KYC: 3 Steps to Get an Effective Know Your Customer Compliance

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Every bank or financial institution has a Know Your Customer (KYC) procedure in place. A KYC solution can protect banks and financial institutions from getting involved in an illegitimate customer’s financial discrepancies or crimes. KYC procedures are essential to assess customer risk and are a legal requirement for compliance with anti-money laundering laws. An effective digital or physical KYC process can verify a customer’s identity, their financial activities, and the possible threats they pose. KYC procedures can help banks and financial institutions provide customers with a seamless banking experience. This blog will dive deep into the primary components of a successful KYC program.

What is KYC?

KYC refers to the steps taken by a bank or financial institution to:

  • Establish the customers’ identity
  • Comprehend the nature of the customer’s activities to verify that the customer’s funds are legally acquired
  • Predict and assess any money laundering risks and threats associated with a particular customer.

In simple words, KYC involves the steps that distinguish between favourable and unfavourable customers. The financial organization’s responsibility is to achieve KYC compliance and ensure that everyone involved has done their bit towards the same. KYC involves documenting and maintaining client information, their transactions, and their source of funds. Companies must leverage corporate business intelligence to collect, store, and analyze customer data. Failure to maintain KYC compliance may cost the organization its reputation, financial damage, and legal consequences. 

Three Steps to Effectively Know Your KYC Compliance Program

To create and effectively maintain a KYC compliance program requires the elements given below:

Customer Identification Program (CIP)

A Customer Identification Program or CIP is an integral part of KYC verification. Through the CIP method, the financial institution confirms the identity of its clients and ensures that they have furnished authentic information before opening an account. 

The main purpose of a CIP is to enable the institution to gather enough information to reasonably believe that the customer is genuine and their financial objectives are above board. CIP is a government mandate for all financial houses, and the information must be verifiable via any authorized documentation. The minimum information the bank requires from the customer under CIP for account opening is:

  • Customer’s legal name
  • Customer’s date of birth
  • Customer’s complete address
  • Customer’s legal identification number

The CIP information must be maintained for up to five years after the customer closes the account.

Customer Due Diligence

Another key element of KYC compliance is performing Customer Due Diligence or CDD. As per the norms put forth by the Financial Crimes Enforcement Network, there are four main requirements for the CDD rule to be satisfied by financial institutions:

  • Identify and verify the customer’s identity
  • Identify and verify the business owner or company identity
  • Understand customer relationships and develop risk profiles
  • Maintain updated customer data and continuously monitor it

The three different types of due diligence are:

  • Simplified Due Diligence or SDD: SDD is generally performed for customers with a low risk of criminal activity. In this, banks collect only the necessary information without a detailed risk assessment.  
  • Basic Customer Due Diligence or BCDD: BCDD is the intermediary level of due diligence. In this, a more elaborate investigation is conducted before a customer opens an account.
  • Enhanced Due Diligence or EDD: EDD leverages expert analyses and constant monitoring to keep a keen watch on customer accounts with a high value and accounts that have had spurious or suspicious transactions in the past.

Ongoing Monitoring

Just well-established CIP and CDD are not sufficient for successful KYC compliance. For the KYC to be successful and foolproof, constant monitoring is essential. It requires having a plan that can maintain and manage accurate and up-to-date information about all the bank clients with the aid of corporate business intelligence. An effective monitoring system must look out for accounts with suspicious activity and warning signs for illegal behaviour, such as

  • Inconsistent and significant changes in customer account activity
  • An unexpected shift in business operations such as a location change or new ownership.
  • Enquires about a customer from a law enforcement agency

Final Thoughts

Innovative technologies integrated with mobile and electronic platforms can help bridge the gap between maintaining KYC compliance and creating a superior customer experience. An effective KYC solution is mandatory for all financial institutions. To comply with the fluctuating KYC requirements, organizations need a KYC solution that satisfies all rules for KYC compliance.

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