KYC (Know Your Customer) is a rather intimidating term that few people properly understand. KYC documents are required in the world of banking and business with the purpose of knowing exactly who the account owner is. KYC is utilized to process, collect, verify and even classify the identity of a customer.
KYC Can Stop Money Laundering
Money laundering is a huge risk that businesses need to carefully track. Companies have to know who business is done with and track business clients. Also, customers gain protection because it becomes really difficult for someone else to assume their identity.
KYC compliance starts whenever an account is opened with a specific business or when business is done with a particular organization. Achieving KYC compliance involves several very important components, like:
Customer Due Diligence (CDD)
CDD is done for all customers. The financial institution needs to know the customer and protect the entire financial ecosystem against terrorists, PEPs (politically exposed persons) and other criminals. Business customers will vary in terms of transaction types, locations, business lines, scale and more. Due to this, CDD efforts differ. This ranges from very simple to enhanced customer due diligence.
Generally, CDD includes verifying customer identity and understanding what monetary thresholds are needed for record retention and reporting. Companies need to analyze different red flags to determine the needed due diligence levels, like:
- Beneficial owner identification.
- Customer understanding.
- AML policies that are in place.
- Approximate annual sales or salary.
- Third-party documentation.
Customer Identification Program (COP)
CIP is needed in order to form a belief that the business fully understands the identity of every single customer. Simply put, the financial institution needs to verify every single business customer or individual identity when an account is opened.
Every single CIP needs a specific risk-adjusted procedure to properly verify the account holder’s identity during the customer onboarding process. Minimum requirements are determined for every single relationship that is established.
Various verification procedures exist, like comparing provided information with the reporting agencies and reviewing ID documents. When the internet is involved, online customer onboarding procedures exist.
Online identification changed in the past few years as new technologies were developed. KYC adds a lot of friction to onboarding processes. Customers have to go through specific identity verification steps and need to sometimes deal with very long waiting times. These are expensive for financial institutions and stressful for the customers.
In order to improve customer experience, banks and other financial institutions now use faster and more precise identification methods. Since many possibilities exist, it is up to the financial institution to choose something that is effective and relevant.
On the whole, KYC is a necessary but very complex process. It is not at all easy to fully understand everything involved. However, financial institutions now work hard to set up brand new methods that can lead to speeding up the entire process. There is no way to avoid the verifications that are done through KYC so the best thing you can do is to just submit everything required.