Money laundering in the country is a big business and is typically associated with the infamous industry of organised crime. Laundered money is used for supporting terrorism, drug activities, and other illegal trade. This is why it is no surprise that the government authorities are taking more action in preventing this by requiring KYC compliance to financial institutions.
KYC compliance is an important component in the battle against money laundering and financial crime. Most institutions take it seriously by hiring KYC providers to ensure compliance with anti-money laundering processes.
If you happen to be a manager or owner of a financial institution, here are the essential things you need to know about KYC compliance.
What is KYC Compliance?
KYC, which means “know your customer or client,” is a mandatory process of identifying or verifying an individual’s identity, who is about to open a particular account in a financial institution. A KYC check is also done periodically to genuinely ensure that an individual is who they claim to be.
KYC compliance is important because it helps prevent financing of terrorists, money laundering, and other illegal schemes. A failure to comply with KYC regulations leads to heavy penalties in the country. According to an article by The Lighthouse, financial institutions have paid millions of dollars in fines because of non-compliance to KYC regulations.
What is the Customer Identification Program?
The customer identification program or CIP is one of KYC compliance pillars, a mandatory process that all financial institutions should implement. CIP requires organisations to verify their client’s identity using credentials such as date of birth, name, social security number, and other supporting documents.
CIP is a tedious process, especially for financial institutions that have a relatively large customer base. Keeping this process in-house is disadvantageous because it can negatively affect business operations. This is why most organisations outsource their CIP needs to KYC service providers for a more efficient and effective process.
What is Customer Due Diligence?
Another component of KYC compliance is customer due diligence or CDD, which is a process that aims to categorise clients depending on their risk profile. CDD is divided into two main categories, which include the following:
Simplified Due Diligence. This category of CDD is a process used for individual accounts with a low risk for terrorism funding and money laundering based on a particular client’s credentials, typically used in low-value accounts or standard bank accounts.
Enhanced Due Diligence. The category of CDD that is used for accounts that have a higher risk of money laundering. When an individual is up for enhanced due diligence, additional information and credentials are required.
Much like CIP, customer due diligence is also a taxing process as it involves transaction monitoring. It would be best that you hire a KYC service provider to find irregularities and for better process handling.
Keeping your KYC processes in-house by checking the information and credentials of several customers might be easy at first, but would become difficult as you scale-up your business. It would be better to hire a KYC provider because there will be a team of experts and professionals who can ensure that your KYC processes run smoothly.