KYC, or Know Your Customer, refers to a collection of protocols that enable banks and other financial institutions to validate the identification of the organizations and persons with whom they do business and guarantee that those entities are functioning legally. Effective KYC process prevents businesses from doing business with organizations or people engaged in illicit conduct such as money laundering, terrorism funding, or corruption. It also enables financial institutions to have a deeper knowledge of their client’s businesses, which can yield useful insights.

Why is KYC Process so Important?

To combat criminal activities that utilize the financial industry to transfer or hide money, governments and central banks throughout the world have expanded the scope and breadth of their KYC laws, enacting new or expanding existing legislation to include practically every aspect of the global financial ecosystem.

The rising emphasis on KYC is due in part to the growing incidence of financial crime throughout the world today. However, it also represents a growth in the number of cross-national linkages between financial organizations and business companies.

Every day, more value than ever transfers across the globe via these links, making it increasingly difficult to detect and prevent unlawful financial activity. To keep up, regulators have altered and enhanced KYC checks.

What is the KYC process?

While the particular stages may change according to the KYC rules in each country, most frameworks incorporate the same aspects. A KYC process often includes validating the customer’s identification, investment eligibility, and doing due diligence on different documents such as proof of address and income.

Customer identification

Risk assessment is a vital component of a successful KYC process, and it is up to the particular business to set the precise KYC policy to fight any possible concerns and assure compliance.

Customer due diligence

One of the other parts of the KYC process criteria for any firm in the investing sector is the ability to trust the investor. Customer Due Diligence (CDD) is an important factor in deciding this. There are many levels of CDD depending on the possible dangers in the business connection. Simplified Due Diligence refers to circumstances in which the danger of fraud or other illicit acts is assessed to be low. As a result, the information required to check a customer’s past is less extensive than in other circumstances. Basic CDD is the most common method of gathering information, whereas Enhanced Due Diligence is used in higher-risk scenarios.

Ongoing monitoring

A single check of your customer’s past is insufficient for creating long-term trust. Some restrictions call for a continuing degree of surveillance. This may entail supervising financial activities and accounts with a focus on thresholds established throughout the risk assessment process.

KYC Process Steps

The KYC process is straightforward and varies just slightly between countries. The KYC process can include, but is not usually limited to, the following steps:

• Step 1 Document submission: An applicant or prospective user of financial services must present documentation to verify their identification and residency status. The submission can be made in either electronic or physical form.
• Step 2 Verify your identity: Based on the documents presented, the authorized agency/organization verifies the identification. For example, if the applicant produces a driver’s license, the Department of Motor Vehicles will verify it (DMV).
• Step 3 Verification of residency: The verification of residence includes determining the resident status (domestic or foreign), current residential address, alternative residential address, citizenship status, and so on.
• Step 4 Examine the financial situation: Documents, communication with the issuer, and physical verification are used to verify the assets and liabilities declared. This lowers the possibility of misrepresentation.
• Step 5 Transactions tracking: The financial institution examines the transactions made by the customer/client, and any transaction that is unusual/high-valued, frequent, or otherwise unusual is immediately marked and subjected to strict manual scrutiny.

After completing all of the above processes, the person/organization is called KYC approved. It may also include a verification certificate, albeit this is not always the case. The user may find the procedure straightforward, but the financial institution’s verification process requires effort and diligence. The KYC process is an essential component of numerous due diligence processes performed by businesses, investors, banks, and others.