A Guide to KYC Compliance in the Financial Industry

KYC (Know Your Customer) is a component part of AML where businesses verify their customers’ identities. The similarities between AML and KYC is that both processes must be carried out during onboarding to ensure that customers are truthful about who they are and are careful to understand the level of money laundering risk they present. KYC and Enhanced Due Diligence KYC allows firms to take a risk-based approach to AML.

What is KYC compliance?

Real-time online ID and identity verification solutions provide convenience to customers and protection for businesses. Know your customer (KYC) guidelines in financial services require that professionals make an effort to verify the identity, suitability, and risks involved with maintaining a business relationship. KYC is also a legal requirement intended as an anti-money laundering (AML) measure. Notably, banks are increasingly demanding that customers provide due diligence information.

What is KYC compliance in banking?

Banks must ensure that their clients are genuinely who they claim to be. The KYC process is the mandatory process of identifying and verifying the client's identity when opening an account and again periodically over time. There are KYC requirements for banks. In case of failure to fulfill KYC compliance requirements, heavy penalties can be applied. For example, in the U.S., Europe, and Asia Pacific, fines have been levied for non-compliance with KYC regulations. Learn more about the KYC process in banking.

Important Stats for Financial institutions

• Eighty-nine percent of corporate customers have not had a good KYC experience – so much so that 13 percent have actually switched to another FI as a result. (trulioo.com)
• 25% even claimed to have aborted the process, as the re-verification of the identity verification was either too time-consuming or – with 16% of the interviewees – led to distrust. (link.springer.com)
• 38% of the interview partners stated that they had problems connecting their trading activities with their bank account, as the bank terminated such a connection for security reasons. (link.springer.com)

What are the three 3 components of KYC?

1. Clear Written Protocols

The BSA requires every financial institution to have a well-written, detailed, and unambiguous Customer Identification Program (CIP). It should outline the procedures and practices comprehensively. A good CIP should also outline the red flags to be on the lookout for. Every institution should have security software for storing customer information. This is to prevent identity and information theft by third parties. In 2019, there were about 3.2 million cases of identity theft in the United States.

2. Effective Verification System

Financial institutions need robust verification systems, both in-person and remote. Public records include immigration information, real estate records, and criminal history. The Office for Foreign Assets Control regulates databases that allow institutions to verify information firsthand. Institutions should adopt software that makes this process easy. On-site inspections enable firms to verify information first hand. If the details provided are inaccurate, it prompts an on-site inspection.

3. Independent Audit Process

Skilled independent auditors help to determine that financial institutions have a proper CIP program in place. Further, it evaluates the entire CIP process for areas that need improvement. An independent audit is typically required to strengthen a firm’s AML program. Learn more about these 3 components here. 

Why KYC Compliance software is essential

KYC software for banks enables employees to verify photo identification, checking the authenticity of the new client against the photo ID. Biometrics technology can instantly identify a person through facial recognition, iris scanning, or fingerprints. Learn more about how you can leverage KYC compliance software at your institution.

• The Thompson Reuters survey indicates that 30% of respondents stated it takes over two months to on-board a new client, while 10% indicate it takes over four months. (trulioo.com)
• While 56% of the participants stated that they generally appreciated a solution based on QR codes given the ease of use with which the identity can be proofed, 13% were worried about the security of the system. (link.springer.com)

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