The Ultimate Guide to KYC Compliance

As we move towards more fully digital lives, it is increasingly important to be aware of the need to protect the personal information of your customers online. Criminals are becoming more and more adept at manipulating and misusing the systems that are used to identify customers and process financial transactions. Fortunately, there is a global task force dedicated to protecting this information, known as the Financial Action Task Force. This inter-governmental body has set international standards aimed at preventing organised crime, money laundering, corruption, and terrorism across the globe. Know Your Customer (KYC) compliance is a significant part of this process.

What is KYC compliance?

KYC compliance is a part of Customer Due Diligence management where businesses identify their customers’ true identity in order to assess the risk associated with that customer and to check its suitability as a client as required by law. KYC is not limited to just the verification of clients – businesses around the globe practise it every day to verify merchants, agents, partners, and employees. With the change in purpose, it also becomes Know your Merchant, Know Your Business, or Know Your Employee. They all have a similar process for verifying identities.

What is the KYC process?

The first step in KYC verification is the Customer Identification Programme (CIP). This involves collecting personal information from the user and then verifying that the information is genuine. To do this, the user uploads an official identification document. The system identifies which document template is being used and checks it to ensure that it has not been tampered with or photoshopped. Once it’s validated, the data is extracted by either optical character recognition or the user manually inputs the information, and then the system compares the data to the original document.

The Ultimate Guide to KYC Compliance

In addition to ID verification, each customer is given an Anti-Money-Laundering (AML) risk rating. Continuous screening is done by the institution in order to deter the risks of fraud from even the authorised user. In the case of a high-risk customer, the financial institutions and businesses perform Enhanced Due Diligence, which is a more strict KYC and AML screening. This step includes an in-depth investigation of the customer’s identity, financial status, income, and transaction patterns. Triggers may include a large number of frequent transactions, transactions above a specified threshold, and unusual or suspicious activities.

Who must comply?

• Banks, their subsidiaries, and Forex exchanges
• Insurance companies and brokerage houses
• Healthcare Industry, including hospitals, in-home care, and online care and drug sellers
• Casinos and e-gaming platforms
• Businesses in FinTech, online payment solutions, money transmitters
• Virtual currency businesses
• E-commerce, dealers of precious metals
• Real estate industry and non-bank mortgage lenders
• Legal sector

How is KYC handled around the world?

Most countries have their own governing bodies for designing and implementing KYC and AML regulations. All of the regulations have a few things in common, which are generally the minimum requirements of KYC/AML compliance. Those who don’t comply with the regulations risk being penalised. Here are some of the regulations practised in major states in the world, such as the USA, UK, and Canada. These regulations may exist in other countries as well with some variations.

1. Reporting entities must screen the identity of their clients before starting any relationship with them.
2. KYC and AML screening must be performed regularly on all customers.
3. Customers should be given a risk rating and necessary measures of additional screening should be taken for those ranked as an excessive risk.
4. A proper record of KYC and AML screening must be maintained.
5. Transactions above the minimum transaction threshold must be reported to the concerned authorities.
6. Penalties are charged in case of non-compliance.
7. Clients must be screened against international sanction lists, terrorist lists, and politically exposed persons lists.
8. Some countries require the reporting entities to maintain an AML department and to hire AML officers for thorough compliance.
9. Businesses are required to develop global risk cover, such as KYC/AML screening software that is able to identify people worldwide.