The (KYC) Know Your Customer definition defines the phrase as a set of regulatory standards used in the finance industry to verify the identity of a customer or a client. The main purpose of the Know Your Customer rule is to stop certain illegal activities from occurring. These can involve things such as money laundering, identity theft, and fraud.
To further understand the Know Your Customer regulations and their purpose, we will cover them and their relevance in the article below.
KYC Know Your Customer Banking
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When it comes to the banking sector specifically, Know Your Customer in banking requires bankers and financial advisors to identify their clients. This benefits the whole process since it allows the bank to learn more about the customer, maintaining the accuracy of customer accounts. Below is an overview of the Know Your Customer process in banking.
Know Your Customer Identity Verification
The first step always includes a detailed identification. You’ve probably participated in this kind of identity verification on numerous occasions, for example when opening a new account at a bank. Typically, this verification entails collecting official identification documents (such as a passport or driver’s license) and documentation of residence (such as utility bills).
Know Your Customers Consent
A very important part of the Know Your Customer requirements for banks is client consent. Banks must first obtain the consent of their client and then proceed with information gathering and eventual verification.
Assessment of Risk
Risk assessment is also part of the process. Banks evaluate each customer’s risk level to ascertain the necessary measures of due diligence. For example, high-risk clients, such as PEPs, or politically exposed persons, require careful examination.
Customer Due Diligence (CDD)
Customer Due Diligence is a part of the Know Your Customer policy during which banks gather extra information about the client’s financial background, fund sources, and business activities, if there are any. To make sure the customer’s financial transactions match their profile and anticipated behavior, the bank checks those as well.
Enhanced Due Diligence (EDD)
Enhanced Due Diligence is typically performed in cases of elevated risk. This can include additional documentation requirements, monitoring, and thorough background checks.
Ongoing Monitoring
Banks need to always monitor their client’s accounts and transactions in cases of unusual activities. With that being said, all activity that deviates from the client’s typical behavior is examined.
Know Your Customer Compliance
KYC procedures have to follow both legal and regulatory requirements. And, these tend to vary depending on the jurisdiction and country. These rules have to be followed by banks, who must also notify the appropriate authorities if any questionable transactions occur.
Keeping Records
Record keeping is an important aspect of the process. Banks have to keep detailed records of their client’s information, transaction history, and documentation. This is typically done for a specified amount of time, which is determined by the relevant regulatory authorities.
Reporting Suspicious Activity
Sometimes the process of monitoring transactions can result in coming face to face with suspicious activities. And, when that occurs, the bank is expected to report those suspicious or potentially unlawful activities to the appropriate authorities, such as financial intelligence units or law enforcement agencies.
Staff Awareness, Training, and Education
Finally, in order to avoid severe penalties, fines, and a damaged reputation, banks need to educate and train their employees to follow KYC regulations and procedures.
(KYC) Know Your Customer Blockchain
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Blockchain technologies are surprisingly not limited to cryptocurrencies. In fact, blockchain can be useful in taking care of many problems that arise in conversations regarding traditional KYC procedures. After all, problems such as identity theft and fraud do happen, and they present a serious challenge in the whole process. However, blockchain technologies can remedy those problems.
Blockchain technology allows for transparent, secure, and permanent record-keeping. For example, companies can develop a decentralized identity verification system that can securely store and share client data in a tamper-proof manner using blockchain technology.
Additionally, increased efficiency is one of the key advantages of adopting blockchain for KYC procedures. Blockchain allows customer data to be secured within a digital identity, which makes paper documents and manual data entries obsolete. This can speed up the onboarding procedure and cut down on the time and expense usually associated with using conventional KYC procedures.
Blockchain also increases the security levels of KYC procedures. For example, customer information is usually kept in centralized systems with traditional KYC procedures, making them susceptible to hacker assaults and data breaches. On the other hand, blockchain technology makes use of sophisticated cryptographic methods to protect client data privacy and security. With that being said, It is far more difficult for hackers to access and alter data when using a decentralized system.
Additionally, by offering a single, unchangeable source for customer data, blockchain technology can improve data accuracy and decrease errors. This helps remove errors and inconsistencies in client data, lowering the danger of fraud and problems with regulatory compliance.