The government is now very serious about KYC know your customer laws. Finance firms need to be sure that they respect all regulations or they can end up faced with really serious repercussions. Knowing the customer means verifying customer identities, whether or not they are real and making sure that he/she is not on a prohibited list. It is important to find a balance so that innocent consumers are not penalized. Also, financial institutions need to protect themselves.
Basically, KYC means that there are two main requirements for compliance: CIP and CDD.
CIP – Customer Identification Program
In order to comply with CIP, the bank needs to identify information. Every single bank runs its very own CIP process. Due to this, different documents might be needed by various institutions. Usually, the individual just needs a passport or a driver’s license. For a company, some documents that might be needed include the business license, trust instrument or partnership agreement. Some further verification might be needed, like financial references or a financial statement.
CDD – Customer Due Diligence
CDD is the more nuanced of the two. When conducting due diligence, the financial institution needs to predict what transactions are going to be made by the customer so that suspicious behavior can be noticed. A risk rating is practically assigned to the customer to determine how often and how much an account will be monitored in the future.
The customers that are at high risk are treated differently. Usually, much more information is required, including account purpose, financial statements, occupation, business operation descriptions and more. No standard CDD procedure exists and there is no official requirement in place. However, banks need to prove the fact that suspicious activity is monitored.
Why Is KYC Important?
When the customer’s intentions and identity are verified first, to then understand transaction patterns, the bank can accurately pinpoint all suspicious activity. Terrorist financing and money laundering usually rely on accounts that were anonymously opened. The increased KYC regulation emphasis let to more suspicious transactions being reported, although this does not mean that increased bad activity exists. It is just that it is easier to detect it.
While regulations are stricter than ever, financial institutions need to spend a lot more money to deal with them. If this does not happen, very steep fines exist. Billions of dollars were already levied against many financial institutions until now and it is a certainty that this will continue.
Besides the benefits of KYC for banks as fines are avoided, there are benefits for the customer. Due to the implementation of stricter procedures, it is so much easier these days to detect whether or not the account holder is actually the one performing transactions. Identity theft is much less common and you can so easily prove the fact that it is really you, especially in an online environment.
As criminals become more knowledgeable and complex in their actions, financial institutions set up brand new ways to protect themselves and their customers. This is why KYC regulations matter so much these days.