the Sept. 11, 2001 terrorist attacks and 2008 global financial crisis.

This helps protect customers, investors, the reputation of the bank, and the integrity of global markets. An effective KYC programme helps verify the identities of customers, review their financial activities and assess their financial crime risk. It assists banks and financial services to identify and prevent crimes such as money laundering and terrorism financing at an early stage. By doing KYC checks, financial institutions are assured that their customers are really what they say they are, and they are not likely to be engaged in any criminal activities. Know Your Client (KYC) procedures serve as a fundamental risk management tool for businesses operating in a complex financial and regulatory environment.

Any individual who controls a legal entity or owns more than 25% of one must have their identity verified via identifying documents (e.g., ID cards and business licenses), proof of address, and in some cases, even biometrics. Potential customers must also provide financial references and statements for review. A key component of KYC is building a customer profile, also known as a customer risk assessment.

To date, almost 6,000 financial institutions are using the Swift KYC Registry to publish their KYC data and receive data from their correspondent banks. It is recognised as the accepted standard for correspondent banking due diligence. The registry has now been extended to corporate customers of Swift to help simplify the KYC process between banks and corporates. Tookitaki developed an end-to-end AML-KYC compliance platform called the Anti-Money Laundering Suite (AMLS).

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