KYC (or Know Your Customer) is a practice in all regulated banks for customers’ identity verification. It is a necessary measure to monitor and assess customer risk. In fact, KYC authentication is a legal requirement for financial institutions as an anti-money laundering (AML) compliance measure.
KYC authentication is a process carried out by organizations to verify the identity of their business partners and clients to stay compliant with current laws and regulations. Failure to stay on top of the KYC process can lead to significant fines for your company. Therefore, you must remain vigilant and up-to-date on your KYC process in order to stay AML compliant.
Although there are many common mistakes every company makes in regards to AML compliance, you should avoid three critical KYC authentication mistakes at all costs.
1. Only Checking Documents
One of the most common misconceptions is that KYC is a simple process that involves the collection and verification of documents. Some companies may even define KYC as a simple process of checking someone’s passport.
Your business needs to do the following things to create and run a compliant and effective KYC authentication program:
Setting up a CIP
CIP (or Customer Identification Program) is compulsory for anyone involved in a financial transaction to verify their identity. CIP is a provision in the Patriot Act and works as a counter-attack against money laundering, illegal activities, corruption, and terrorism funding.
You must set up a CIP that has a minimum requirement for anyone to open a financial account. This information must include name, date of birth, identification number, and address. While you gather this information, you’re required to verify the identity of the customer before offering them any services.
Understand the source of funding
If you have a business that operates in the financial sector, you’ll have to pay due diligence when dealing with your customers. You need to determine their volatility and try to get a deeper understanding of how the customer earns their money.
Therefore, you should investigate their income source, business, and any other financial source they claim to use to earn money.
It is not enough to check your consumers just once; you need a customer monitoring program from time to time. It may include oversight of a customer’s financial account and transaction based on thresholds applied to the customer’s risk profile.
You must look out for spikes in activities, adverse media mentions, and unusual out of the area or cross-border activities. You must also check if a customer’s record and information is up-to-date and does the amount and type of transaction match the purpose of the account stated by the customer.
Perform risk assessments
Performing risk assessment on each customer is another critical element for a successful CIP. While the CIP process guides you to prevent illicit activities, it is up to individual risk assessment to determine the exact risk level of the customer.
2. Poor Risk Assessments
According to Comply Advantage, a KYC risk rating is a straightforward and simple calculation of risk. The risk may be a certain customer, or a company can face a risk-based on its entire clientele’s portfolio. Most businesses focus and calculate both, as both of them are equally important.
Once you have gathered data from your customers, you compile them into a portfolio. After completing the portfolio, you can analyze the data and determine the KYC risk rating of every client. In the case of a high-risk rating, you will have to closely and consistently monitor the customer.
However, if a customer has a low-risk rating, you should still monitor them but not as diligently. KYC risk rating allows your business to efficiently and quickly sift through a plethora of information.
Here are some patterns of behavior that can help identify high-risk customers.
Customers links to high-risk countries
Customers belonging to the high-risk business industry
Unusual account activity
Lack of lawful or obvious economic purpose
The customer is a Politically Exposed Person (PEP) or a relative of PEP.
Accounts of businesses with cash-intensive activities such as bullion dealers, real estate developers and jewelers, etc.
3. Not Staying Up-To-Date
As fraudsters are getting smarter, they are more likely to bypass low-level KYC authentication and security measures. FATF demonstrated an optimistic attitude towards technological evolution in the financial industry back in 2017. It introduced Regtech in 2017 and issued a guidance sheet for using digital ID systems. All regulatory authorities, government agencies, and businesses are the stakeholders of this guidance paper.
It provides insight into components, processes, and technical standards for the use of digital ID systems in the financial industry. FATF aimed to project a huge change in KYC/AML compliance worldwide.
There have been several changes in the KYC and AML regulations in the last few years. European Union introduced AML Directive 5 in 2019, with plans of full implementation in 2020. The amendment addresses credit and financial institutions, prepaid cards, legal sector, virtual currencies, and real estate, etc.
This new directive requires businesses to practice enhanced and improved due diligence. The identity verification threshold for any remote transaction is now EUR 50. Additionally, the transaction threshold for anonymous prepaid cards will now be EUR 150 instead of EUR 250.
AMLD 6, proposed in 2019, is a stringent framework that applies tougher penalties and widens criminal liabilities to legal individuals.
In short, 2019 was phenomenal for KYC/AML regulations. The regulatory bodies not only revised the regulations but also worked on improving and enforcing the compliance habits by businesses on a global scale.
Therefore, it is more important than ever before for your business to have a secure identity authentication system in place. It will help you catch fake identities, stay compliant and avoid any mistakes in your KYC authentication process.
Let the Experts Help You
Staying AML/KYC compliant is essential for the overall wellbeing of your financial institution. That said, without the right KYC or ID authentication system in place, fraudsters are bound to slip through the cracks. That’s why financial institutions world-wide rely on Intellicheck!
Intellicheck is a highly successful and trusted solution provider for KYC authentication for financial institutions. Intellicheck’s ID authentication solutions are not only simple to use but also easy to integrate with existing document scanning systems. All you need is to scan an ID to determine its authenticity within seconds.