Financial crime is spreading at an alarming rate. According to the United Nations Office on Drugs and Crime, global annual money laundering amounts to 2% to 5% of global GDP. This massive surge is causing anxiety among regulatory officials and businesses. Regulatory regimes are growing more stringent, and KYC compliance is becoming increasingly crucial for enterprises.
With worldwide KYC requirements changing, organizations’ top priority is to optimize their compliance operations with customer onboarding. Online KYC screening solutions address various problems that executives consider implementing KYC compliance in their firms.
KYC compliance necessitates substantial research. The following is a comprehensive guide on five essential things for firms worldwide to know.
1. KYC Documents Required
Individuals and companies are both subject to the KYC process. KYC as a service authentication is based on identification and residence verification. The documents necessary for the KYC procedure for individuals include the typical paperwork that people use, such as:
- Driver’s license
- Passport
- Social security card/number
The following documents can be presented as proof of residence:
- Utility bills, such as telephone, electricity, gas, etc.
- Employment documents
- Bank statements
- Housing contracts and rent agreements
2. KYC Process
The KYC process is straightforward and varies just slightly between countries. A basic KYC procedure flow is shown below:
Submission of documents
An applicant or prospective user of financial services must present documentation to verify their identification and residency status. They can submit either electronic or physical forms.
Identity verification
The authorized agency/organization verifies the identity based on the documents presented. For example, if the applicant produces a driver’s license, the Department of Motor Vehicles will verify it (DMV).
Residency verification
The residency verification includes determining the resident status (domestic or foreign), current residential address, citizenship status, alternative residential address, and so on.
Verification of the financial condition
Documents, contact with the issuer, and physical verification are used to verify the assets and liabilities claimed. This lowers the possibility of misrepresentation.
Transactions monitoring
The financial institution examines the transactions made by the customer/client. Any unusual/high-valued, recurring, or otherwise unusual transaction is immediately marked and subjected to strict manual scrutiny.
3. KYC Requirements
Customer Identification Program
CIP requires financial businesses to gather four pieces of identifying information about a client, including name, date of birth, address, and identity number.
Customer Due Diligence
CDD is a process that collects all of a customer’s credentials to authenticate their identity and assess their risk profile for suspicious account activity.
Enhanced Due Diligence
EDD is used for consumers at a higher risk of infiltration, money laundering, or terrorism financing, and it is frequently required to acquire additional information.
4. KYC Compliance
Financial Industry Regulatory Authority Rule 2090 (Know Your Customer) and FINRA Rule 2111 oversee KYC (Suitability).
According to FINRA Rule 2090, every broker-dealer must use reasonable effort when opening and managing client accounts, as well as know and retain records on the profile of each customer and identify each individual who has permission to act on the customer’s behalf.
According to FINRA Rule 2111, a broker-dealer must have a reasonable opinion that a recommendation is appropriate for a customer based on the customer’s financial status and needs. Before buying, selling, or exchanging security on the client’s behalf, the broker-dealer must examine the customer’s current facts and profile, including the customer’s other securities and investments.
5. The importance of KYC
KYC is a widely accepted criterion in the investment business. It’s a process put in place by industry regulatory authorities to protect all stakeholders in the industry, and it’s in any investment firm’s or investor’s best commercial interest, especially if there’s a lot of money at stake.
In addition to the KYC process for new investors, repeat investors must undergo KYC or “renew” their KYC profile on file with the firm. It is vital to keep correct and up-to-date records throughout the company.
For customers
Although the significance of KYC may not be evident to investors, regulators prioritize their protection. These stringent checks can be time-consuming for the investor, but they establish a safe and trustworthy environment for financial or investment operations within the organization.
Digital technology has enabled a far smoother, streamlined onboarding experience, transforming a months-long procedure into an intuitive experience you can complete on any device in minutes. The technology used to protect sensitive information has also progressed, with solutions such as enhanced authentication and encryption providing customers with trust in all KYC procedures.
Smooth KYC operations will give your consumers confidence that they are dealing with a legitimate organization and will make them more comfortable spending payments to your firm or not.
For companies
When a company or issuer follows KYC regulations, it reduces the financial risks associated with its transactions with specific clients. Knowing a customer’s source of income, determining their ability to invest in your market, and acquiring their whole financial portfolio and background are all critical components of KYC criteria. These checks can also be significant risk management measures to avoid commercial interactions with potential clients who have engaged in unlawful activity.
KYC procedures also aid in establishing trust in a business relationship and provide an organization with information about the nature of consumer activities. Furthermore, they are an essential component of the onboarding process and can considerably improve investor servicing and management over the length of the relationship.
Bottomline
Know Your Client (KYC) rules and criteria are used by investment and financial services firms to verify the identity of their customers and any associated risks with the customer relationship. Customers must give a personal identification profile, and KYC guarantees that investment advisors know their clients’ risk tolerance and financial situation.
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