How well do you know your clients? How certain are you that they are truthful about their true identity? These are difficult questions to answer, especially when you rely solely on the information provided by the person you are speaking with.
For this reason, the “know your customer” process is being implemented in various industries. Continue reading this article to learn more about how to create an effective KYC program.
The term “Know Your Customer” refers to the steps that financial institutions and businesses take to:
- Create a customer identity
- Recognize the nature of the customer’s activities.
- Ensure that the source of the customer’s funds is genuine.
- Evaluate the customer’s financial crime risks
The following elements need to be done to execute an accurate KYC program:
Step 1: Customer Identification Program
Risk assessment is a critical component of a successful customer identification program at the institution and account levels. However, it is up to the individual institution to determine the exact level of risk guided by the CIP.
To open an individual account, you must provide your name, date of birth, address, and identification number. These pieces of information are already sufficient for account opening, and institutions must verify the account holder within a reasonable time frame.
Identity verification procedures include the following:
- All documents containing information supplied by customers (valid IDs, proof of billing, statement of account, etc.)
- non-documentary methods such as comparing the customer’s information with consumer reporting agencies, public databases, other due diligence measures, and so on.)
- Use of both documents and non-documentary methods.
Step 2: Customer Due Diligence (CDD)
One of the first analyses conducted by a financial institution is to determine whether or not a potential client is trustworthy. CDD, or Customer Due Diligence, is one of the critical elements in risk management and protecting yourself from criminals, terrorists, and politically exposed individuals who may pose a risk.
The following are the levels of due diligence:
Simplified Due Diligence is used when terrorist funding or money laundering risk is low, and a full CDD is not required. Accounts with low value are a prime example of this.
Basic Customer Due Diligence entails gathering information for all customers to verify a customer’s identity and assess the risks associated with the customer.
Enhanced Due Diligence is or high-risk customers, additional information is collected to provide a deeper understanding of customer activity and mitigate associated risk.
Step 3: Continuous Monitoring
It is not sufficient to check your customer once; you must also monitor your customer regularly. Continuous monitoring aids in supervising and controlling financial transactions and accounts based on risk thresholds established as part of a customer’s risk profile.
Here are some things to keep an eye on:
- Increase inactivity
- Out of the ordinary cross-border activities
- Inclusion of individuals on sanction lists
- Negative media coverage
If the account activity is deemed suspicious, you may be required to submit a Suspicious Activity Report (SAR).
So, these are the fundamental components of the Know Your Customer program. It may be more difficult to operate within the boundaries set by regulatory institutions, but these work in our security interests. And, while they may appear more complicated, it is encouraging to know that organizations are working to reduce risk and crime involvement.