KYC policies were aimed at combating money laundering, but it all reversed after 9/11. Additionally, cybercrimes and frauds exposed daily businesses to legal, operational, and reputational threats, with far-reaching financial consequences. As a result, regulatory agencies established KYC measures to prevent financial crimes.
Before creating a customer account, banking institutions normally go through KYC checks. Money laundering is getting more prevalent because criminals these days are constantly revising their methodologies to hide and conceal their illicit funds. Terrorist financing, tax evasion, drug trafficking, smuggling, corruption, and other illegal activities are examples of illegal sources. As a result, know your customer practices are generally known by companies around the world as a means of identifying customers and preventing money laundering.
What is KYC Compliance?
Financial firms must comply with KYC regulations to guarantee that their consumers are who they claim to be. KYC compliance is achieved through client identification as well as verification checks. If a customer’s KYC validation fails or yields negative findings, banks have the power to deny account opening applications. In today’s dynamic financial world, KYC CDD AML compliance plays a critical role in combating money laundering and terrorism funding.
With digitization, manual KYC verification is getting difficult to ensure client and company interests, making it tough for finance companies to fulfill KYC compliance. Hence, digital KYC checks are improving and fulfilling worldwide compliance and laws more effectively.
Each county has its set of requirements to follow as they have their government-issued identification cards, driver’s licenses, passports, credit/ debit cards, and utility bills. Financial, online gaming, and gambling sites, for example, have stricter KYC/AML compliance requirements and may even have their own regulating bodies. State agencies are needed by countries to monitor regulatory compliance. Portugal, for instance, has three different regulatory agencies for banking, securities, and gaming.
KYC in Banking
One of the greatest applications of due diligence in banking is to prevent financial fraud including money laundering as well as identity fraud. Financial entities which provide account opening solutions rely heavily on online KYC in banks. Furthermore, rigorous ‘know your customer’ systems assist with client identification and authentication in the case of virtual payments, ensuring the validity of those sending or receiving cash. Customers must establish their identity through either document verification or live video KYC, which has shown to be an effective method of preventing fraud.
It is not only banks that need to adhere to KYC, but also other financial firms such as insurance companies. They require KYC systems because they allow potential policyholders to register online. Insurance businesses can use ‘know your customer’ methods to ensure that the consumers they are insuring are genuine and who they profess to be. Then there are other firms that rely on KYC such as mortgage companies, brokerage firms, and other loan companies who perform customer due diligence to secure their profits and activities.
How KYC Protects Global Firms?
Performing customer due diligence for banks is really necessary as it provides information about the clients with who the company does business. It enables the banking sector to conduct thorough client due diligence in order to authenticate their identities and combat identity theft, money laundering, and fraud. KYC compliance prevents firms from unexpected reputational risk influenced by different system breaches. Money laundering and terrorist financing restrictions are becoming more stringent by the day in many nations throughout the world.
Comprehensive KYC checks that all entities complete identification, including anyone desiring to interact with a company in any way. screening against blacklists to pinpoint money laundering suspicions, inspecting UBOs in case of KYB, collecting client information, and verifying against PEP’s global lists for added security are all part of in-depth CDD checks.
Those with a greater level of risk undergo further authentication processes such as screening for bad media and thorough business analysis for risk profiling. Owing to the ever-changing security landscape, all the risk profiles are regularly updated. Financial firms all across the world are instructed to obey “know your customer” requirements. Regulatory agencies have imposed penalties for failing to observe rules and policies relating to ‘know your customer’ and anti-money laundering requirements. Companies, on the other hand, spend billions of dollars in fines every year for refusing to follow KYC and AML compliance, and that is just financial losses, not to mention the reputational harm.
Final Thoughts
Identity theft, money laundering, corruption, tax evasion, and terrorism financing are all problems that can be mitigated by performing proper KYC checks. Clients, their behaviors, and transaction patterns can all be better understood with a comprehensive risk analysis. The KYC verification procedure gathers information from customers in order to authenticate their identities, prevent potential crimes. Financial organizations use KYC verification measures to make sure their clients aren’t engaged in money laundering.
