Anti-money laundering laws or AML requires financial institutions to closely monitor their clients’ transactions. This starts with verifying the identity of all their first-time customers. Known in the financial sector as Know Your Customer or simply KYC, it is an important step in dealing with new clients. It helps ensure that you are not doing business with a money launderer or a terrorist.
There are KYC providers who can help protect your firm from fraud and all losses that may result from illegal transactions and funds. This includes possible fines, sanctions, and the subsequent damage to your organization’s reputation.
Customer Identification Program
At the risk of sounding extremely simplistic, the Customer Identification Program or CIP is a process designed to help financial institutions know exactly who someone is before going into a transaction with them. Identity theft happens more frequently than people realize, and it has led to billions of dollars in losses. What is more, the Panama Paper leaks have exposed weaknesses within the framework of financial institutions that money launderers and other criminals were able to exploit.
The CIP is the first component of the KYC process that helps ascertain the identity of an individual attempting to make financial transactions, ensuring that it is safe to do business with this person.
At the minimum, the CIP requires the following information before any individual can open a financial account:
2: Date of birth
4: Identification number
Once this information is submitted, the financial institution must verify it within a reasonable amount of time. The verification process can be carried out using documents and non-documentary methods, including public databases and comparison of submitted data with consumer report agencies. This procedure is at the heart of CIP and it is something that KYC providers can help you with. They can help clarify and codify this procedure for the benefit of your staff, executives, and even the regulators.
Customer Due Diligence
The Customer Due Diligence or CDD analyzes the trustworthiness of a potential customer. This is done by screening the following information against KYC protocols:
4: Date of birth
In KYC compliance, CDD is the step where the information above is collected online in real-time and then used to verify the identity of the onboarding client. Based on the results of this step, the potential customers are assigned a rating indicating their credibility level. The financial institution uses this rating to assess the risk that the customer profile presents.
Based on the profile generated by the two previous steps, threshold levels are developed for the future transactions of the potential customer. These thresholds are then used in monitoring the customer on an ongoing basis.
With the help of KYC providers, you can look out for any unusual activities in your customer’s day-to-day transactions, which may include any of the following:
1: Sudden spikes in the activities
2: Activities in other areas or across borders
3: Sudden inclusion of other people in sanction list
4: Unusual incidents that merit adverse media attention
5: If anything unusual is observed, the financial institution is required to submit a report.
Part of the ongoing monitoring is the periodic review of the customer’s account. This ensures that the account record is up-to-date, that the nature and value of the transactions are commensurate to the type of account, and the risk level generated by the account is appropriate for its type and amount.