Steps to Achieve the Know Your Customer Compliance

Effective KYC involves knowing your customers'customers' identities, financial activities, and the risks they pose. 

Do you know your customers? 

At least, that's how it should be. If you are a financial institution (FI) that promotes money laundering or terrorist financing, you may be subject to fines, penalties, and defamation. Most importantly, KYC is a key practice that protects organizations from fraud and losses resulting from illicit funds and transactions. "KYC" refers to the steps a financial institution (or company) takes to:

customer identification

Understand the nature of your business (The main purpose is to ensure that the client's source of funds is legitimate.)

To monitor the activities of our customers, we assess the money laundering risk associated with these customers.

Creating and implementing an effective KYC program requires the following elements:

1) Customer Identification Program (CIP)

How do you know if someone is who they say they are? After all, identity theft is widespread, affecting more than 15 million US consumers and accounting for $24 billion in stolen goods by 2022. For lenders such as financial institutions, this is more than a financial risk. It's the law.

In the United States, CIP requires proof of identity from anyone conducting a financial transaction. The CIP, enshrined in the Patriot Act, is designed to reduce money laundering, terrorist financing, corruption, and other illegal activities. 

Different jurisdictions have similar provisions. These proposals include identity verification procedures.

The desired outcome is for obligated businesses to identify their customers accurately. A critical element of a successful CIP is risk assessment, both institutionally and procedurally, for each account. Although the CIP provides guidance, it is up to individual agencies to determine the exact level of risk and the policies associated with that level of risk. The minimum requirements for opening a personal financial account are clearly set out in the CIP.

Name

Date of birth

approach

ID number

Collecting this information at account opening is sufficient, but the institution must verify the account holder's identity " within a reasonable time." Identity verification procedures may include:

Documentation.

Non-documentation methods (which may include verification of information provided by the customer through consumer reporting agencies, public databases, and other due diligence measures).

A combination of both.

These procedures are the basis of CIP. It must be clear and codified to provide consistent guidance to employees, managers, and regulators.

The exact policy will depend on your institution's risk-based approach and may take into account the following factors:

Types of accounts offered by the bank

How to open a bank account

Types of Identifiable Information Available

2) Customer Research

One of the first analyses of any financial institution is to determine whether potential customers can be trusted. You need to make sure that your potential customers can trust you. Customer due diligence (CDD) is an essential part of effective risk management and protecting yourself from potential threats from criminals, terrorists, and politically influenced persons (PEPs).

There are three levels of due diligence.

Simplified Due Diligence ("SDD is for situations where the risk of money laundering or terrorist financing is low and a full SDD is not required—for example, accounts or small accounts.

Key Customer Due Diligence ("CDD"") is the information we obtain from each customer to verify their identity and assess the risks associated with that customer. Although some elements of ESD are specifically defined in national legislation, it is ultimately the responsibility of financial institutions to determine the risk and take measures to prevent their customers from becoming malicious actors. 

Here are some practical steps you can take to include them in your customer review program:

Find out who your potential customers are and where they are, and better understand their business. This can be as simple as finding evidence of the customer'scustomer's name and address. When we authenticate or screen potential customers, we identify who the customer is by classifying them into risk categories before digitally storing this information and supporting documentation.

It is important to follow the proper process to determine if you need an EDD in addition to a basic CDD. In this context, regular due diligence with existing customers can be helpful. Factors considered in determining whether an EDD is required include, but are not limited to:

the position of the person

human occupation

transaction type

Expected activity patterns based on transaction type, dollar amount, and frequency

Expected payment method

During a requested audit, records of all CDD and EDD activities performed for each client or prospect are required. 

3) Continuous monitoring

More than one customer review is required. A program of ongoing customer monitoring is needed. Continuous monitoring capabilities include financial transactions and accounts based on thresholds developed as part of the client's risk profile.

Depending on your client and risk mitigation strategy, other factors to monitor include:

The peak in action

Extraterritorial or unusual cross-border activity

Add people to your approved list

negative comments from the media

Regular account reviews and associated risks are also considered best practices.

Have your account records been updated?

Do the transaction type and amount match the stated account goals? Is the level of risk appropriate for the type and number of transactions?

Typically, the level of transaction monitoring is based on a risk-based assessment. 

Corporate KYC

Just as personal accounts require identification, due diligence, and monitoring, corporate accounts also require KYC procedures. For private customers, the process is similar to KYC, but the requirements are different. In addition, risk factors such as transaction volume and transaction value are becoming more apparent, and procedures are becoming more complex. 

This process is often referred to as Know Your Business (KYB).

While each jurisdiction has its own unique KYB requirements, there are generally four steps to implementing an effective program:

Your compliance and legal teams are well-paid, intelligent, and valuable resources. eKYC provides a better working environment, attracting more workers.