Before the September 11, 2001, terrorist attacks, no serious money laundering protection was in place. Businesses were not able to disrupt illegal deposits, wire transfers and withdrawals meant to finance terrorism. Due to the 9/11 attack, KYC (Know Your Customer) laws were put in place through the Patriot Act.
The Mandatory Nature Of KYC
To put it as simple as possible, KYC compliance is mandatory in order to safeguard against people that finance terrorism or launder money. Many different safeguards have to be implemented and every single business needs to know its customers. This includes details like name, address and more.
Banks spent over $100 billion just in 2016 in order to satisfy all related KYC compliance regulations. This amount is expected to constantly grow. Even if the huge investments were made, up until now, fines totaling $26 billion were imposed against numerous financial institutions due to non-compliance with KYC and AML regulations. This happened only in the past 10 years.
The Bank’s KYC Process
If you want to strengthen and clarify CDD requirements so you respect the KYC financial sector laws, as a bank, you need to implement a program that includes at least 4 minimum elements. These are:
- Verifying and adequately identifying customer identity.
- Verifying and identifying beneficial owners for legal entity customers, like natural people that control or own legal entities.
- Understanding the purpose and nature of relationships between customers in order to develop a proper risk profile.
- Conducting constant monitoring for all suspicious transactions, maintain and update all customer information.
Requirements For Customers During Onboarding
In order to meet all KYC requirements, banks need to first gather and then verify identity information. This is needed whenever onboarding new customers. Requirements vary based on the type of bank account needed (business or individual).
The individual customers that visit the bank bring proof of identity, like an identification document issued by the government, proof of address and some extra documents. A banker then checks the documentation with the purpose of physically ascertaining that the individual is actually who he/she claims to be. In the case of business accounts, extra information is needed to identify beneficial owner identities and the business activity that is conducted.
Processes for businesses are much more complex, as is the case with online account creation. Financial institutions are required by law to verify digital identities for customers in order to make sure that real-world, actual identities match. A trustworthy link has to be established between a real person and the digital identity provided. Due to this, the verification process might include a combination of ID verification, machine learning, and even biometrics.
Banking Technology In The Future
Numerous financial institutions use online identity verification processes that tie a customer’s digital identity to authenticated IDs issued by the government. After the digital identity of the banking customer is validated, it is corroborated with some sort of certified liveness detection and selfie photograph. This guarantees that the person in contact with the bank is actually who he/she says. Various verification methods are possible and can be considered by banks.
Photos courtesy of gettyimages.com