Know Your Customer KYC POLICY
Know Your Customer (KYC) procedures are a critical function to assess and monitor customer risk and a legal requirement to comply with Anti-Money Laundering (AML) Laws.
Do you know your customer? You better, if you’re a financial institution (FI) or you face possible fines, sanctions and maybe even public ridicule if you do business with a money launderer or terrorist. More importantly, it’s a fundamental practice to protect your FI from fraud and losses due to illegal funds and transactions.
“KYC” refers to the steps taken by a financial institution (or business) to:
Establish customer identityUnderstand the nature of the customer’s activities (primary goal is to satisfy that the source of the customer’s funds is legitimate)Assess money laundering risks associated with that customer for purposes of monitoring the customer’s activities To create and run an effective KYC program requires the following elements:
1) Customer Identification Program (CIP)
How do you know someone is whom he or she says they are? After all, identity theft is widespread, affecting over 13 million US consumers and accounting for 15 billion dollars stolen in 2015. If you’re a US financial institution, it’s more than a financial risk; it’s the Law.
The CIP mandates that any individual conducting financial transactions needs to have their identity verified. As a provision in the Patriot Act, it’s designed to limit money laundering, terrorism funding, corruption and other illegal activities. The desired outcome is that financial institutions accurately identify their customers:
A critical element to a successful CIP is a risk assessment, both on the institutional level and on procedures for each account. While the CIP provides guidance, it’s up to the individual institution to determine the exact level of risk and policy for that risk level.
2) Customer Due Diligence
For any financial institution, one of the first analysis made is to determine if you can trust a potential client. You need to make sure any potential customer is worthy; customer due diligence (CDD) is a critical element of effectively managing your risks and protecting yourself against criminals, terrorists, and corrupt Politically Exposed Persons (PEPs).
There are three levels of due diligence:
Simplified Due Diligence (“SDD”) are situations where the risk for money laundering or terrorist funding is low and a full CDD is not necessary. For example, low-value accounts or accounts where checks are being on other levelsBasic Customer Due Diligence (“CDD”) is information obtained for all customers to verify the identity of a customer and asses the risks associated with that customer. Enhanced Due Diligence (“EDD”) is additional information collected for higher-risk customers to provide a deeper understanding of customer activity to mitigate associated risks. In the end, while some EDD factors are specifically enshrined in a countries legislations, it’s up to a financial institution to determine their risk and take measures to ensure that they are not dealing with bad customers.3) Ongoing Monitoring
It’s not enough to just check your customer once, you need to have a program that knows your customer on an ongoing basis. The ongoing monitoring function includes oversight of financial transactions and accounts based on thresholds developed as part of a customer’s risk profile.
Up to now, regulations call for a risk-based assessment. However, as of January 1, 2017, The New York Department of Financial Services (NYDFS) requires specific measures of transaction monitoring and filtering.
KYC News Around the World KYC: Knowing Your (Onboarding) Costs $60 million. $300 million. One month, four months? Welcome to the well-meaning but truly inefficient world of onboarding and KYC — where financial services firms are mired in manual processes and where wait times are forever, and expensive.
The unquenched longing for a transformed KYC and AML solution In spite of heavy investments, FIs have been unable to optimally counter the growing peril of money laundering. Regulatory fines on FIs for KYC/AML related violations continue to rise.
Push for Aadhaar-enabled e-KYC for digital transactions Aadhaar-enabled electronic know your customer (KYC) process should be “firmly established” as the acceptable KYC, a panel with representatives from all financial sector regulators has proposed.
US insurers ‘lagging behind’ in the fight against financial crimes Money laundering is an ever-expanding problem for the American insurance industry. An increasing number of individuals are using insurance accounts to hide money from federal taxation agencies – and the industry needs to step up and tackle the situation head-on. MAS to roll out national KYC utility for Singapore The Monetary Authority of Singapore (MAS) is piloting a national know-your-customer (KYC) utility for financial services, based on the MyInfo digital identity service, jointly developed by the Ministry of Finance and GovTech.