Building effective know your customer (KYC) and anti-money laundering (AML) programs can be a complicated endeavor. It requires a thorough understanding of applicable global and local regulation, as well as multiple tools and processes. Compliance with these regulations is essential to doing business in a number of industries.
Yet, these regulations are an essential part of doing business, across a number of industries, like financial services, healthcare, and insurance. In this blog, we’re discussing the basics of KYC, including who needs it and what it takes to achieve and maintain KYC compliance.
Who needs KYC?
A number of different industries are mandated to undertake KYC and AML compliance, with the largest including banks and financial services, insurance, and others.
- KYC requirements for banks and other financial institutions are in place to verify customers’ identities and evaluate risk factors that could indicate some type of fraud. These also apply to some cryptocurrency exchanges and other money service businesses (MSBs).
- Insurance companies need to quickly, yet thoroughly, assess prospective customers’ potential risk factors and monitor their clients’ transactions for any signs that they might not genuinely be who they say they are. They benefit greatly from secure, end-to-end KYC and AML related procedures for identity verification.
- For transportation providers, KYC processes protect drivers, riders, and assets against fraud and damage, while ensuring regulatory compliance and reducing operational costs.
- In electronic gaming, KYC-compliant age verification helps protect providers and platforms by identifying high-risk customers or signs of fraudulent activity and stopping them in their tracks.
- For retail and eCommerce companies, KYC and AML compliance includes verifying account holders and their payment information, as well as enforcing age restrictions when applicable.
- As the sharing economy continues to grow and diversify, customers need to be able to trust their core platforms. Effective identity verification helps protect customers as well as the companies they engage with.
What are the benefits of KYC?
Regulatory compliance is non-negotiable, but KYC and AML processes provide additional compelling value for businesses and their customers. In banking, healthcare, insurance, and related industries, KYC/AML regulations protect customers and patients from identity theft and other fraudulent schemes.
At the same time, compliance protects organizations from regulatory fines and other penalties while safeguarding their data against unauthorized access. Ultimately, KYC regulations serve to protect parties on both sides.
Additional KYC benefits include the ability to build trust into identity verification and cybersecurity processes, detect and prevent money laundering activities, and more.
What are KYC requirements?
While the aims and intention of KYC requirements are more or less universal, the regulatory bodies that set and enforce these rules vary by region.
- In the US: Recent legislation includes the Patriot Act (2001), Intelligence Reform & Terrorism Prevention Act (2004), and the Anti-Money Laundering Act (2020). The Financial Crime Enforcement Network (FinCEN) is an organization that applies a rulemaking process to keep KYC/AML requirements modern and effective.
- In the UK: AML regulations are outlined in the Terrorism Act (2000), Proceeds of Crime Act (2002), and Money Laundering, Terrorist Financing and Transfer of Funds Regulations (2017).
- In the EU: Companies must abide by regulations set forth in the Fifth and Sixth Anti-Money Laundering Directives (also known as 5AMLD, 6AMLD).
What are the 3 main KYC process steps?
The 3 main KYC process steps are client or customer identification, customer due diligence (including enhanced due diligence), and ongoing monitoring.
- Client/Customer Identification: During account setup or onboarding processes, organizations use KYC processes to verify that the person signing up is who they claim to be. This step may include gathering relevant identity documents or personal information, verifying them, and using them to confirm the customer’s legitimate identity.
- Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD): Once a user or customer has their identity verified, customer due diligence requires organizations to collect additional credentials and evaluate their profile more deeply, to identify suspicious activity or other potential risk factors. Enhanced due diligence may then be necessary for customers or accounts that represent a higher risk of unauthorized access or fraudulent behavior.
- Ongoing Monitoring: Since customer information changes over time, it’s important to apply ongoing monitoring practices to help ensure that accounts stay safe — and organizations remain in compliance.
Can KYC be automated?
Since manual processes can be time-consuming (and potentially risk running afoul of KYC regulations), KYC can — and often should — be automated. Automation saves time, prevents errors, and helps to keep data secure and identities protected.
Onfido’s platform leverages artificial intelligence (AI) for an automated, end-to-end KYC verification process, so you can keep pace with regulations while keeping your brand — and customers — safe and secure.
Our compliance manager’s guide contains a summary of key regulations around the world, best practices of KYC programs, and what to look for in technology partners.