When it comes to KYC rules, financial institutions are being held to increasingly greater standards. They’ll have to pay more money to comply with KYC or face severe fines. Almost any business, platform, or organization that interacts with a financial institution to create an account or conduct transactions will be required to comply with these KYC banking rules.
What is KYC in banking?
KYC stands for “Know Your Consumer,” and it is a standard due diligence technique used by financial institutions and other financial services firms to analyze and monitor customer risk as well as to authenticate a customer’s identity. KYC banking ensures that a consumer is who they say they are.
Clients must supply credentials that establish their identity and address in order to use KYC banking. ID card verification, facial verification, biometric verification, and/or document verification are examples of KYC verification credentials. Utility bills are one example of acceptable proof of address documents.
KYC is an important method for identifying client risk and whether or not the consumer can fulfill the KYC requirements for bank to utilize their services. Anti-Money Laundering (AML) requirements must also be followed. Financial organizations must verify that their customers are not utilizing their services to engage in illegal activity.
Why is KYC important?
Financial institutions are obligated by law to use KYC banking to verify a customer’s identification and detect risk indicators. Identity theft, money laundering, financial fraud, terrorism financing, and other financial crimes may all be prevented through KYC measures. Noncompliance might result in severe consequences. To combat identity theft, money laundering, and financial crime, current KYC banking procedures take a risk-based approach:
KYC banking is a service that allows financial organizations to verify a customer’s legal identification. This can help prevent phony accounts and identity fraud caused by counterfeit or stolen papers.
Dummy accounts at banks are used by both organized and disorganized criminal groups to keep funds for drugs, human trafficking, smuggling, racketeering, and other crimes. These illegal sectors try to evade suspicion from a KYC bank by distributing the money across a large number of accounts.
KYC banking is intended to prevent fraudulent financial activity such as applying for a loan using fake or stolen identification and then receiving funds through fraudulent accounts.
What’s the difference between AML and KYC?
AML (anti-money laundering) is the legal and regulatory framework that financial institutions must adhere to in order to prevent money laundering. AML differs from KYC (know your customer) which refers to validating a customer’s identification and is an important aspect of the entire anti-money laundering framework.
Financial organizations are in charge of designing their own KYC solutions. However, AML regulation varies by jurisdiction or nation, necessitating the development of KYC procedures that adhere to each set of AML criteria.
Uses of KYC and Its variety of purposes
Examples of KYC triggers include the following:
- Unusual business transactions
- Changes to the client KYC verification or new information
- Changes in the nature of a client’s company Changes in the client’s occupation
- Adding additional people to a party’s account
A bank, for example, could identify specific risk elements including frequent wire transfers and overseas transactions as a consequence of initial due diligence and continuous monitoring.
What are KYC requirements?
Proof of identification with a photograph and proof of residence are the two fundamental KYC documents that are required. These are needed to verify one’s identification while creating an account, such as a savings account, fixed deposit, mutual fund, or insurance policy.
The following is a list of documents that are generally recognized as standard forms of identification:
- PAN (Personal Identification Number) card
- Voter identification card
- Valid driver’s license
- a letter from a well-known public official or public servant
- A picture is included in the bank passbook.
- An employee identification card from a publicly traded corporation or a government agency.
- ISC, CBSE, and other university or educational board identification cards
The following is a list of commonly used identification documents that are accepted as standard evidence of address:
- Voter identification card
- Valid driver’s license
- Not more than six months old electricity or telephone bill
- Statement of bank account
- a gas bill or a consumer’s gas connection card
- a letter from a recognized governmental official or employee
- Statement from a credit card
- Deed to acquire a home
- Lease agreement and receipts for the previous three months’ rent
- For evidence of residency, an employer’s certificate is required.
Regulations governing know-your-customer (KYC) have far-reaching ramifications for both customers and financial organizations. When engaging with a new customer, financial institutions must adhere to KYC regulations. Financial crime, money laundering, terrorism funding, and other sorts of unlawful financial behavior are all prohibited under these rules.
Money laundering and terrorist funding frequently use anonymously established accounts, and the increasing focus on KYC legislation has resulted in more questionable transactions being reported. A risk-based approach to KYC can assist reduce the risk of fraudulent activity and improving customer satisfaction.