Banking is a highly regulated industry and the government is holding it to higher standards considering the KYC (know your customer) regulations. This has a huge impact on users and the banking entity. As a result of this, banks are deploying services to comply with KYC to eradicate fraud. The responsibility of identifying customers falls on every single entity involved in transactions with the process.
KYC banking laws are created to ensure that financial institutions always verify their customers, assess risks appropriately and facilitate customers with no prohibited lists. Moreover, KYC regulations can help combat fraud such as money laundering and financing terrorist activities.
Banks and other financial institutions cannot escape the KYC authentication process of identifying customers. On the initial basis, know your customer regulations were introduced and incorporated in 2001. The law was passed to help avoid terrorist activities. But nowadays, it has become important for every bank to must carry out KYC checks.
KYC banking – Basics and Process
The Patriot Act Section introduced KYC laws, including requirements and enforcement of the bank secrecy act 1070. As a result of this act, banks are liable to employ the customer identification program (CIP) and customer due diligence (CDD) in KYC banking.
To meet CIP, KYC requirements for banks include asking their customers for specific documents related to identifying information. These are the types of documents typically include name, address, date of birth, government-issued ID cards, licenses, and other documents. Banks can decide which documents they require when it comes to verifying individuals.
The next step in KYC banking is KYC due diligence. To comply with due diligence in banking, financial institutions must have an insight into the normal transaction activities of customers. So that whenever any transaction other than normal happens, banks are able to spot or stop them. Furthermore, banks must assign the user a high-risk assessment to get to know which customers have the chance of causing a threat to the institution. New customers can be onboarded as well on the basis of evaluating their high risk.
KYC and AML – Differences Between them
The process of verifying the identity of customers is called know your customer. These are the initial parameters in any business where they can verify individuals coming for onboarding. Catching fake consumers at the start can help save a lot of other concerning threats to banks.
While AML, the acronym for anti-money laundering is the process that reflects stopping the money laundering. Launderers are acting very smartly to undergo money laundering.
Automating KYC banking laws
Modern times require modern solutions to combat crimes. Nowadays, the identity verification services are becoming automated to cater to the needs of the mobile-driven generation. Customers are now identified digitally to ensure that no fraudster takes the services of the banking sector and then in return harm the institution itself.
In KYC banking, it is important to consider that the institution is complying with KYC solutions and make sure every stakeholder has done its part. This process includes documenting and securing relevant data of clients, the nature of the transaction they perform, the type and reason of their account, and the source of their funds. If the banks become unable to follow all these things they may risk their reputation, face heavy fines, and may include in impossible legal complications.
Identification of customer
This includes obtaining basic information about a client. Depending on the country, some other factors may also be reviewed as to check if the customer is included in PEPs or not.
Client Due diligence
CDD is performed to gain customers’ data from reliable and authentic resources. Due diligence financial services also make sure that the nature and reason of the account are checked, and the transactions performed by the customers are also kept in check.
Enhanced Due Diligence
When the customer is flagged as high risk, enhanced due diligence is performed. In this case, banks strictly observe the customers. Clients are required to submit more documents and their transaction monitoring is also performed on a strict basis.
Fraud in the banks and financial institutions requires them to follow the set regulations. KYC banking is one such regulatory measure that provides the banks with the leverage of avoiding financial scams while saving the market reputation. CDD and EDD is the part of the know your customer process and it provides the financial institutions the chance to confirm their customers are who they claim to be and carry out ongoing monitoring of the high-risk profiles.