Money Laundering is one term, known to all these days because of the significant rise in the cases that have been reported. As per United Nations Office on Drug and Crime (UNODC), the amount of money laundering that occurs each year is nearly 5% of the global GDP. A huge sum of these illegally acquired funds passes through the financial systems, ultimately creating problems for the financial institutions. Hence, over a complete period of the client relationship, the financial institutions face trouble in getting to know the sources of client funds. This is where the KYC and AML regulations come to the rescue.
Banks and other financial institutions are increasingly relying on the compliance frameworks i.e the KYC policies that enable them to verify their customer’s identity.
Considering the importance of identity verification, banks usually dedicate around 10% of their workforce to financial crime-related activities.
KYC Compliance Requirements:
Know Your Customer (KYC) solutions enable them to know their customer’s backgrounds in detail before getting them on board. The need to verify and authenticate the user’s identity arises because of their exposure to fraud and their financial system is the fraudster’s easiest target. Strict KYC compliance assists these institutions to fight money laundering, terrorist financing, and other financial crimes at bay. Verifying and authenticating the customer’s identity during the onboarding processor at the time of account opening, helps considerably in understanding their respective transaction, hence, detecting any suspicious activity, almost instantly.
Strict KYC compliance enables the financial institutions to judge the customer’s risk status based on his previous operational activities and the industries he’s operated in. If he turns out to be a high-risk individual, the business refrains from getting him on board and reports him to respective authorities. Hence, effective risk prevention is another significant advantage of complying with the KYC regulations.
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How is KYC an Umbrella Term:
The reason KYC is said to be an umbrella term is the broad range of methods and practices it comprises of, namely;
- Know Your Business (KYB): Where KYC particularly focuses on authenticating the customer/user identity, KYB focuses on the legitimacy of the organization as a whole. Performing the same function as that of KYC but on a broader level. Hence, it allows the financial institution to gather and verify detailed information about the company they are engaging with for the purpose of preventing risk or fraud. Financial institutions diligently work on the application of effective KYB procedures for security purposes.
- Customer Identification Programs(CIP): These identification programs initiate the KYC procedures by authenticating their identity through their personal details. For this purpose, the biodata of the respective customer is entered into the system.
- Customer Due Diligence (CDD): A more detailed inspection of the information obtained by the CIP is performed by the customer due diligence program. The details acquired by the customers, previously, are verified to ensure that he is not an impersonator. If he proves to be a high-risk individual, enhanced due diligence (EDD) is used by enforcing strict rules, especially when engaged in financial activities for the prevention of money laundering.
- Electronic KYC: Integrating digital technology into KYC services has become a common practice in compliance with digital advancements. Doing so has brought ease to the business processes and optimized them. E-KYC works efficiently to faster, accurate and effective performance and instant adaptability to the frequently changing technological trends. Moreover, it significantly benefits the users by saving their visits to the praised and providing them easy accessibility.
- PEP Checks: Politically Exposed Person checks are extremely vital to a business’s survival in the long run. People belonging to the PEPs list have very high chances of being potential threats to the business as they hold a high-risk status. They could impose serious threats to the business by engaging in financial crimes, hence, it is extremely important to perform a pep check during the onboarding process.
Despite the increasing costs of the KYC solutions, it has increasingly been acquired by the financial as well as other institutions in order to save themselves from potential financial crimes. Among those, banks have made the most use of it. With the adequate implementation of the KYC policy, a significant change in the onboarding experience has been observed which was nearly 93 to 76%. In Spite of the huge benefits that the AML and KYC requirements bring, it has been observed that nearly 35% of the industry faces difficulty in adapting to it.