What is KYC (know your client)?

KYC stands for Know Your Customer, or Know Your Client, and it is a set of standards in the financial services market to ensure that businesses verify the identity and risks involved in a business relationship with their customers. This comes under their broader AML policies, for anti-money laundering.

Who needs to implement KYC?

KYC is relevant across all industries, but is especially pertinent for banking, finance, insurance, real estate, and trading and cryptocurrency. As cyberthreat becomes more sophisticated, and the digital world becomes harder to visualize and control, KYC has become increasingly important. The KYC process involves accurately identifying the customer, and verifying that they do not have relationships with any other people who have participated in terrorism, money laundering or corruption.

It is used for securely transferring global payments, and each country has their own rules, enforced and monitored by their own governing body. For example, in Australia, AUSTRAC monitors all financial transactions and sets the rules for client identification, while in Canada, this is regulated by FINTRAC, Canada’s financial intelligence unit. India, Italy, Japan, Mexico, South Korea and the UK are some examples of other countries that regulate and enforce KYC due diligence.

How can a business perform KYC checks?

Criticism of KYC is that it puts a heavy burden on the business. Organizations should look for ways to standardize KYC for enhanced due diligence at the point where new relationships are formed and also at set milestones. This can limit the amount of repetitive or ad-hoc work that needs to be done. An example is setting up an automated customer identification program.

There are some governments and regulators who have been able to streamline and enforce KYC as part of their processes. For example, in Europe, AML5 and eIDAS have introduced systems and processes that ensure fully-secure digital identification methods with KYC embedded within. This is regulated as part of customer due diligence.

What are KYC documents?

There may be specific KYC documents that a business needs to collect for KYC and customer due diligence, for example a copy of their customers drivers’ license, their passport, or a document that serves as proof of address. These can be added to an onboarding process and in many cases automated. Also, KYC does not need to be carried out in person, it can be digitized and completed online using eKYC (electronic-KYC) to collect all relevant documentation.

What is KYC in banking?

In banking, KYC is the mandatory process that identifies and verifies the client’s identity when they open a bank account. Banks will also carry out this process on an ongoing basis to ensure the client’s account remains safe from fraudulent activity. The purpose of KYC is for banks to ensure that their clients are who they say they are.

To open a bank account, the client must submit ‘proof of identity, proof of address’ and a recent photograph. For instance, KYC in India uses six documents called ‘Officially Valid Documents (OVDs) to prove identity. These documents include a passport, driver’s license, voter’s identity card, PAN Card, Aadhaar Card issued by UIDAI, and NREGA Card.

KYC requirements for banks

Know your client is just one procedure international banks must follow to limit anti-money laundering (AML) efforts. KYC requirements for banks mandate KYC protocols for every customer who wants to open or has opened a bank account. These procedures are ongoing whether it’s for KYC in Canada, KYC in Ukraine, or KYC in Egypt.
Institutions often take KYC even further by ensuring clients do not appear on government sanction lists, politically exposed person (PEP) lists, or known terrorism lists.

Why does KYC matter?

With the ongoing technological advancements, fraudsters are coming up with new ways to commit financial crimes. KYC enables banks to identify and verify clients. This prevents banks from being used by criminals for money laundering.
KYC is also important because it’s a standard international banking institutions can trust. KYC in South Africa for example commands all financial institutions to comply and penalizes those that don’t.

KYC regulations and legal foundations

KYC regulations state that banks must verify clients’ identities before they enter into a business relationship. Know Your Client regulations include:

• Customer due diligence: establishes a customer’s identity and evaluates their risk
• Sanctions and watchlists: checking national and international sanctions lists and watchlists for clients involved in illegal activities
  Risk assessment: establishing and implementing policies and procedures to understand client risk
• Ongoing monitoring: Creating and implementing policies for continuous monitoring of clients
  Since 2016, regulations have allowed account opening through electronic channels. To streamline the creation of KYC accounts, many countries have implemented ways to verify clients’ identities online. KYC procedures in Brazil created an Open Data Portal, enabling clients with authenticated digital identities to quickly open an account.

How does KYC work?

Since the KYC process has been digitized, KYC verification takes different shapes, using different technologies (e.g., AI), security features (e.g. hologram), and security checks (e.g., biometrics). It typically includes the following stages:

Document Verification: The individual’s government-issued ID is verified for forgery or any other issue.
Face Verification / Liveness Check: Face verification checks ensure the live presence of the client and check criminal acts in time.
Address Verification: Proof of Address (POA) verifies the address on government-issued identity documents against POA.

The advantages of a robust KYC process

KYC has several benefits. These include:

Instant availability

After a successful KYC check, clients receive immediate access to banking features and don’t need to wait to request services.

Anywhere, anytime

Clients can undergo KYC verification at any time, from anywhere with automated solutions.

Cost-efficient

AI-driven and automated KYC solutions can increase KYC’s affordability, making it more accessible for smaller institutions.

Compliance

KYC processes are customizable and can implement security checks and add-ons for more stringent security and regulatory compliance.

Reputable and trustworthy

KYC regulations reduce fraud, penalties, and reputational damage, all of which foster trust between financial institutions and clients.

Swift Identity Verification

Swift ID Verification uses advanced technology to perform real-time identity checks on user-submitted documents. Financial institutions can integrate the service into a workflow to ensure accuracy and compliance. Swift identity verification eliminates the need for external hardware.