What Are the Steps in the KYC Verification Process?

Companies and organizations need to know exactly who they are doing business with. Beyond protecting their financial interests in a general sense, companies and organizations must comply with all applicable KYC regulations and anti-money laundering (AML) policies. KYC is especially important for firms that offer any sort of financial services—although the principles extend to many industries. In this article, you will find an overview of know-your-customer (know-your-client) compliance, why it is so important in the modern financial environment, and the three key steps in the KYC verification process.

What Is Know-Your-Customer (KYC)?

To start, it is important to have a general understanding of KYC. You may hear it referred to as either know-your-customer or know-your-client. Broadly defined, KYC is a standard that requires parties to know who they are working with—both their actual identity and basic information about them. KYC standards became a big issue in the financial services industry after the USA Patriot Act of 2001 was signed into law. A provision within the Patriot Act made KYC mandatory for all U.S. banks. It also created comprehensive customer identification program (CIP) standards. To be clear, the U.S. is by no means the only country that has detailed KYC standards in place for banks and financial institutions. Other standards, including the UK FSA and the EU 6th Directive on AML, may also be applicable.

Protect Your Interests with KYC Compliance

KYC is critically important in the modern financial, technological, and regulatory environment. First and foremost, KYC matters because it is the law. Financial entities that fail to comply with relevant KYC standards could face significant legal liability. Authorities take these matters very seriously. They must have proper protocols in place to identify and stop criminal activity, money laundering, identity theft, and financial fraud.

Banks and other financial institutions that do not have adequate KYC practices in place could also face serious business harm and/or reputational harm. Solutions are available. Integrity provides reliable KYC compliance verification. Along with other services, including identity verification and age verification, we make sure that banks, financial institutions, and other financial entities have all of the tools, knowledge, and resources that they need to protect their best interests.

Three Key Steps to KYC Compliance and Verification

1. Identify Your Customer

Know-your-customer/know-your-client always starts with the identification of a customer. As noted previously, regulations promulgated under the USA Patriot Act require banks and other financial entities to have an adequate Customer Identification Program (CIP) in place. You should think of CIP as the initial phase of the KYC verification process. When someone opens an account or does business with a financial institution, that entity is supposed to obtain and preserve relevant identifying information. Along with other things, this personal identifying information includes:

  • Name;
  • Physical address;
  • Date of birth (DoB); and
  • Relevant ID number, such as a Social Security number.

Once the basic customer information is collected, it can be then cross-referenced for consistency. In effect, the steps of the KYC verification process are designed to help ensure that the customer or client is who they say that they are. If there are inconsistencies or other problems with the documentation that they provided, that is an early warning sign of problems and there should be an immediate follow-up on the matter.

2. Conduct Due Diligence

A key part of KYC verification is to ensure that the person or person(s) opening accounts or otherwise doing financial business are who they say they are. Of course, confirming their identity does not necessarily make them a favorable or safe customer. The second step of KYC is conducting comprehensive due diligence on a prospective customer. Among other things, proper know-your-customer due diligence measures should include:

  • Collecting data from available and utilizing sources, like Integrity from Aristotle;
  • Check AML lists for Financial Sanctions and PEPs
  • Evaluating the data to determine the safety of a customer/client;
  • Assessing the nature and central purpose of the client’s activities; and
  • Assessing the likely beneficiaries of the proposed relationship.

Proper due diligence on the front end of a potential customer relationship or client relationship can reduce liability risks and prevent other serious problems. Banks, financial institutions, and financial entities implementing a KYC verification process should ensure that they have the right system for due diligence in place. If you have specific questions about conducting due diligence for a potential client or customer, the team at Integrity can help.

3. Ongoing Monitoring (As Appropriate)

KYC requirements are ongoing. That is to say that banks, lenders, and other financial institutions are responsible for knowing all of the clients and customers—not merely the new ones. For this reason, step three of the KYC verification process is ongoing monitoring. What exactly ongoing monitoring entails depends on several different factors, including the specific risks posed by a client.

Certain types of clients or customers may be at “higher risk” due to their activities. As a simple example, a client or customer with a high velocity of small financial transactions may be at higher risk than a customer whose transactions are measured over time. That is not to say that there is anything wrong with taking on clients with high velocity, but they may be trying to skirt financial regulations by maintaining a small financial amount. However, a bank or financial institution should have effective and comprehensive KYC safeguards in place to ensure that the additional risk of a particular customer or client is properly accounted for and increase KYC requirements should questionable financial behaviour occur. Ongoing KYC compliance monitoring can dramatically reduce the risk of potential violations.

Integrity Is a Leader in Identity and Age Verification

A division of Aristotle, Integrity is a proven leader in identity verification, age verification, and KYC compliance. Working in both the commercial and government sectors, we are committed to helping our clients find the narrowly-tailored, cost-effective solutions that work best for their needs. If you have any specific questions or concerns about know-your-customer (KYC) compliance and/or verification, our team is more than ready to help you find the best solution. Give us a call now or connect with us directly online to set up a confidential to learn more about what we can do for you.

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