What is KYC verification? A common question appears in mind while entering financial procedures. Know Your Customer (KYC) procedure is a standard in the banking and finance industry that ensures the verification of a client’s identity and financial profile to prevent illegal financial activities.
When Did Know Your Customer (KYC) Start?
The idea of customer identification has been in the industry for a long time. Initially, KYC laws were legislated in the U.S. in the early 1970s in order to fight money laundering. However, KYC has been changing and improving with time due to financial situations and crises.
These security measures are undoubtedly strengthening online businesses and financial sectors since they reduce the risk of connecting with illegitimate customers and protect organizations from heavy fines.
Now that it is clear what Know Your Customer is and when it started, keep on reading to know what is KYC verification and its significant steps.
Steps Involved in KYC Verification
In the rapidly increasing global economy, illegal financial activities are on the rise. KYC laws are designed to prevent financial institutions from fraud, for instance, corruption and money laundering. Though KYC compliance should be present in all industries, it is most applicable in the financial sector and online business industry.
The subsequent sectionsd explore what KYC verification is and what steps it involves. This process has a few main elements to create an effective KYC program.
Collection of Customer Information
Gathering your customer’s personal and financial information is the first step in the KYC verification process. Clients go through this process while registering their accounts in financial institutions.
Gathering Proof from Users
The next step after gathering the required information is to verify provided information. To guarantee the precision and authenticity of identity information, it is crucial that users provide supporting evidence promptly. This evidence acts as a verification tool, which leads to greater trust in the accuracy of the information provided. Face verification, address, and various identity verification documents are required to prove one’s legitimacy.
Customer Identification Program (CIP)
Merely knowing what is KYC verification won’t suffice until all the necessary steps of KYC verification have been taken to implement KYC solutions.
How can a company ensure that the person is who he or she claims to be? The credibility of financial institutions comes at risk without knowing who their customer is. On average, large financial services firms in the United States incur a cost of $20.5 million for regulatory compliance operations.
In the U.S., the Customer Identification Program ensures that every individual performing transaction activities has proved their identity. As per Patriot Act, this process is created to curb money laundering, corruption, and illegal financial activities.
The financial sector should get the data of its client that includes name, date of birth, address, and identification number. Once the bank gathers this information, the supporting pieces of evidence and document should be investigated for verification purposes.
Risk assessment of clients’ and businesses’ accounts is another critical component of CIP. The financial institutions issue a risk score against the assessment of the account, depending upon the level of the account.
Customer Due Diligence (CDD)
One of the first steps in KYC verification process for any financial institution is to determine the trust level of the potential client. Customer Due Diligence for banks (CDD) is a critical element where banks screen the customer’s information to protect themselves from terrorists, politically exposed persons, and other criminals.
The CDD process analyzes and concludes the potential of risk from a specific customer or business to the financial institutions and reveals the previous record of their financing involvements.
It is crucial for private and offshore banks to maintain their emphasis on CDD since their industry puts them at a higher susceptibility to financial crimes.
It’s not enough to monitor and verify the customer’s accounts just once. In fact, the accounts require continuous checks and monitoring with time. During ongoing monitoring, financial institutions keep a frequent check on users’ transactional activities.
However, banks should keep a check on spikes in activities, unusual cross-border activities, and media mentions. Generally, the levels of monitoring of accounts depend upon the risk associated with the client or business.
Understanding what is KYC Verification is crucial in promoting security and preventing illegal financial activities. The process involves collecting customer information, verifying that evidence, implementing identification programs, conducting customer due diligence, and maintaining ongoing monitoring of customer and business accounts. By following KYC regulations, financial and business organizations can mitigate fraud risks and ensure legal compliance. Whether in the banking sector or online businesses, implementing effective KYC procedures is essential for maintaining the integrity of financial transactions and protecting against potential threats.