In an effort to prevent identity theft and mitigate risk, the United States government stepped in to make sure that companies were verifying the true identities of their users before completing transactions. As a result, the Customer Identification Program (CIP) was created to ensure that financial organizations were following a set of rules and regulations to better keep tabs on the money moving in and out of American banks. It is important for businesses and financial organizations to know when they need to employ Know Your Customer (KYC) processes in order to be in compliance with these regulations.
Typical customer activities do not raise any red flags, but those accounts with high levels of money transfers and irregular activity require due diligence efforts to establish their validity. KYC systems are important because they help organizations identify potential money laundering (anti-money laundering – AML) risks from a bank counterparty. KYC solutions allow banks and financial institutions to verify the identities of clients and check them against government data to fight back against fraud and other criminal activities.
To be effective with KYC diligence, it is necessary to standardize data collection. This can be done by asking a series of questions based on the V3 Challenge. You will need to know the variety of data that requires analysis, the velocity at which the data must be analyzed and its rate of change, and the vagueness of the data.
The Financial Industry Regulatory Authority (FINRA) is an independent self-regulatory organization that was created to help oversee the securities industry in the United States. FINRA is an excellent source of information so you can learn more about KYC rules and compliance.
For more information on Know Your Customer (KYC) Rules, check out our infographic below! Click on the image to expand the infographic.