KYC, “Know Your Customer,” also known as “Know Your Client,” is an indispensable process for any financial business while acquiring clients. It’s especially essential for the fintech industry—thanks to the fintech specialist behind this.

This particular process has 3 main parts, in other words, components. Let’s learn about them to confirm the perfect KYC process for your business.

What exactly is KYC?

To conduct business with banks and other financial organizations, it is necessary to follow a set of procedures for confirming a customer’s identity. And you can do it with the help of the KYC program.

Compliance with KYC laws can prevent common fraud schemes, including money laundering and terrorism financing.

Financial institutions are better equipped to identify suspicious activity by KYC. Because it first confirms a customer’s identity and intentions when creating an account. Also, it helps you to analyze the transaction patterns of a prospective customer.

3 Components of KYC

As a financial institution, you are prone to be a victim of money laundering or terrorist funding. And that will result in penalties, sanctions, and reputational harm. So, check the following components to establish and maintain an efficient KYC program.

  1. Customer Identification Program (CIP)

How can you tell whether someone is really who they claim to be? Financial institutions can accomplish that with the aid of CIP.

You see—identity theft is a common problem. For this reason, identification verification processes are strongly advised. In this manner, a financial institution is able to evaluate the risk of choosing a specific client.

It is vital to check for accuracy and carefully review all of the information of a client to look for discrepancies. You should also know if your potential customer is politically exposed. 

Customers who are politically exposed should be treated as high risk and subject to specific mitigating measures. That’s because they are more likely to be corrupted.

What does CIP contain?

The CIP clearly defines the minimal conditions to open an individual financial account. A CIP form will ask you to submit the following information.

  • Name
  • Date of birth
  • Address
  • Identification number
  1. Customer Due Diligence (CDD)

Finding out whether you can trust a potential client is one of the first things each financial institution focuses on. To confirm the credibility of a possible customer, you can utilize CDD.

It helps a great deal in managing risks efficiently and defending oneself from potential threats like terrorists, criminals, and politically exposed individuals.

The data should be gathered from reputable sources. And additional due diligence measures should be taken to identify the relationship’s goal, intended nature, and key beneficiaries.

Finally, the relationship should be continuously monitored to ensure all activity is in line with the customer data that has been recorded.

Different levels of due diligence

You can perform many sorts of due diligence depending on a client’s activities and capacity. Let’s find out more about them.

Simplified Due Diligence

This is used when a full CDD is not required since there is little risk of money laundering or terrorism funding. For instance, accounts of a low amount of money and transaction.

Basic Customer Due Diligence

This is essential for every customer. Here is the information gathered to confirm the identifications of the customers and evaluate the risks involved with them.

  1. Enhanced Due Diligence (EDD)

This procedure is necessary if the consumer poses a higher risk than anticipated.

Customers with political exposure usually have a history of doing business with rivals and are considered high-risk customers.

Deeper criminal investigation and more thorough customer interaction monitoring are two common examples of enhanced due diligence techniques.

Carrying out these procedures consistently at a large scale can be challenging and time-consuming. Automation plays an increasingly important part in KYC compliance to address these problems.

Factors to consider to perform EDD

A few aspects need to be considered by the institution to determine whether EDD is required. So, to decide whether EDD is necessary, one must consider the following factors.

  • Location of the Individual
  • Job title of the individual
  • Transaction types
  • Anticipated activity pattern in terms of transaction types
  • Dollar value and frequency
  • Expected payment scheme

However, the process is not limited to these factors all the time. In certain cases, an institution can consider a few more factors.

Concluding remarks

Organizations are under increasing pressure to pinpoint, examine, and comprehend precisely who they are doing business with, particularly to lessen the global threat of terrorism and financial crime. Know Your Customer (KYC) regulations are one way such pressure shows itself. And the KYC check involves 3 different components that ensure the identity of clients.