What is KYC in banking?

KYC is an abbreviation for “Know Your Customer” or sometimes “Know Your Client”. It is a procedure that helps companies verify the identity of their clients (natural persons and financial entities) in compliance with legal requirements and corresponding laws and regulations.

KYC is an essential part of the AML compliance program aimed to better understand the nature of the client’s activities and prevent money laundering along with terrorism financing and other related criminal schemes.

KYC cohesion

Being a mandatory process for client-onboarding, KYC verifies potential customers’ addresses and identities before opening accounts, withdrawing deposits or performing any sort of financial transactions. KYC includes government-issued ID’s check, document verification (for example, utility bills) as proof of address, and in the case of eKYC — facial and biometric verification.

Importance of KYC in Banking

Banking is a financial sector with the highest risks of fraud and money laundering, and this makes it crucial to constantly run customers’ background screening processes to mitigate illegal activities.

KYC makes disguising or hiding illegitimate funds a way harder task for all kinds of bad actors.

All irregularities in customers’ transactions are closely monitored to track any suspicious actions performed by individuals and organizations, such as sudden fluctuations in account activity or a large number of suspicious transactions, excessive amounts of cash transactions, transactions to the countries, that are known to be more susceptible to money laundering.

This way, the KYC procedure protects banks from both financial and reputational damage while helping to comply with government regulations.

The times when criminals could hide their capitals simply by opening up anonymous accounts are gone long ago. Now, when stricter KYC and identity verification measures are an obligation which is enforced by governments worldwide, there is more reporting of suspicious activity, and banks are getting better at catching fraud.

Banks that fail to comply with KYC regulations meet heavy penalties, which are only getting harsher over time.

Banks’ regulatory obligations

As recommended by the Basel Committee on Banking Supervision(BCBS) and FATF 40, any bank’s internal policies should include the following parts of the KYC procedure:

•     Customer identification;

•     Monitoring of customer transactions;

•     Procedures for internal reporting of suspicious or unusual transactions;

•     Training staff to know and comply with KYC regulations;

•     Securing and maintaining KYC related documentation.

Three cornerstones of Know Your Customer policy

Although KYC is quite a straightforward concept, it is extremely critical to a successful AML program when working with large financial entities. Therefore, there are three main components of KYC compliance: 

•   Customer Identification Program (CIP)

•   Customer Due Diligence (CDD)

•   Ongoing Monitoring (OM)

If you’re looking for help with AML compliance, you can find AML compliance solutions here.

Customer Identification Program (CIP)

CIP demands banks to ask clients for official forms of identification. When dealing with the individuals it is usually a government-issued ID such as a passport or ID card, and a driver’s license. When onboarding financial organizations, it can also include a partnership agreement, proof of incorporation or a government-issued license.

Both natural persons and financial entities can be asked for additional information such as a financial statements or financial references.

Customer Due Diligence (CDD)

Customer Due Diligence means collecting and analysing information about onboarding customers to evaluate any risks they may potentially pose.

To put it simply, banks perform due diligence to predict what sorts of transactions their clients are most likely to carry on. To know that, banks ask clients for the origin of their funds, explanation of business, the purpose of opening an account and other financial information.

Ongoing Monitoring (OM)

Of course, one-time check of customers’ financial background isn’t sufficient to ensure 100% security. Deep understanding of the account activity’s average patterns and its continuous monitoring is vital to detect the tiniest irregularities and prevent any risks before they even arise.

eKYC

Covid-19 and common world trends to digitisation pushed banks to rely more heavily on digital channels of onboarding.

Electronic Know Your Customer or eKYC is a procedure of verifying the customer’s identity and address electronically. It is performed by capturing information from identity documents (OCR technology) or the use of facial and biometric recognition for online identity verification. eKYC is considered to be a faster and more reliable solution than traditional KYC check as its accuracy is supported by Artificial Intelligence (AI) and machine learning algorithms.

KYC and ID Verification Compliance Requirements with BASIS ID

BASIS ID makes fulfilling KYC compliance requirements a very simple task for both banks and their customers. BASIS ID’s KYC checks service involves full biometric identification which consists of 500 video frames biometric and liveness analysis, 3D face modeling for motion, rotation and blinking analysis, facial expressions analysis, and comparison with the identity document, as well as spoofing detection.

Moreover, BASIS ID offers screening of customers against sanctions lists, triggers for enhanced due diligence, risk scoring, etc based on 43000+ databases. BASIS ID technology far exceeds the regulatory requirements, which makes it an excellent choice for both security-minded and convenience-minded banks.

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