The rapid rise in fintech has led to the emergence of an increasing cybercrime threat. The digital economy and banking have paved the way for fraudsters involved in money laundering, terror funding, and other illegal financial practices. For example, in 2014, World Bank revealed that about USD 1 trillion worth of illicit funds were transferred out of developing states annually. Therefore, the states whose citizens are involved in unlawful monetary practices receive certain sanctions and even economic isolation if required. In their respective jurisdictions, states and their financial institutions work to implement and accelerate anti-money laundering measures. Banks have significantly adopted security measures to combat financial crimes.
Know Your Customer in Banks- An Introduction
Know Your Customer or Know Your Client is commonly known as KYC, and it is the most necessary anti-money laundering procedure. It is a mandatory requirement for banks and other financial organizations involving various methods of customer identity verification. Resultantly, KYC becomes crucial for transparent and safe economic activities. Banks use digital KYC authentication at the time of customer onboarding by collecting all the identification details. KYC banking is a growing phenomenon for AML compliance, especially in developed countries, because it guarantees the smooth functioning of banks.
Know Your Customer Requirements and Guidelines
Each state government has put forth its set of guidelines and Know Your Customer requirements for financial organizations. The United States of America significantly shifted its emphasis on the need to regulate economic activities, specifically after the 9-11 incident. To eliminate the chances of money laundering and terrorism funding, the U.S. government passed particular guidelines to its financial organizations. All the banks in the country are responsible for verifying their customers and checking the transactions flowing through their organization via KYC banking. Therefore, to fulfill the KYC protocols, banks collect specific details, such as the customer’s full legal name, date of birth, residential address, and Identity Card number. These requirements not only help banks identify high-risk customers through their past financial activities but also aid in efforts to prevent money laundering.
KYC Security Check – Significance in the U.S.
As mentioned above, KYC banking allows secure financial transactions under AML compliance and eventually aids the state government in combating cybercrimes and illicit funds transfers. After 9-11, KYC banking has gained paramount significance in regulating monetary institutions and keeping a security check on customer data in the U.S. There are many forms of illegal practices like arms and human trafficking, money laundering, smuggling, and terrorism. All these activities are financially funded through monetary transfers via banks, and without an adequate KYC banking system, they can immensely harm the country. Therefore, the financial organizations in the U.S. act as the primary force against money laundering and terror financing while playing a vital role in the global fight against terrorism.
There are four key KYC security check elements:
- The customer acceptance policy is a document that defines the basis of the bank-client relationship. Its inadequate implementation may make the bank liable for serious noncompliance risks.
- The customer identification procedures allow banks to keep customer identity records, per the law requirements.
- Next, transaction monitoring is crucial for banks to ensure that customers are not part of any money laundering scheme.
- Lastly, the banks must comply with AML risk management to protect themselves from financial crime.
AML Customer Due Diligence and Online KYC
AML Customer Due Diligence is another name for Know Your Customer authentication and is required from any organization, including banks, that complies with anti-money laundering regulations. Therefore, banks follow AML compliance by adopting online KYC procedures. Its primary objective is to identify risks that could be posed by any customer and prevent financial crimes. The banks collect customer data through digital KYC procedures and verify customer identity. CDD is critical and a primary requirement in KYC banking regarding identity verification and risk profile assessment.
There are two fundamental types of CDD in KYC banking: Simplified Due Diligence and Enhanced Due Diligence.
- If the risk perception is lower, the regulators allow for a simplified procedure called Simplified Due Diligence. Mostly, the banks perform SDD that focuses more on customer identity. SDD is time-effective and involves less effort in the verification process.
- Enhanced Due Diligence is another, more advanced type of CDD.
EDD Compliance and EDD banking
Contrary to Simplified Due Diligence, Enhanced Due Diligence occurs when the risk profile is higher. It provides banks with additional information checks and allows verification of funds along with the customer’s location. EDD banking is carried out for customers with any previous record of financial crime, such as money laundering. Banks collect additional information from customers with high-risk profiles to understand their transaction activities in-depth. Banks must follow EDD compliance protocols if engaged with Politically Exposed Persons, shell companies, money launderers, and terror financing groups. Similarly, they deal with customers having high transactions with foreign nations.
KYC Banking is an effective and crucial procedure for securing the institution from fraudulent customers. Moreover, it shields banks from unknowingly facilitating illicit monetary flows. Therefore, KYC in banks is essential for AML and CFT compliance as it protects banks from financial criminals involved in money laundering and terrorist financing.