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KYC Compliance

4 Essential Elements That Make Up A Great Know Your Customer (KYC) Policy

Know Your Customer or Know Your Client process is a key point of focus for enterprise industries, such as banking, finance, lending, insurance, logistics, e-commerce, and healthcare. These industries observe a consistent influx of a variety of customers, keeping the businesses on the edge of risk at all times.


When a simple error in the customer onboarding process could result in an apocalypse of financial and reputational disruption, businesses have had to learn the hard way to pay attention to the minute details of the customer-oriented processes.


Hence, the importance of robust KYC procedures is understood by businesses, and in the current customer onboarding landscape, KYC verification plays a critical role.


KYC is a very broad subject on its own. It comes with a variety of provisions and the tools it offers can be dynamically incorporated to create and provide standardized identity validation experiences to a wide range of customer types. And this brings us to the following.


Why Do Entities Need A Good KYC Policy To Begin With?


Financial institutions are at risk at all times. With unprecedented security breaches, money laundering, and other non-compliant activities taking place, financial institutions must be proactive with incorporating AML (anti-money laundering) and ATF( anti-terrorism financing) strategies. And this is possible with thorough and comprehensive identity validation procedures as stipulated in the KYC policy of the financial institution.


The Importance of A KYC Policy


A KYC policy is not just a set of predefined rules and regulations, but a regulatory handbook that enables financial entities to be prepared with a plan of action during unprecedented security and financial breaches. It further lays out the foundational layers of identity verification prior to profile onboarding, streamlining the customer onboarding process and retaining key identity information for protocol action.


Additionally, a KYC policy helps financial institutions to draw out all the possible probabilities of risks a profile can bring. This is known as risk assessment. The advanced protocols specified will help the financial institutions to take the necessary action and follow the protocols should there be any unusual activity in the customer’s account or if there is suspicious transactional conduct.


But what exactly makes up a good KYC policy? The following will take you through the core elements of a great KYC policy and a simplified approach to incorporate it into your ecosystem.


Four Essential Elements Of A Great KYC Policy


  • Client Acceptance Policy

    Financial entities must consider a variety of use cases before devising their customer acceptance policy. The draft can begin with defining the types of customers along with the probability of risk that each of them possesses.


    A thorough definition of what a customer is within the context of your business, beneficiaries of your customers, nominees, valid identification of the customer and the related parties, and more must be defined.


    Additionally, you must also define the relationship a customer holds with your entity and the services that you are responsible for and aren’t.


    The onboarding and exit procedures must be laid down to allow the customers to understand what they’re agreeing to. This will reduce the friction during the onboarding process and exit processes, enabling a hassle-free experience for both parties.


  • Customer Identification Program

    Validating the identities of your customers with proof of identification is crucial. A customer identification procedure enables you to define the various types of proof of identity that you can accept and obtain from the customers within feasibility and reason.


    Generally, the social security details, taxpayer identification number, legal name, date, and place of birth, and address are obtained along with the proof of identification to validate the identities of the customer.


    Customer Due Diligence (CDD) will allow you to take this narrative a step further by validating the identities of the customer against a variety of confidential (yet authorized) data lists.


    The due diligence procedure enables you to screen the customer profiles per the high-risk profile validation checklists, such as politically exposed people watch list, OFAC watch list, Death master file, designated foreign terrorist organizations list, and other federal watch lists.


    These identity checks will not only allow you to check if the profiles are listed in the federal watch lists but also simultaneously lead your investigations towards high-profile/adverse media coverage, enabling you to assess the risk spectrum of a profile and the possible successive processes.


  • Ongoing Monitoring Of Accounts & Transactions

    Financial entities are at the risk of being complicit in legitimizing illegitimate funds from unknown sources. These unknown funds are often used for illegal activities and/or have been derived from illegal or unlawful activities, collaterally increasing the civil liability of the financial institution.


    Understanding the nature of transactions, threshold limits, trends, and the sources of in-flow and out-flow of funds must be monitored carefully for this. In such a use case, financial entities do not have to inform the customer about the same and can proceed to the next procedures.


    A KYC policy will allow the financial institutions to define what is and isn’t a suspicious activity and devise a series of protocols to be followed before submitting a suspicious activity report (SAR) with the authorities.


  • Risk Management


A lifecycle model can be implemented to address, assess, identify, and verify the risk a profile could bring. A holistic approach to compliance can make this possible.


Risk management begins with a strict understanding and training of the repercussions of not following the protocols. Accounting staff, customer management teams, and other internal compliance teams must be trained and informed of the KYC policy that has been implemented. The teams must also be communicated about any revisions made to the policy as necessary.


It is important for not just the top-level management, but the key executives to understand these protocols and standards of security and financial compliance as the absence of consensus in the KYC policy can bring havoc within the organization.


KYC policies are defined and devised by entities in accordance with the regulations of the federal agencies. No organization can put into motion the activity or protocol that is deemed to be unfair, discriminatory, or unlawful.


Fundamentally, a good KYC policy enables financial entities to reduce the risks and repercussions of identity theft and non-compliance.


You too can prevent and assess risk with viable and highly scalable identity validation solutions, such as Compliancely, which enable you to verify the identities of your customer profiles prior to onboarding.