- KYC solutions are taken at the industrial level to combat financial crimes such as money laundering, terrorist financing and ensure customer credibility.
- To stabilize the economy, KYC verifications are crucially important.
- UBOs verification is done to make sure that your business entities are also not part of any criminal activity and a successful healthy business relationship can be ensured.
Often we come across the phrase KYC or Know Your Customer, but do not know its significance. In the business world, especially, in the finance industry, the term KYC holds greater importance. KYC refers to a process in which businesses verify their customers before onboarding them. Customer verification helps deter the risks associated with each identity. This is done in order to reduce financial crimes such as money laundering and terrorist financing activities that are done when bad actors misuse the legitimate financial system.
KYC verification is a regulatory requirement that is followed all over the world. Complying with global regulation is also important as they require each financial company to undergo customer scrutiny to contribute to clean the financial system from malicious activities. Moreover, to stabilize the economy, KYC verifications are crucially important. Recognizing the effect KYC verifications depict is enforcing other industries to identify and verify their customers and deter the risks of financial crimes, payment scams, identity theft, data breaches and in short ensure authorized access.
Fundamentals of KYC
The business world is exploring the need for KYC checks by mapping it onto the company use-cases. Online businesses that face payment scams and credit card frauds are taking in place stringent KYC compliance practices to ensure that no fraudulent entity is facilitated through their business. Therefore, KYC verification is a solution to protect the identities who are or are the source of financial threats.
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Following are the fundamentals of Know Your Customer (KYC):
Customer Identification Program (CIP)
CIP is an important component of the KYC Solution. In this part, customers are asked to provide personal information and this information is then verified to ensure that the provided information is correct or not. The requirement of CIP was made mandatory in 2003 for the banks and other financial institutions to develop customer identification programs in their business practices and to combat financial frauds.
Depending on the type and size of an organization, institutions define their CIP processes.
For this, documents are required that serves as an identity proof against the provided information. These identity documents include government-issued official documents such as s ID card, dring license or passport, etc. Other documents may include utility bills, financial references, financial statements, etc.
Customer Due Diligence (CDD)
Customer Die Diligence covers various aspects when it comes to customer identification and verification. For secure customers onboarding process, identities are verified against several identity proofs. This is to ensure that no exposed person or bad entity having a name in some criminal databases is allowed to enter into legitimate systems. Customer transaction pattern is analyzed, behavioral traits are judged to undergo all the KYC practices that can help identify future risks associated with that identity. In this same phase, the risk rating is assigned to every customer based on the profile details. This helps ensure that how much an entity could be vulnerable to the financial system.
Enhanced Due Diligence (EDD)
Enhanced due diligence (EDD) is a more comprehensive component of identification. In this component, extensive identity verification is done by screening the identities against several sanction lists, Politically Exposed Person (PEPs) records, criminal databases, and global watchlists. Based on AML screening of customers, the risk rate is assigned that depicts the likelihood of identity to be involved in any financial crime such as money laundering and terrorist financing. Moreover, UBOs verification is done to make sure that your business entities are also not part of any criminal activity and a successful healthy business relationship can be ensured.