Know Your Customer (KYC)
Know Your Customer (KYC) holds a pivotal role in combating financial crime and money laundering within the banking sector. Customer identification stands out as a crucial initial step, setting the stage for effective performance throughout the entire process.
Financial institutions operate in a high-stakes environment shaped by global anti-money laundering (AML) and countering the financing of terrorism (CFT) regulations. International standards, notably those established by The Financial Action Task Force (FATF), influence national laws, including robust directives like AML 4 and 5, as well as preventive measures such as "KYC" for client identification.
To grasp the essence of KYC and its electronic counterpart, eKYC, let's delve into their definitions and explore how advanced identification verification systems enhance KYC processes.
What is KYC? KYC, or Know Your Customer (sometimes Know Your Client), is a mandatory process for identifying and verifying a client's identity during account opening and periodically thereafter. In essence, banks are obligated to ensure the authenticity of their clients' claimed identities, with non-compliance potentially leading to the refusal of account opening or business relationship termination.
Why is the KYC Process Important? Banks establish KYC procedures to ascertain the legitimacy of their customers, assess risks, and prevent money laundering, terrorism financing, and other illicit activities. This process encompasses actions such as ID card verification, face verification, document verification (e.g., utility bills for proof of address), and biometric verification. Failure to comply with KYC and AML regulations can result in heavy penalties.
KYC Documents KYC checks rely on independent and reliable sources of documents, data, or information. Clients must provide credentials to prove their identity and address. In some jurisdictions, like the U.S., additional requirements for verifying the identity of legal entity customers have been introduced.
What is eKYC? In India, Electronic Know Your Customer (eKYC) involves electronically verifying a customer's identity and address through Aadhaar authentication, leveraging the national biometric eID scheme.
eKYC, Facial Recognition, and Digital Account Opening eKYC, or online KYC, gains popularity as it improves in accuracy through the integration of Artificial Intelligence (AI). Facial recognition plays an unexpected yet promising role in KYC onboarding, particularly in the context of increased reliance on digital channels and apps due to factors like the COVID-19 pandemic.
Anti-Money Laundering Directive In Europe, AMLD4 and AMLD5 directives strengthen measures against money laundering and financing terrorism, emphasizing the need for improved understanding of customers, stricter Customer Due Diligence (CDD), and data sharing with central administrations.
KYC and Customer Due Diligence Measures Banks adhere to KYC policies encompassing customer policies, customer identification procedures (including checks against politically exposed persons/sanctions lists), risk assessment, and ongoing monitoring. These measures range from traditional paper-based checks to advanced digital processes involving biometric verification.
Enhanced Due Diligence (EDD) Enhanced Due Diligence (EDD) involves a more in-depth analysis to provide higher identity assurance, reflecting the commitment of financial institutions to robust KYC processes.