Know your customer (KYC) is the procedure to determine the authenticity of customers to protect the business from fraudulent activities and terrorist financing
It is almost impossible to miss the terms KYC and AML in the world of banking or finance. KYC laws were introduced in 2001 after 9/11 as part of tightening financial laws to detect any kind of terrorist behavior. Today, every legal and financial operation require KYC Compliance in some form.
What’s the need for KYC Authentication
One may assume all the paperwork involving KYC is tedious and tiresome, but it is highly important as well. The main purpose of KYC is to prevent any kind of identity theft, financial fraud, money laundering, and terrorist financing. Through the use of efficient KYC solutions, the company can better know their customers and avoid any potential risks accordingly.
KYC and AML
AML stands for Anti-money Laundering and it includes law, policies, and regulations to combat money laundering and generating income fraudulently. At the core, KYC/AML is connected although they are different. As established above, KYC includes the verification of the customer and their financial dealings. Similarly, AML consists of KYC solutions, risk assessment and risk-based AML policies, internal audits, AML compliance.
KYC and Cryptocurrency
The main idea of cryptocurrency is anonymity and KYC is the exact opposite of it. So why is KYC so important in the crypto world? The reason is simple. Due to the anonymity presented by the digital currency, it is highly lucrative for terrorists and fraudulent people. To ensure that the digital currency is not being used illegally, it is highly important to provide KYC solutions to digital exchanges. The process of KYC for banks and digital exchanges is the same as it requires Proof of Identity (POI), Proof of Address (POA) and other relevant documents.
KYC Solutions – A List of Known Measures
To run an effective KYC procedure, some important elements are necessary. Let us examine them.
Customer Identification Program (CIP)
To know about the validity of your client and to ensure they are who they say they are, it is important to properly identify your customer. Identity theft is far too common and widespread and according to statistics, over 16.7 million US consumers were affected by identity fraud resulting in the theft of $16.8 billion in 2017.
The main requirements to open a financial account are:
- Date of Birth
- Identification Number
While gathering this information is enough, the company must ask the client for relevant documents and check the authenticity of these documents at a suitable time.
Customer Due Diligence (CDD)
You have to trust your client and for that purpose, you have to perform CDD on them. Customer Due Diligence is the process that involves verifying the authenticity of your client protecting your organization from any potential terrorists or fraudulent people. There are three levels of CDD:
- Simplified Due Diligence (SDD) which involves low money accounts and the risk for money laundering or terrorist financing is low.
- Basic Customer Due Diligence (CDD) is information taken from all the customers to perform checks.
- Enhanced Due Diligence (EDD) involves collecting more advanced information from high-risk customers.
It is not enough to check your client only once and for that purpose, you would need a software that can monitor your clients regularly. Any spike in the client’s activity or unusual cross-border account activity etc. has to be monitored closely.
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