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Characteristics of a Reliable KYC Tool

Knowing Your Client or KYC is really a time-consuming, resource-intensive process. However, it is a necessary step to ensure that you’re doing business with outstanding, trustworthy clients. All these efforts just to check and verify your potential customer’s information and activities will help save you from millions of dollars in losses, fines, and fees, and a ton of headache.

Image Courtesy Of Robert Bye

Every business has one end goal: to make a profit. This is why most of them try to cater to a wider, more global audience. They’re casting a bigger net for a more bountiful catch. Unfortunately, this move could backfire in several ways, and one of them is getting the wrong customer. After all, the ocean may be full of fish, but not all of them are edible.

In order to avoid dealing with the wrong customers, businesses need to have a stringent system in place, so that they could filter the good clients from the bad. This is where KYC compliance tools come in. KYC, short for Know Your Customers, was initially used in the financial industry. It’s because the risk that a bad customer poses is so great, it could cost a financial institution hundreds of millions of dollars in fines and fees.

When you’re in the market for a KYC tool for your business, you shouldn’t jump headfirst into the first offer that you get. In order to land arguably the best KYC compliance tool around, you need to research and learn more about these and how they suit your business.

Here are the top characteristics of the KYC tool you should consider:

Robust Customer Identification Program to know more about your customers

Putting yourself in the position of a financial institution, how can you know if someone is who they say they are? Yes, you always ask for identifying documents, proof of employment, and other paperwork to know who they are, but how can you be sure that all of them are legitimate? Identity theft is so widespread that many of these identifying documents are available for download online. It affects millions of US consumers, with tens of billions of dollars in losses every year. That’s why for banks and other financial institutions, spending millions of dollars to safeguard their interests is quite necessary.

When it comes to CIP, people who are transacting financially need to get their identity checked and verified. This is mandated by law, after all, as provisioned in the Patriot Act. This is put in place to limit and deter illegal activities like money laundering, funding of terrorist groups, corrupt practices, and more.

For the rest of the world, over 190 participating countries/jurisdictions globally have committed to the guidelines of the Financial Action Task Force or FATF. This pan-government organization aims to fight money laundering or an international scale, so they’ve designed several identity verification methods.

This just means that every customer, no matter what the financial capacity, is obliged to accurately identify themself before any transaction.

At the very least, one must provide their name, date of birth, address, and identification number before opening an individual financial account, as delimited in the CIP. The financial institution must then verify the identity within a reasonable time, through various identity verification procedures. This includes reviewing documents, as well as comparing the information given by the customer with existing data from consumer agencies, public databases and records, and more.

For CIP to be a success, the financial institution should always do risk assessment, even for small, account-level procedures. CIP is ultimately just guidance, and the ones following the procedures are the transacting institutions. So it’s really up to them to determine the exact risk level, and what should be done to address that potential issue.

Knowing you can trust a potential client through Customer Due Diligence

One important aspect of KYC is knowing beforehand if your potential client is trustworthy. This is vital to forging a long-lasting partnership, especially considering that you’ll be dealing with finances. Your KYC tool should have a due diligence element, so that you can effectively manage risks when and if the need arises. Customer due diligence (CDD) is your first step to avoiding potential headaches for your financial business, as you protect yourself against criminals, terrorists, or politically exposed persons.

There are different levels of due diligence, and knowing them will help you give proper attention to more specific cases than ones which pose little risks compared to others. First one is simplified due diligence, which is mostly applicable for low risk situations. A full CDD is not needed especially for low value accounts. A customer who uses their credit card overseas on a holiday won’t get the fullest CDD, as it is a common occurrence.

The next one is basic customer due diligence, which, as the name implies, the basic step in CDD wherein information is obtained for all customers. This is done for normal customer identification and risk assessment.

Lastly, we have enhanced due diligence, which is done for higher-risk customers. Additional information is asked and gathered to provide a deeper understanding of customer activity to avoid the risks that come with them. A good example would be for politicians opening bank accounts. Banks may go the extra mile to gather information or have safeguards in place, in the eventuality that the account holder will do anything illegal with their account.

If you’re just starting to build your due diligence initiative, you can consider including the following steps:

  • Knowing the identity and location of the customer, their business activities, and the purpose of their transaction with your business. Ask for a documentation that reflects these information.

  • During customer authentication, you can already classify their risk category and describe some of their notable characteristics, patterns of activity, and the potential issues that might arise should you push through with their transaction. Store this information as an additional documentation in your digital records.

  • Go through existing records and transactions when you’re dealing with potential customers, just to check and verify their activities. Any changes can be flagged for review, especially if they beyond their usual activity. For example, a consistent amount of deposit and withdrawal is broken by a transaction several times larger than usual. At least try to verify if this transaction is correct, and flag it for review.

Knowing Your Client or KYC is really a time-consuming, resource-intensive process. However, it is a necessary step to ensure that you’re doing business with outstanding, trustworthy clients. All these efforts just to check and verify your potential customer’s information and activities will help save you from millions of dollars in losses, fines, and fees, and a ton of headache.