Articles
Achieving Know Your Customer Compliance
by Account Mein Fintech Solutions We are India’s largest B2B Channel Payments PartneDo you know your customers? At least, that's how it should be. If you are a financial institution (FI) that promotes money laundering or terrorist financing, you may be subject to fines, sanctions, and defamation. Most importantly, KYC is a critical practice that protects organizations from fraud and losses resulting from illicit funds and transactions. "KYC" refers to the steps a financial institution (or company) takes to:
- Customer identification
- Understand the nature of your business. (The primary goal is to ensure that the client's source of funds is legitimate.)
- To monitor our customers' activities, we assess the money laundering risk associated with these customers.
- Creating and implementing an effective KYC program requires the following elements:
1) Customer Identification Program (CIP)
How do you know if someone is who they say they are? After all, identity theft is widespread, affecting more than 15 million US consumers and accounting for $24 billion in stolen goods by 2022. Lenders, such as financial institutions, have more at stake than just financial risk. It's the law.
In the United States, CIP requires proof of identity for anyone making a financial transaction. The CIP, enshrined in the Patriot Act, is designed to reduce money laundering, terrorist financing, corruption, and other illegal activities. Different jurisdictions have similar provisions.
The desired outcome is for obligated businesses to identify their customers accurately. A critical element of a successful CIP is risk assessment, both institutionally and procedurally, for each account. Although the CIP provides guidance, it is up to individual agencies to determine the exact level of risk and the policies associated with that level of risk. The minimum requirements for opening a personal financial account are set out in the CIP.
- Name
- Date of birth
- approach
- ID number
Collecting this information when opening the account is sufficient, but the institution must verify the account holder's identity "within a reasonable period." Identity verification procedures may include:
Documentation.
Non-documentation methods (which may include verification of information provided by the customer through consumer reporting agencies, public databases, and other due diligence measures).
A combination of both.
These procedures are the basis of CIP. This policy should be addressed as with other anti-money laundering (AML) compliance requirements. It must be clear and codified to provide consistent guidance to employees, managers, and regulators.
The exact policy will depend on your institution's risk-based approach and may take into account the following factors:
Types of accounts offered by the bank
How to open a bank account
Types of Identifiable Information Available
The bank's size, location, and customer base, including the products and services customers use in different geographic areas.
2) Customer Research
One of the first analyses of any financial institution is to determine whether its potential customers are trustworthy. You need to make sure that the potential client can be trusted. Appropriate expertise (CDD) is essential in effectively managing risks from criminals, terrorists, terrorists and politicians (PEPS).
There are three levels of insurance.
Expired inspection ("SDD") -The risk of money laundering or terrorism is low, and no full CDD is required—for example, accounts or small accounts.
Enhanced Due Diligence ("EDD") is additional information we collect from high-risk customers to understand better their activities to reduce risk. Although some elements of ESD are defined explicitly in national legislation, it is ultimately the responsibility of financial institutions to determine the risk and take measures to prevent their customers from becoming malicious actors. Here are some practical steps you can take to include them in your customer review program:
Find out who your potential customers are and where they are, and better understand their business. This can be as simple as finding evidence of the customer's name and address. When we qualify or screen prospects, we identify their customer type by classifying them into risk categories before digitally storing this information and supporting documentation.
It is essential to follow the proper process to determine if you need an EDD and a basic CDD. This process may be ongoing as existing customers are likely to move into higher-risk categories over time. In this context, regular due diligence with existing customers can be helpful. Factors considered in determining whether an EDD is required include, but are not limited to:
the position of the person
human occupation
transaction type
Expected activity patterns based on transaction type, dollar amount, and frequency
Expected payment method
Records of all CDD and EDD activities performed for each client or prospect are required during a requested audit. 3) Continuous monitoring
More than one customer review is required. A program of ongoing customer monitoring is needed. Continuous monitoring capabilities include financial transactions and accounts based on thresholds developed as part of the client's risk profile.
Depending on your client and risk mitigation strategy, other factors to monitor include:
- The peak in action
- Unusual extraterritorial or cross-border activity
- Add people to your approved list
- negative comments from the media
Regular account reviews and associated risks are also considered best practices.
Have your account records been updated?
Do the transaction type and amount match the stated account goals? Is the level of risk appropriate for the type and number of transactions?
Typically, the level of transaction monitoring is based on a risk-based assessment.
Corporate KYC Just as personal accounts require identification, due diligence, and monitoring, corporate accounts also require KYC procedures. The process is similar to KYC for private customers, but the requirements differ. In addition, the transaction's size, the trade's value, and other risk factors become more apparent, and the process becomes more complex. This process is often referred to as Know Your Business (KYB).
While each jurisdiction has its own unique KYB requirements, there are generally four steps to implementing an effective program:
Get business activity
Identify and verify specific company records, including registration number, company name, address, status, and critical management information. The information you collect will vary depending on your jurisdiction and anti-fraud standards, but you should gather information regularly and integrate it into your workflow.
Analysis of ownership structure and shares
Identify the entity or person who owns the property directly or through another party—identification of the final beneficiary (UBO).
Calculate a person's total ownership or management control and determine whether they exceed the UBO reporting thresholds.
Perform AML/KYC checks on individuals.
We perform AML/KYC checks on all persons identified as UBOs. That's a challenge: Ensuring KYC compliance and delivering that compliance in a cost-effective, scalable way that doesn't unnecessarily burden customers is even more significant. A Thomson Reuters survey found that financial institutions face increasing costs and complexity. 89% of corporate customers needed a better KYC experience, and 13% switched FIs.
In addition to the poor customer experience, the actual costs of implementing a comprehensive KYC compliance program continue to rise. Among the 800 financial institutions that participated in the study, the average was $60 million a year, with some companies spending as much as $500 million. In the UK, a report by Consult Hyperion estimates that KYC compliance costs banks £47 million a year, with each check costing between £10 and £100.
In the future, compliance professionals will have no choice but to shoulder the weight of these new requirements and expectations. It is important to note that these strict rules are essential in combating fraud, money laundering, terrorist financing, bribery, corruption, market abuse, and other financial violations.
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About Account Mein Fintech Solutions 
We are India’s largest B2B Channel Payments Partne
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Created on Nov 10th 2023 02:25. Viewed 82 times.
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