What is KYC – A Complete Guide to Know Your Customer (KYC) Identity Verification for Businesses

What is KYC Identity Verification

Contents

 

What is KYC

According to the international AML-CFT guidelines, every transaction or service is subject to KYC identity verification. Therefore, businesses must maintain Know-Your-Customer (KYC) and Know-Your-Business (KYB) regulatory compliance regimes to combat the growing money laundering and terrorism financing threats. Today, each nation has its method of authenticating customer identity and legitimacy; and to overcome the identity fraud nuisance that has grown manifold in the wake of remote onboarding and digital payments.

Know-Your-Customer (KYC) is a standard measure applied on various fronts during customer onboarding and monitoring lifecycle. This blog will inform you more about KYC identity verification services and why KYC Compliance is an integral, inevitable norm for financial and regulated non-financial institutions to follow today.

 

Why KYC Identity Verification is Important

The rising course of online businesses has led to increasing customer onboarding and screening protocols. Thus, organizations and businesses must follow standard identity verification methods to meet regulatory compliance, verify customers, and ensure they are who they claim to be.

It is vital to identify whether the person opting for a specific service or making a particular transaction is real with a genuine identity. Simple measures often help mitigate identity theft risk linked to money laundering and terrorism financing.

The KYC requirements are made compulsory during i. account opening (customer onboarding); ii. identifying Ultimate Beneficial Ownerships (UBOs); iii. for credit approval; iv. maintaining enhanced due diligence; v. finding suspicious activities and transaction alerts; vi. Sanctions, PEP, and Adverse Media screening; and vii. for almost any process that requires validation of individual identity.

 

Which Industries Require KYC Verification Services

Each nation has its laws on Know-Your-Customer (KYC), and its requisites vary from industry to industry. However, there is a general understanding of the importance of KYC verification among regulated institutions, businesses, and individuals. The users or account owners must heed the guidelines and provide basic ID proofs before opting for a regulated product or service—a government-issued ID such as a driver’s license, social security card, or passport. Along with ID document confirmation, checking the address on record, with utility bill verification, is also a significant aspect of any standard KYC procedure.

KYC compliance is a continuous process and part of ongoing Customer Due Diligence (CDD). Earlier, the term KYC was linked to banks and financial institutions. But, with mounting money laundering and terrorism crimes, KYC identity verifications now compulsorily apply to the non-financial sectors, including fintech, real estate, credit unions, lending, etc.

Along with conventional banks and neo-banks, regulated financial and lending organizations are subject to strict KYC compliance. Other major industries subject to compulsory KYC verification for their clients are fintech, insurance, cryptocurrency, gambling, real estate, retail & ecommerce (especially age-restricted), travel, health, telecom, online gaming, etc. Particularly, the upward trend in on-demand apps that require mass-onboarding feature fall under the scope of mandatory user KYC verifications to mitigate anonymous and fraud transaction risks linked to money laundering.

 

KYC from a Regulatory Perspective

All regulated financial and non-financial institutions must perform KYC checks seriously to build credibility and trust in their customers. Nowadays, there are automated KYC verification services offered by various RegTech companies. A robust digital KYC solution with a user-friendly interface means faster onboarding and turnover for businesses.

The Financial Action Task Force (FATF) first introduced KYC guidelines in its AML Recommendations based on mutual evaluation, peer review, money laundering typologies, and other technical assistance. However, FATF only provides the strategies, and it is completely onto the individual member nation to follow them. The KYC rules and laws may vary from nation to nation, but the underlying idea is to control money laundering and terrorist financing worldwide, as most such crimes are international.

 

KYC Compliance in Various Countries

Over 190 countries today strictly conform to AML-KYC regulations. Various nations have enacted KYC into law –

In the USA, the Bank Secrecy Act and the Patriot Act are regularly amended and implemented by the Financial Crimes Enforcement Network (FinCEN) under the supervision of the Department of Treasury. It is on the part of the FinCEN to regulate the KYC identity verifications for financial and non-financial institutions.

The Federal Law for the Prevention and Identification of Operations with Resources from Illicit Origin 2013 decides the KYC norms in Mexico. And in Brazil, the Conselho de Controle de Actividades Financieras (COAF) addresses the KYC guidelines with its government and the Brazilian Central Bank.

In Europe, AML-KYC laws are governed by Anti-Money Laundering Directives (AMLD). There are, in total, 6 AMLDs drafted to date from 1991 to 2021. The major KYC regulations are mentioned in 5AMLD, emphasizing video and biometric KYC authentication to confirm beneficial customer ownership. Besides, special attention has been given to newly tech-driven industries, including cryptocurrencies, digital finances, e-wallets, online gambling, and pre-paid cards.

Within Europe, electronic IDentification, Authentication, and Trust Services, the eIDAS, homogenizes digital KYC identification for remote customer acquisition with e-Sign and video verification. The eIDAS gained its prominence late in 2014 with the 5AMLD. While in the United Kingdom, 5AMLD and The Money Laundering Regulations 2017 direct the implementation of KYC guidelines.

Various laws in different nations govern KYC regulations. These are AUSTRAC 1989 in Australia, FINTRAC 2000 in Canada, BaFin 2002 in Germany, FINMA 2007 in Switzerland, PMLA 2002 in India, and FICA 2001 in South Africa.

 

KYC Checks and Customer-Standpoint

The digital KYC identification notion among onboarding customers has changed over time. Nowadays, customers look for meticulous KYC verification services and onboarding process that helps build trust in the authenticity of the business.

Certainly, online customers always seek a fast and easy product or service access, with the safety and security of their identity and payment information they share with the online platform. People are looking for a less cumbersome onboarding process with equal data security. Hence delay in the acquisition is a big hindrance to the customer-success process.

AI-driven automated KYC solutions have made remote onboarding an extremely friendly process. The APIs and SDKs are easy to integrate and customize as per the national industrial regulations. Moreover, digital KYC identification compliance eliminates penalties and a firm’s reputational loss; customers are indeed looking for such regulated institutions that follow rigorous and updated KYC methods.

 

KYC Measures – An Integral Part of AML Framework

Know Your Customer (KYC) is an important subset of Anti-Money Laundering (AML) procedures. AML measures are based on regulations to mitigate money laundering risks linked to fraud, corruption, and other financial crimes. KYC fulfils one of the AML requirements linked to customer identification, due diligence, and continuous monitoring with a risk-based approach.

Any offline or online onboarding KYC process is accomplished with two main KYC document verifications; the first is photo ID proof, and the second is proof of address.

Today, innumerable identity verification data giants offer IDs and address authentication services. Alongside, Artificial Intelligence (AI) driven automated KYC solutions are offered by various RegTech companies with security features like ID card format checks, rainbow print/hologram verification, photoshopped image recognition, etc. Furthermore, there are multi-level security checks like biometric face recognition, liveness detection, and face comparison technologies to verify one’s identity.

 

Steps to Complete KYC Procedures

AML-KYC compliance is an ongoing process. Onboarded customers are subject to lifetime scrutiny based on the risk levels they put on to that particular business as customers. The three AML-KYC compliance procedures are described as the three pillars of the KYC lifecycle and are mentioned below –

Customer Identity Verification Program (CIP) – CIP is the basic KYC ID document and proof of address verification procedure during customer onboarding.

Customer Due Diligence (CDD) – This model approaches customers based on their risk profiles – i.e., beneficial ownerships, PEPs, Sanctions, and Adverse Media. In the case of Enhanced Due Diligence (EDD), customer data is collected from various sources to build risk levels. Customers are thus distinct as high-risk, medium-risk, or low-risk based on their profiles.

Continuous or Ongoing Monitoring – The ongoing KYC approach maintains constant monitoring and reporting of suspicious activities on existing customers. Again, Sanctions, PEP, and Adverse Media have crucial roles to play while continuously monitoring customers to determine customer risk levels more effectively.

 

AML-KYC Compliance with IDMerit

IDMerit is the global pioneer in the KYC identity verification industry. IDMkyc is our flagship AML-KYC compliance product that offers the most accurate biometric, ID documents, and video verification services with advanced NFC and AI-driven automated KYC solutions based on advanced Machine Learning technologies.

Contact IDMerit KYC Customer Success Manager to get a live IDMkyc product demo. Follow us to learn more about our succeeding blogs on Know Your Business (KYB) and Know Your Transaction (KYT) solutions.

Keep reading our KYC, KYB, and KYT articles to learn more about global identity verification norms defined to fight the looming money laundering predicate crimes related to bribery, corruption, the proliferation of weapons of mass destruction, human trafficking, and many more.

Jay Raol
Jay Raol

Jay Raol has been a Media Manager, Entrepreneur, Political Analyst and an Environmentalist. He aspires to climb the mighty Himalayas, and learn a new language every year. He lives in the beautiful city of Carlsbad in Southern California and owns a great collection of books. He is on schedule to publish his first book; 'Thou Art, Dope'. Co-founded two companies that provide futuristic solutions to the world while being quite enthusiastic about helping and investing in technology startups.

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