What is Know Your Customer (KYC)?
A deeper dive into what KYC is and how to go about choosing the right solution
An essential aspect of sustaining a successful business is ensuring your customers are trustworthy. Without the proper identity proofing strategies in place, fraudsters will exploit any and all vulnerabilities in your system to commit various crimes, including using synthetic identity fraud or stolen identities for money laundering purposes. Today’s digital landscape is rapidly evolving; organizations that do not adapt to the times and technological advances are putting themselves and their customers both at a disadvantage and at risk, especially when it comes to preventing financial crime.
What is anti-money laundering (AML)?
Money laundering continues to be a rampant and costly issue—according to the United Nations Office on Drugs & Crime, the annual amount of money that is laundered globally per year ranges between $800 billion and $2 trillion US dollars—and governments are responding by introducing and enforcing more severe regulations in efforts to prevent financial crime.
Anti-money laundering (AML) is a global set of different laws and regulations that focus on preventing money laundering, terrorist financing and other financial crimes that use illicitly accessed funds. Though regulatory AML bodies and mandates vary jurisdictionally—the Anti-Money Laundering Act of 2020 in the United States and 6AMLD in Europe, to name a few—there are increasing efforts being made for worldwide cooperation between governments to prevent money laundering and related fraud. Failure to comply with AML regulations in any of the countries where a business operates can result in steep fines and sanctions.
What is Know Your Customer (KYC)?
Understanding who the user is behind a transaction is the core component of what is known as Know Your Customer (KYC). While it is important for organizations in any industry to establish trustworthy customers, doing so is a requirement throughout most of the world for those in financial or regulated industries. As an important part of anti-money laundering regulations, KYC requires businesses to verify the identity of users and assess the risk each user poses in order to prevent money laundering and fraud. Businesses with global operations and customers or organizations looking to do business internationally need to stay up to date and comply with the expanding regulations.
Due diligence and verifying customers’ identities should not take place only during customer onboarding, but rather throughout the customer journey to detect and prevent fraudulent activity, including money mules, first-party fraud and account takeovers.
A key pillar of a successful and compliant KYC program is evaluating a customer’s level of risk through due diligence. To successfully enact KYC, there are three levels of due diligence that can be used when monitoring a user: simple due diligence, customer due diligence and enhanced due diligence.
- Simple due diligence (SDD): this is when there is a low risk of money laundering or terrorist financing because of accounts with low values of transactions, thus not requiring a more extensive customer due diligence process and reducing friction during onboarding for good customers.
- Customer due diligence (CDD): this is when more identity proofing is required to verify a customer’s identity and determine the risk they pose. This form of due diligence will typically be implemented (but is not limited to) when a customer is opening a financial account.
- Enhanced due diligence (EDD): this is a more extensive due diligence process used to verify identities, monitor activity and determine the risk posed by high-risk customers such as politically exposed persons (PEPs) or high-value transactions that could be conduits for money laundering and terrorist financing activities.
Choosing the right KYC solutions provider
Compliance officers and others tasked with ensuring regulatory compliance and fraud prevention may find it difficult to find or integrate a know your customer solution that enables a risk-based approach, reduces friction during customer onboarding and does not disrupt current systems when integrated. The chosen KYC solution must also help answer the four primary questions needed to determine whether a customer is trustworthy:
- 01. Is this a real person?
- 02. Is this person who they claim to be?
- 03. Can we as an organization do business with this person?
- 04. Should we as an organization do business with this person?
A comprehensive, AI-powered solution like IDology’s KYC/AML Regulatory Compliance provides end-to-end KYC and AML compliance by incorporating a number of technologies to mitigate risk and establish trust. This includes but is not limited to document verification, data-centric validation, facial recognition matching and liveness tests, screening against global sanctions and PEP lists, identity risk scoring and transaction monitoring.
By utilizing an automated KYC system with a risk-based approach, organizations can confidently verify identities, establish customer trust and prevent their business from unknowingly facilitating money laundering—without compromising customer experience or AML compliance.
Are your customers who they say they are? Learn more about KYC and how to establish trustworthy customers in the Buyer’s Guide to KYC.