Due to CFT (countering the financing terrorism) and AML (anti-money laundering), financial institutions are affected. There are international regulations that are being implemented in laws. They encompass really strong directives.
KYC is a mandatory process that involves verifying and identifying client identity as an account is opened. This is also done in time. Banks basically need to make sure that clients are actually who they claim they are. All banks are allowed to halt business relationships and deny opening accounts when minimum KYC requirements are not met.
Why Is KYC So Important?
The KYC procedures that banks use involve necessary actions to guarantee customers are real. At the same time, risks are monitored and assessed. Such processes help identify and prevent terrorism financing, money laundering and countless illegal schemes.
A KYC process regularly includes verifying the ID card, one’s face and document verification (like utility bills being used as a proof of address). Some banks even use biometric verification.
There are different KYC regulations and AML regulations that exist. Banks have to respect what the law says. The responsibility for KYC compliance rests completely with the bank. If compliance does not exist, the bank incurs heavy penalties.
All KYC checks are done through a reliable and independent source of data, information or documents. Every client has to offer the required credentials in order to prove both address and identity. After May 2018, in the US, banks also need to verify legal entity customers that control, profit and own companies that are serviced with accounts.
If any corporate company wants to open a bank account, identification documents and security numbers need to be provided. Such data is also needed for shareholders, board members and even some employees.
Customer Due Diligence And KYC Measures
KYC is mandatory for financial institutions, including banks. It is used in order to identify the identity of the customer. Everything started with 2001’s Patriot Act Title III and had the purpose of offering tools that law enforcement can use in order to prevent the activities of terrorists.
Whenever a customer enrolls in a business relationship with a bank, international AML regulations have to be followed. The banks frame KYC policies with 4 elements:
- Customer policy
- Customer identification procedures
Digital Identity Verification
With most banks, KYC is all about paper-based documents. However, in many cases, we are talking about a digital process. It involves verifying digital documents and how genuine they are. The digital ID verification is a process that allows the bank to capture demographic data. In the long run, this helps streamline onboarding and conduct risk assessment.
All financial institutions need to maintain records about the information obtained with customer due diligence and all transactions. The requirement applies to all the new bank customers and the existing customer base. Failure to comply leads to serious problems, like huge fines.