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KYC Process: Improve Security for Businesses against Financial Crimes

Technology is reducing the barriers of language and distance in business all over the world. It has shifted the world to a platform of economic opportunity. From software companies to production units, trading to banking, and physical to online stores, businesses are dependent on technology now. Huge success comes with a big responsibility. With the rise of money laundering, drug trafficking, and terrorist funding, firms should know with whom they are doing business. In this case, the KYC process is used to verify whether the customer is real or a fraud.

KYC Process

The “Know your customer” or KYC process ensures that the person is who they claim to be. It allows banks and other financial businesses to identify the individuals and firms with which they are doing business. An effective KYC process safeguards businesses against money laundering, corruption, terrorist financing, and other illegal activities. Before onboarding, KYC checks are performed to verify an employee’s identity. For example, a company hires a person without first passing him through a proper KYC verification. Then, he will have access to their sensitive departments like finance and information. If the employee is a criminal, he can leak sensitive information and cause financial harm to the company. So, KYC is necessary for all businesses.

The objective of the KYC Process

There are four main objectives when collecting the KYC information of any client. These objectives are given below:

  • Determine the client’s identity.
  • Check the client’s true identity.
  • Learn about the client’s funding sources.
  • Keep track of the client’s activities.

Relation between Anti-Money Laundering and KYC Process

AML and KYC are not in competition with one another. This is so because KYC falls under the broad umbrella of AML. The AML can be made easier through a variety of mechanisms, like KYC. In particular, KYC defines identity verification and risk evaluation. However, the term “AML” can be used to describe a much wider range of methods. Ultimately, KYC is considered an AML part. 

KYC Compliance Steps

The three steps of the KYC process are as follows:

Customer Identification

Before inspecting customer identification documents, it is necessary to verify them and thoroughly examine all available information for inconsistencies. The firm must ensure that its client’s name is not found on any sanction lists. Also, it has to consider that its customer is not exposed as a PEP (politically exposed person).

Customer Due Diligence (CDD)

Implementing background and other screening checks before onboarding a customer is known as CDD. These checks are applied to ensure that their client is real and will not become a security threat to them. 

Enhanced Due Diligence (EDD)

A more deep and intense screening of the customer relationship is included in enhanced due diligence measures. The most efficient way to achieve KYC compliance is to integrate data collection and analysis into current procedures, like customer onboarding.

Traditional VS Modern KYC Process

Previously, financial institutions began the KYC process by simply asking clients to give basic information about their business operations. The information included the business addresses, names of the firm’s directors, national social security numbers, firm license numbers, and so on. All this information was manually provided to the regulators. The manual verification system was too time-consuming and expensive. Usually, it takes one or two weeks to validate a company. So, automated methods have been developed to execute the KYC process to save time and money. The incorporation of artificial intelligence into KYC solutions improved the efficiency and speed of verification. Modern KYC methods can verify a document in less than 30 seconds with the highest accuracy.

Benefits of KYC

The KYC process is beneficial for financial and regulatory institutions in several ways:

  • By checking past financial transactions and also assets owned, knowing your customer helps lenders in their assessment of potential risk.
  • It limits identity fraud by background checking.
  • The KYC process stops terrorist financing, drug and human trafficking, and money laundering.
  • Boosts a country’s investment and stability by creating a less risky and more trusted financial environment.
  • Reduced uncertainty allows firms to do business with other companies.

Conclusion

In this modern age, crimes and fraud have also changed. They have become more active and dangerous. Due to these frauds, companies have to bear a loss of billions of dollars. So, to stop these frauds, there is a need for more robust and sophisticated regulations. The KYC process is the procedure that ensures the customer is who they claim to be. KYC checks examine the background of a client before onboarding him. It prohibits companies and individuals from dealing with businesses that are involved in crimes. An automated KYC process can save time and money by verifying a company or individual in seconds. The integration of AI into the KYC process makes it more robust and effective so that no criminal can bypass it.

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