Know Your Customer: Reasons Why Your Business Need It

Know Your Customer Reasons Why Your Business Need It
Know Your Customer (KYC) is the process that most banks follow as part of their onboarding process. It is to verify and confirm the identities of the customers. KYC was introduced as an obligatory regulation for every business that deals with money to combat money laundering and terrorist fundings. Initially, KYC compliance was part of banking institutions only. But taking into account the increasing trend of criminal activities and frauds, the government agencies have now imposed these regulations on all the businesses. In fact, the banks and other obliged entities are required to pass on these policies to everyone they do business with.

Meeting Regulatory Compliance

Know your customers is an important phenomenon for businesses dealing with finance in any form. Whether banks, crypto platforms or investment firms, the government and regulatory agencies have set tight reins for every institution regarding the identities of their customers and their data. The need for identifying the customers’ identities has always been there. But the proper laws were introduced a few years back.

The KYC regulations were introduced as the section of the US Patriot Act passed in 2001 after the incident of 9/11. These laws were introduced to deter terrorist activities by hindering criminal fundings that take place right under the nose of businesses and government. The Patriot Act is actually concerned with the financial transactions and somewhere an extension of the policies of “The Bank of Secrecy Act 1970”.

With the strict regulations imposed on the businesses, they are obliged to conduct the KYC process to comply with KYC regulations. As stated by the Patriot Act, the businesses and organizations that deal with finance are obliged to meet two main requirements,
  1. Customer Identification Program (CIP) - To confirm the identities of the customers and ensure that they are who they say they are.
  2. Customer Due Diligence (CDD) - to cover multiple aspects of customer identification, mainly identifying the risks associated with certain customers.

Considering these requirements, it is essential for businesses to perform the KYC process to stay on the safe side and successfully meet the regulations.

An Imperative Part Of AML

It is crucial for organizations and businesses to verify the customer’s identities and hinder any suspicious or criminal entity from accessing the services and making illegal transactions. The customer identification program and customer due diligence requirements of the KYC process serve businesses to carry out a background check on the customers. Doing so, the organizations can analyze the behavior and pattern of the customers, hence helping them in anomaly detection.

There has been a rapid increase in money laundering and terrorist funding. We often come accross multiple news reflecting such incidents. Observing this, the regulatory institutes have made it obligatory for the financial institutes to implement AML policies according to country law and immediately report any suspicious activity to the authorities. It is a common practice of the money launderers that they rely on fake accounts and try their best to stay anonymous so that they won’t get caught.

The organizations that fail to report such accounts and entities are held by regulatory agencies. In fact, it can cost them hefty fines and in some cases imprisonment. Verifying the customers’ identities at the time of onboarding and even running timely CDD can save organizations from this unhealthy situation in the future. Moreover, with the 5th AML directive on its way, the businesses are going to face more challenges in terms of meeting the AML laws.

Secure Customer Base And Combat Fraud

With the world moving towards digitization, the fraudsters and cybercriminals are getting an open opportunity to access the systems and exploit the user accounts and business reputation. All this is because of the inability of the businesses to verify their customers before allowing them access to the services. Know your customer is an efficient process to confirm the identities of the customers and hence securing the customer base.

In most of the organizations, the frauds are carried out by the insiders. When the consumers are screened thorugh CIP and CDD programs, the organizations and businesses are able to have a more defined and secured customer base. It eventually helps in combatting fraudsters who might have been trying to open their accounts through fake information and or using someone’s identity.

AUTHOR_NAMEAbout the Author:
This is Harrison Mason. Technical Content writing is my passion. I have broad experience in writing for the technical field. I started my writing at the age of sixteen when I was in college. Now I’m already writing for contribution sites as an independent influencer. I wrote many articles on medium and many of them are published in various publications. I wrote many case studies for businesses to let them know the real need for digital transformation for their business. I really love to Write on Age Verification and Biometric Verification.
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