Introduction
Constant issues faced by financial institutions include identifying their
clients and putting in place measures to deter and detect illegal
financial activity. Importantly, all types of financial institutions, such as
banks, credit unions, and the financial companies that make up the
Fortune 50, are required to comply with a series of increasingly
complicated laws known as KYC, which stands for know your customer.
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The Significance of Conducting KYC
Procedures
If a customer wants to engage in any form of financial transaction, KYC is almost
always a necessary prerequisite. Following the completion of the customer
verification process, the consumer provides the financial institution that
administered the exam with information regarding their identification, address, and
previous financial history. This can provide the bank with the peace of mind that it
needs to know that the money the customer decided to invest was not done so for
any purpose related to money laundering.
What is KYC?
Know your customer, often known as KYC, is an efficient method for an
organisation to validate and, as a result, verify the legitimacy of a
customer. Before making any investments in different instruments, the
consumer needs to provide all of the necessary KYC papers so that this
can happen. Before granting consumers the authority to engage in any
kind of financial transaction, the RBI requires that all financial institutions
complete the Know Your Customer (KYC) process for those customers.
This is a straightforward, one-time process that only needs to be
completed once, regardless of whether the consumer chooses to verify
their identity via online KYC or offline KYC.
Types of KYC
The Know Your Customer (KYC) verification process might take either of
two forms. Both are excellent options; selecting one over the other
depends solely on personal preference and how easily it meets one's
needs in comparison to the other. Both are as described below:
Aadhar-based Know Your Customer
Because this verification process takes place online, it is extremely handy
for individuals who have access to broadband or the internet. In this
section, the consumer is required to upload a scanned copy of the original
Aadhar card that they possess. With Aadhar-based KYC, the consumer is
only allowed to invest up to 50,000 per year in a mutual fund, even if they
have expressed an interest in making such an investment.
Verification through In-Person Meetings
If the customer desires to invest additional money in mutual funds on an annual
basis, they will be needed to complete a verification through in-person meetings,
which take place offline. To accomplish this, the consumer has the option of going to
a KYC kiosk and verifying their identity with the help of their Aadhar biometrics, or
they can call the KYC registration agency and request that an executive come to
their home or place of business to complete the verification process.
What are the advamtages of using KYC?
Establishing the veracity of a customer's identification and determining
any potential risks associated with that identity is required by law for all
financial institutions. The procedures for knowing your customer (KYC)
help prevent financial crimes such as identity theft, money
laundering, financial fraud, and funding for terrorist
organisations. Heavy fines may be imposed on those who do not
comply.
The Know Your Customer (KYC) protocols that are in place today take a
risk-based approach to combating identity theft, money laundering, and
financial fraud:
Theft of Identification
Using KYC, financial institutions are able to establish proof of a customer's
legal identity, which helps prevent identity theft. This has the potential to
stop the creation of fraudulent accounts and the theft of identities using
falsified or stolen identity documents.
Money Laundering
Both organised and disorganised criminal enterprises use sham accounts
in banks to store financing for activities such as narcotics trafficking,
human trafficking, smuggling, racketeering, and other illegal activities.
These criminal organisations try to evade suspicion by dispersing the
money among a large number of accounts in order to cover their tracks.
Fraudulent Financial Activities
Know Your Customer (KYC) procedures are designed to prevent fraudulent financial
activities, such as using fake or stolen identification to apply for a loan and then
receiving funding through fraudulent accounts.
History of KYC laws
In the 1990s, rules for know-your-customer checks were put in place to combat
money laundering. After the attacks of September 11, 2001, the United States
government responded by passing the Patriot Act, which included more stringent
legislation regarding know-your-customer requirements. These alterations were in
the planning stages before the terrorist attacks of September 11, 2001; but, the
political impetus necessary to put them into effect was provided by those attacks.
Customer Identification Program (CIP) and Customer Due Diligence are two of the
requirements that must be fulfilled by financial institutions in order for them to be in
compliance with the increased KYC duties that are mandated by Title III of the Patriot
Act (CDD).
What’s the difference between AML and KYC?
AML, which stands for "anti-money laundering," is distinguished from
KYC, which stands for "know your customer", because AML refers to the
legislative and regulatory framework that financial institutions must
adhere to to prevent money laundering.
More specifically, KYC refers to the process of confirming a customer's
identification, which is an essential component of the entire AML
framework.
It is up to individual financial institutions to design their own know-your-
customer (KYC) programmes. However, AML legislation might differ
depending on the country or jurisdiction, and this necessitates that
financial institutions build KYC procedures that are compliant with each set
of AML criteria.
Who Has a Need for KYC?
A client identification and verification process known as know your
customer, or KYC, is required of all financial institutions that deal with
customers during the establishment and maintenance of accounts. In
most cases, conventional Know Your Customer procedures are required
whenever a new client is brought on board by a company or if an existing
customer purchases a regulated product.
The following types of financial organisations are required to comply with
KYC protocols:
Financial advisory services and securities broker-dealers
Applications for financial technology (fintech apps), based on the
types of activities in which they participate
Private lenders and lending platforms
Banks
Cooperatives of Credit
Regulations regarding know-your-customer checks are becoming an
increasingly important issue for virtually any organisation that deals with
money. In order to reduce the risk of fraud, banks are obligated to comply
with KYC regulations, and they also make it a requirement for the
companies and other entities with which they conduct business.
How Does KYC Work?
The fundamental requirements for the Know Your Customer (KYC)
procedure are laid forth in laws and regulations. The precise Know Your
Customer standards (such as KYC paperwork, for example) change from
industry to industry. In general, however, financial service providers and
banks are required to implement the most stringent KYC procedures.
The Know Your Customer (KYC) procedure has been digitised, which
means that the KYC verification can now be completed using a variety of
methods or technologies (such as NFC and AI), security features (such
as holograms), and numerous security checks (e.g., biometrics,
liveness). It is possible for it to include the following procedures or
stages:
The individual's government-issued identification document is
checked for any signs of forgery or any other problem throughout
the document verification process.
Face Verification / Liveness Check - In order to detect any spoof
attacks in a timely manner, face verification checks are carried out
to guarantee the customer is currently present and alive.
For the purpose of address verification, one obtains a proof of
address (POA), which compares the address listed on government-
issued identification documents with the POA.