Financial institutions face challenges with respect to compliance and customer responsibilities. The harsh monetary fines, as well as reputational damage, haunts financial institutions. However, it is crucially important for the businesses to identify bad actors from the system and deter the risk of fraud. KYC (Know Your Customer) regulations are in place for identity verification of customers in banks and other financial institutions. The need for this is to reduce financial crimes such as money laundering and terrorist financing.
KYC Regulations are primary regulations to which financial institutions need to strongly comply. For the establishment of a clean customer base, the compliance ensures that no criminals entity is facilitated through the financial business. Whether it is an insurance company, bank or a loan/investment service provider, KYC and AML compliance is mandatory. Now the challenge is to conduct it. The following are 3 effective steps towards KYC compliance, that are:
Customer Identification Program:
Financial institutions need to conduct a Customer Identification Program that refers to the identification and verification of the identity of individuals participating in the financial system. This is an approach towards maintaining a clean customer base by ensuring the credibility scale of customers based on its identity information.
The financial institutions collect information from the customers. For example, they ask personal details such as name, date of birth, address, etc. this is the information that is also present on some identity documents such as on driving license, national ID card or even on the passport.
After data collection, identity proof is asked that could be in the form of the mentioned documents. If the user-provided information matches with the one present on the document, identity is verified. Based on the information a risk rating is assigned against the identity of the customer. In this way, financial crimes such as money laundering can be mitigated.
Customer Due Diligence
Trusting a potential client is crucially important. In financial institutions, the risk of bad actors is higher. Money launderers find financial institutions a source to launder their money across the world. To ensure a credible customer base, customer due diligence is crucially important. It is an element that corresponds to managing the risks associated with the entity and protecting the businesses against high-risk criminals.
There are about three levels in customer due diligence in which customers are treated differently and their scrutiny is done on different levels. For example, Simplified Due Diligence refers to the account screening of customers to deter the disks of money laundering and terrorist financing.
In the basic Customer Due Diligence, Face Verification Solution is verified against certain identity checks and parameters. Whereas, in Enhanced Due Diligence (EDD), a thorough screening of customers is performed. AML screening of customers is done against updated sanctions lists, global watch lists, and records of Politically Exposed Persons (PEPs). This helps identify the high-risk customers, eliminate money laundering cases and take measures in time.
Ongoing Customer and Transaction Monitoring
One time checks are not enough, ongoing monitoring of both customers and transactions would be done in order to maintain a clean environment. KYC process includes the evaluation of customer profiles in the random time span. The ongoing transactions should be monitored to mark the suspicious ones and take immediate actions against them. The transaction pattern, source, destinations and threshold should be monitored continuously to see any suspicious elements in the financial system. The malevolent transactions should be reported to the appropriate entity immediately.