In today’s digital world, it is more crucial than ever to understand your customers. Verifying who is behind the screen can protect your business and your customers, and depending on your industry, it may even be required. Know Your Customer KYC and AML are regulations requiring businesses to verify the identities of their customers. Here is the pertinent information.
What is Know Your Customer (KYC)?
KYC also goes by the names customer due diligence, know your client, and identity verification.
At its core, KYC involves verifying the identities of current or prospective customers so that you know with whom you are interacting. Consider it a mini-background check before conducting business with a customer. A customer may be an individual or a business, but KYC for businesses is typically referred to as corporate KYC or Know Your Business (KYB).
Why should I be concerned with KYC?
Having a KYC program is important for more reasons than just avoiding fines, which we will discuss below. As stated previously, KYC can benefit both your business and your customers:
It can safeguard your customers and help you establish their trust.
Customers may appreciate that you are taking steps to secure their accounts, vet your marketplace, protect them from account takeovers and other forms of identity theft, and so on.
It can aid in the reduction of fraud and financial crimes.
Even though KYC processes cannot eliminate fraud, knowing who your customers are can help you weed out bad actors and ultimately limit crimes that can result from fraud, such as money laundering and terrorism financing.
It’s frequently required.
In certain industries, a KYC program is required to meet compliance requirements. If you violate KYC/AML regulations, you could face a fine or even imprisonment. Companies were fined nearly $1 billion in the first half of 2021 alone for noncompliance.
Who must adhere to KYC regulations?
The Financial Crimes Enforcement Network (FinCEN) in the United States mandates that financial institutions adhere to KYC requirements. Regulations can vary from nation to nation, but frequently regulated entities include:
KYC for Banking
Know Your Customer
By knowing more about their customers, banks can reduce the risk of fraudulent transactions, the likelihood that their system will be used to commit crimes such as money laundering, and the possibility of noncompliance with FinCEN and FINRA regulations.
KYC obligations extend beyond traditional retail banks to fintech and “neobanks” that primarily or exclusively operate online. Before allowing high-value transactions to proceed, banks must ensure that they have implemented KYC processes that effectively capture, confirm, and verify customer data.
KYC requirements for credit unions
KYC for credit unions is comparable to that of banks, with the exception that many credit unions maintain physical locations to better serve their clients. Consequently, credit unions may find themselves in the unusual position of having in-person customers who wish to conduct certain transactions digitally.
As a result, credit unions require KYC solutions capable of bridging the digital/physical divide and ensuring that clients’ identities are confirmed and account information is secure regardless of how they choose to conduct transactions.
KYC for financial institutions
Online payment companies facilitate the transfer of funds between parties. Consequently, they require robust KYC processes to ensure that all parties to a transaction are who they claim to be.
Payment companies require robust KYC solutions capable of capturing and verifying customer data in real-time to reduce total risk and increase customer confidence. If customers are confident that their personal information is being handled securely and verified accurately, they are more likely to continue doing business with the payment company.
KYC for insurance institutions
To determine policy limits, deductibles, and premiums, insurance agencies collect a variety of customer data, such as personal, medical, and financial information. Consequently, insurance providers must have robust Know Your Customer (KYC) procedures capable of ensuring that customers are who they claim to be.
Imagine that an insurance company issued a policy to a person posing as someone else or based on false information provided. Given the extensive regulatory oversight in the insurance industry, this could result in substantial fines for noncompliance.
KYC for regulated industries, including gambling establishments
Online and brick-and-mortar gambling establishments process enormous amounts of money daily. The constant flow of cash demonstrates why gambling companies must know precisely who they’re dealing with and what type of risk they represent, ranging from revenue generated by player expenditures to payouts for large wins.
For instance, gambling establishments may request financial information in addition to personal data to ensure that players can pay their debts if the odds are against them.
KYC requirements for cryptocurrency exchanges
Previously relatively unregulated, cryptocurrency exchanges are now required to implement Know Your Customer programs that reduce the risk of fraud and deter money laundering.
Given the anonymity of many crypto platforms, KYC may emphasize verifying trusted ID addresses, evaluating watchlists, and requiring customers to provide complete documentation of their source of funds.
KYC for digital wallet providers
As mobile-based payments become more prevalent, the number of digital wallet providers is exploding, and each provider must employ robust KYC to mitigate the risk of fraudulent transactions.
Without effective KYC, fraudsters may be able to use someone else’s payment information to link key financial sources, such as debit accounts or credit cards, to their digital wallet, and the digital wallet provider may be held liable. This risk is mitigated by an effective evaluation of customer data at the outset.
KYC for asset management firms
Frequently, asset management firms manage enormous sums of money for their clients.
In this situation, KYC is essential to ensure that new clients are seeking to open an account and make substantial investments are thoroughly vetted prior to conducting transactions. Specifically, asset management firms must ensure that potential clients are not on international watchlists or politically exposed person (PEP) lists.
KYC for real estate agencies
Frequently, real estate agencies handle transactions worth hundreds of thousands to millions of dollars for a single purchase. Consequently, comprehensive KYC should be an integral part of the sales and purchasing processes.
If agencies can confirm that prospective customers are who they claim to be, they can proceed with confidence when making offers or closing sales deals. In the absence of this information, agencies risk noncompliance and the potential loss of licensure.
KYC for trust establishment services
Trust formation services assist individuals and families in establishing trusts that facilitate the transfer of assets and reduce their potential tax liability.
There is a growing demand for robust digital KYC solutions that enable trust formation staff to quickly and easily verify the information of both trust owners and eventual beneficiaries.
KYC for high-value item dealers
The emergence of digital storefronts and global shipping has made it possible for sellers of expensive items to move their operations online. In many instances, these items are rare or irreplaceable, generating significant interest from both legitimate buyers and criminals.
To verify parties on both sides of a high-value transaction and to ensure regulatory compliance, KYC processes must be effective.
While not all industries are required to conduct KYC procedures, any business can implement them to improve its overall security. In fact, the majority of businesses that deal directly with consumers implement some type of identity verification program because it protects both the business and the consumer. And in the future, as the world becomes more digital, more and more industries will likely be required to comply with KYC regulations.
Frequently Asked Questions
What are the most common KYC documents?
KYC documents commonly used include passports, driver’s licenses, and other government-issued IDs such as state IDs, birth certificates, and SSN cards.
EDD is a component of the KYC process.
Enhanced due diligence (EDD) is a level of due diligence that entails more in-depth checks and verification to mitigate total risk. EDD is frequently used by businesses to evaluate high-risk clients and confirm their identities.
How many KYC types exist?
There are two primary types of Know Your Customer checks: digital (eKYC) and in-person (also called paper-based KYC).
Can I do KYC online?
Yes. Numerous identity verification platforms enable online KYC completion. eKYC is frequently quicker, more efficient, and safer than paper-based KYC.
What are KYC sanctions?
Sanctions are lists of individuals or organizations who have committed (or are suspected of committing) illegal acts like fraud or money laundering. It is illegal for any US citizen or company to conduct business with a sanctioned entity, so it is essential to routinely review relevant sanctions lists during the Know Your Customer (KYC) process.