Know Your Customer (KYC) is a compulsory process for the banks and other financial institutions when opening a new account or on regular basis used for identification and verification of customer’s identity. If a customer fails in meeting the minimum KYC requirements, banks and other financial institutions will have the right to refuse to open the account or to terminate the business relationship with that customer. In the digital environment, the vitality of conducting a full and successful KYC checks in order to assure the authenticity of the identity of the customers has become more critical than ever. The importance of KYC lies in the fact that it serves as a crucial weapon in the war against financial crimes and money laundering as the identification of customers is the initial step for each process. As the digitalization inhabits both beneficial and risky features for the financial industry, the regulatory developments have evolved and become more challenging for the banks, fintechs, insurance companies and other financial institutions for the purpose of ensuring a more secure financial eco-system. KYC is taken as one of the key elements to prevent the financial crimes and is actively affecting the scope of the regulations. 

There are a set of supportive applications and processes to achieve a fully and effectively functioning KYC process. The most important ones are including but not limited to Customer Due Diligence (CDD), Enhanced Due Diligence (EDD), transaction monitoring, fraud detection methods and Suspicious Activity Reporting (SAR) filings.

1. Customer Due Diligence (CDD)

Customer Due Diligence (CDD) is one of the important steps of achieving Know Your Customer (KYC) requirements. It is a combination of processes for collecting and analyzing information about a customer or a potential customer during the onboarding process and on an ongoing basis operated by the financial institutions to achieve KYC requirements and detect any suspicious behavior/activity. Evaluation of the collected data about a customer from different sources, either provided by the customer himself or checking sanction lists, public or private data sources, in order to perceive and uncover risky behavior which has the potential to threaten the financial institution is the ultimate purpose of CDD. Customer Due Diligence requires basic information about customer which are ID, firm name and address, activities engaged in, business relations and risk profile.

2. Enhanced Due Diligence (EDD)

FATF’s international standards require that an additional risk-based approach must be applied to the CDD in case of the high risk profile of a customer. Therefore, Enhanced Due Diligence (EDD) is an enhanced form of CDD that is more risk-sensitive and requires more detailed information about the customers (in addition to the CDD requirements) such as background information, source of funds, source and structure of wealth and adverse media screening. Higher-risk customers that are associated with increased probability of getting involved in money laundering or terrorism financing crimes are subject to enhanced due diligence (EDD) processes with a risk-based approach.

3. Transaction Monitoring

Transaction monitoring is defined as monitoring and keeping track of customer transactions and accounts holistically for preventing illegal activities and creating a model of full customer activity including the past and present. Money transfers, deposits, withdrawals and other related banking transactions are all monitored in this system. It is a useful tool in detecting financial crimes, fulfilling ongoing CDD processes and achieving effective Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) procedures.

It is fully under the responsibility of the banks and other financial institutions to detect unusual or suspicious transactions and report them. Therefore, they need to ensure that they employ a sufficient transaction monitoring system. The automated and intelligent solutions offered by the latest technological developments such as advanced data analytics and anomaly detection that alert suspicious transactions, support FIs in employing more effective transaction monitoring and remain compliant.

4. Fraud Detection

As biometric systems adopt a fundamental role for ID verifications in the digital onboarding processes, fraud detection has gained more priority in detecting abnormal activities or behavior with the use of machine learning or AI-based systems. In order to conduct an effective fraud detection, it is important for financial institutions to adopt not an one-sided but a holistic approach with a diverse set of capabilities including technical, organizational and business-focused. Behavioral biometrics and AI-based technologies play a vital role in the ID verification and therefore fraud detection in the digital onboarding processes. Facial liveness detection, voice liveness recognition, age and gender analysis and behavioral analysis are the important steps used in digital ID verification powered by technological facilities. FIs operating these technologies can benefit from a simpler, more secure and cost-effective process handling.

5. SAR (Suspicious Activity Reporting) Filings

Suspicious Activity Reporting (SAR) is a reporting programme developed and provided by the Bank Secrecy Act (BSA) of 1970 for monitoring, detecting and reporting suspicious financial transactions which may be overlooked by other forms of reports. It is also called as “criminal referral form” and it became the standard form for reporting suspicious financial transactions in 1996. SAR effectively supports financial institutions in detecting and uncovering important financial criminal transactions such as money laundering, fraud, or other financial criminal schemes. Financial Crimes Enforcement Network (FinCEN) of United States requires FIs to submit SAR forms so that the modernized case management systems can pre-populate SAR forms and file them electronically to associated regulatory authority.

In the demanding and challenging digital financial landscape, financial institutions need to understand the importance of acquiring a holistic approach to be able to address the issues related to compliance, security, efficiency and customer satisfaction at the same time. Technological developments in the fields like RegTech, AI, machine learning and biometrics provide great opportunity for enhancing the overall operational efficiency, reducing cost, strengthening fraud detection measures and ensuring AML compliance.

Necati Yavaş, Sales and Business Development Director