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KYC.html
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<h1 style="margin-left: 10px;"><span style="color: crimson;">KYC</h1></span>
<hr>
<h3 style="font-weight: 100; margin-left: 10px;"><span style="color: navy;"><u><b>Know Your Customer (KYC)</b></u></span>, also known as <span style="color: navy;">Know Your Client </span>, is a standard in the investment industry that ensures advisors can verify a customer's identity and know their customer's investment knowledge and financial profile.
The <span style="color: navy;">KYC</span> rule is an ethical requirement for those in the securities industry dealing with customers during the opening and ongoing maintenance of accounts.
It is implemented at the onset of the customer-broker relationship to establish the essential personal profile of each customer before any financial recommendations are made. The customer is also made aware of the need to comply with all the laws, regulations, and rules of the securities industry.
<br>
<br>
<span style="color: navy;">“KYC”</span> refers to the steps taken by a financial institution (or business) to:
<br>
<ol type="i">
<li>Establish customer identity</li>
<li>Understand the nature of the customer’s activities (primary goal is to satisfy that the source of the customer’s funds is legitimate)</li>
<li>Assess money laundering risks associated with that customer for purposes of monitoring the customer’s activities</li>
</ol>
<br>
<span style="color: navy;"><u><b>Importance of KYC:</b></u></span>
<br>
<br>
The extensive use of new technologies and the internet makes it necessary to define standards that help fight online fraud and financial crime e.g.
<br>
<ol type="i">
<li>Laundering</li>
<li>Terror/Terrorist Financing</li>
<li>Corruption </li></ol>
<br>
The KYC procedure enables companies to identify and verify the identity of a customer and to ensure that the customer is actually who they say they are.
<br>
KYC procedures are a critical function to assess customer risk and a legal requirement to comply with Anti-Money Laundering (AML) laws.
<br>
Effective KYC involves knowing a customer’s identity, their financial activities and the risk they pose.
KYC is a fundamental practice to protect an organization from fraud and losses resulting from illegal funds and transactions.
<br>
<br>
<span style="color: navy;"><u><b>KYC Process: </b></u></span>
<br> <br>
The KYC process is generally comprised of 6 steps:
<br>
1. Data collection <br>
2. Document checks <br>
3. Information validation <br>
4. Risk assessment <br>
5. Client approval <br>
6. Ongoing monitoring and record maintenance <br>
<br>
There are several different KYC programs that can be implemented. Choosing the right one is a critical decision. Unsuitable KYC programs can lead to non-compliance penalties. The appropriate selection is dependent upon the type of organization.
<br> <br>
<span style="color: dodgerblue;"><u><b>Requirements of “Know Your Customer”</b></u></span> <br>
The “Know Your Customer” framework contains three steps: customer identification program (CIP), customer due diligence (CDD) and enhanced due diligence (EDD).
<br><br><span style="color: dodgerblue;"><u><b>Customer Identification Program</b></u></span>
<br>
At the minimum, firms must pull four pieces of identifying information about a client, including name, date of birth, address, and identification number.
Most firms take additional steps in their screening process. Many will make sure that clients do not appear on government sanction lists, politically exposed person (PEP) lists, or known terrorism lists— those who do appear usually require enhanced due diligence.
Other items considered now include financial transactions, which firms use to separate potentially risky behaviour from regular business activity.
Much of this information comes from various reporting agencies, public databases and third-party sources.
<br> <br>
<span style="color: dodgerblue;"><u><b>Customer Due Diligence (CDD)</b></u></span> <br>
Customer due diligence is classifying all the information collected during the Customer Identification Program.
Firms examine the nature and beneficiaries of existing relationships to ensure all activity is consistent with historical customer information.
The goal is to obtain enough information to verify a customer’s identity and assess their riskiness. Since financial crime happens quickly, firms frequently monitor this information for unusual spikes in activity or changes to sanction lists. Most clients pose little to no risk, but the few who do are subject to enhanced due diligence.
<br><br>
<span style="color: dodgerblue;"><u><b>Enhanced Due Diligence (EDD)</b></u></span> <br>
If a customer is believed to pose additional risks, firms take extra steps to gain a better understanding of their motivations. A high-risk person may include those with political exposure or relationships with designated persons. Even someone in a high-risk country can raise a red flag for compliance.
In practice, firms must demonstrate a deeper understanding of the high-risk clients identified by a standard customer due diligence program. Some of the information required to perform enhanced due diligence includes a source of wealth verification, detailed management reports and relevant third-party research.
<br><br>
<span style="color: dodgerblue;"><u><b>Ongoing monitoring and record keeping</b></u></span> <br>
The company needs to investigate account activity and transactions undertaken by its existing customers. The goal of such monitoring is to ensure that no suspicious customer behavior will go unnoticed by the company. It includes:
Creating the business and risk profile, including where necessary the source of funds.
Ensuring that the documents, data or information held are kept up-to-date.
<br> <br>
<span style="color: dodgerblue;"><u><b>Advantages of KYC process</b></u></span> <br>
In an increasingly global economy, financial institutions are more vulnerable to illicit criminal activities. Know Your Customer (KYC) standards are designed to protect financial institutions against fraud, corruption, money laundering, and terrorist financing.
<br><br>
<i>•Rapid availability:</i>
After a successful KYC check, customers usually receive immediate access to products and services. Any delays or difficulties in concluding a purchase or contract between companies and users can be significantly reduced through digital KYC onboarding processes, thus improving customer experience.
<br><br>
<i>•Anywhere, anytime:</i>
Users can go through KYC verification at any time and from anywhere through automated remote solutions. As a rule, digital KYC identification solutions impress with high user-friendliness.
<br><br>
<i>•Cost-efficient:</i>
Companies and service providers benefit from higher conversion rates and optimized customer acquisition costs, especially with AI-driven and automated KYC solutions.
<br><br>
<i>•Compliant with regulations:</i>
KYC processes are usually modular and can therefore be supplemented with various security checks and add-ons (e.g., QES, 1-cent bank transfer) for additional security and regulatory compliance.
<br><br>
<i>•Reputable and trustworthy:</i>
Not only will complying with KYC regulations reduce the chance of penalties, it will also avoid any reputational damage. Customers will trust in a financial institution that takes KYC seriously and in turn establishes credibility.
<br> <br> <span style="color: dodgerblue;"><u><b>Digitalization of KYC </b></u></span><br>
Prior to the introduction of eKYC, customer identity verification required an in-person meeting to manually check the customer’s ID documentation, or to check important legal documents through a third party source. As an alternative, Knowledge-Based Authentication (KBA) was also used. Unfortunately, these processes are all less efficient, costly, and leave more room for human error.
To improve the accuracy of KYC, the verification process has been digitalized. Modern conventions of eKYC include, but are not limited to:
<br> <br>- Security features (hologram)<br>
- Security checks (biometrics)<br>
- Other technologies (AI or NFC)<br> <br>
Digital KYC procedures streamline the customer onboarding process. In a matter of minutes, the customer can complete the verification process from anywhere. Thus, customer data is easily accessible for continuous monitoring and record-keeping.
</h3>
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