KYC Regulations and Processes: Everything You Need to Know

Why Is KYC Compliance Important for Financial Services?

Know Your Customer (KYC) processes became commonplace in the post-9/11 cautious world. They are one of the first steps that customers have to go through when they call a helpline. Whether you are calling your bank or the summer service number your call is directed to the KYC protocol line first. The process is usually automated and can differ with each business. But usually, you must answer a personal question correctly or verify a PIN.

KYC processes are one of the first lines of defense against financial fraud or money laundering. It is one of the most widely used processes in the banking sector. Banks usually follow through with the protocol every time you call or when someone wants to open an account. KYC compliance can help banks verify that they are dealing with a real person and avoid falling into a trap. This article will talk about KYC and how it can help businesses secure their financial information from fraudsters.

What is KYC Compliance?

Securing the digital identity of your organization is important if you want your financial process to remain safe and trustworthy. In simpler terms, advanced ID verification systems and KYC compliance can help identify who is calling and verify that it is actually them. KYC has been backed up by the global Anti-Money Laundering (AML) and Countering Financing of Terrorism (CFT) organizations. The standard practice is also mandatory for some businesses due to international regulations like FATF (Financial Action Task Force).

Banks need to ensure that the person is who they are claiming to be. Otherwise, fake accounts and money laundering can become a piece of cake for many. So, if a potential client refuses to or doesn’t qualify for the KYC check, the bank can refuse to service them.

Why is the KYC Process Important?

Knowing your customer/client is important to ensure safety and maintain standards of service. Most financial organizations have to get KYC compliance by law. These checks are placed to avoid falling into scams, identity theft, money laundering, and illegal wire transfers. Globally, many illegal transactions can support mafias, drug lords, and terrorists. KYC regulations can help keep all transactions in line and maintain a thorough check and balance.

In many locations around the world, if your business fails to comply with KYC or AML standards, you may get heavily fined as well. So, not only do these processes prevent under-the-table and illegal funding, but they can also save your business from fines. Moreover, KYC compliance also enables your business to market itself as a trustworthy and secure option. Your clients need to trust you with their money and this can be a great way to show them that they can.

Which Businesses Require KYC Compliance?

KYC processes are not just a “good to have” and voluntary compliance. There are laws and regulations in place that may mandate them for your business. The most important sector that requires KYC compliance is finance and all financial institutions. The financial sector may benefit the most because not only can you verify customer identity but can also access the risks associated with having them as a client. Here are some of the businesses that need to comply with the Know Your Customer protocols:

  • Private lenders or online lending platforms
  • Banks
  • Credit unions
  • Fintech applications
  • Brokers
  • Wealth Management firms

It is safe to say that almost any individual business that deals with customers’ money and financial details should be KYC compliant. It is a critical issue and without it, your business may not foster a trustworthy relationship with clients.

What Are the KYC Triggers and Risk Factors?

KYC protocols are usually used for regular check and balance and initial screening during the onboarding process. For example, you may need to go through the verification to prove who you are when you open a bank account. However, based on your account type, KYC also puts in triggers to flag your account and call it “high-risk”. Such accounts might be monitored more frequently than others. Here are some of the risks factors that can trigger a KYC check for your account:

  • A different location
  • Changes to the client’s occupation
  • Adding a new party to a shared account
  • New information about the client
  • Unusual transaction
  • Failed background check
  • Change to the client’s business

KYC Compliance and Evolving Business Needs

Most companies now employ automated KYC processes. The world is getting increasingly digitized and it can be impossible for businesses to manually verify each customer. Therefore, you may have noticed that your internet company or bank redirects your call to an automated check. You may have to enter a verifiable pin code or answer questions like your parent’s maiden name. So, online and automated KYC verification is possibly the only solution for any business to meet the growing needs and stricter requirements.

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