What Are The 3 Key Components of Know Your Customers (KYC)?

Three of FATF's recommendations are directly related to verifying and confirming the identities of customers, and these are Recommendation #10 about Customer Due Diligence, Recommendation #11 about Record Keeping, Recommendation #12 about Politically Exposed Persons (PEPs), Recommendation #16 about Wire Transfers, Recommendation #17 about Reliance on Third Parties.

If this tells something about the elements of KYC, it is a consequential process. Below, we will discuss the three KYC components by explaining:

• Which Businesses are Required to Perform KYC?

• What are the 3 components of KYC?

• KYC stages, benefits, and purpose.

• KYC automation solution for financial institutions.

What is KYC?

KYC, also known as Know Your Client or Know Your Customer is the whole process of identifying customers, initially starting with collecting KYC documents and ending only with the complete end of the customer’s relationship with the financial institution, i.e. closing the account completely.

In fact, the KYC stages must be done periodically over time, and this is to ensure the accuracy of the KYC documents and to keep them up-to-date with new and evolving KYC rules and regulations.  Also, the KYC process is not limited to financial institutions, there are many sectors and businesses that require the KYC process. So, what other sectors need KYC? Read below in the next section.

What Are The Benefits of KYC?

Before the whole concept of KYC was invented, the financial system was way less regulated and far riskier for FIs and the broader economy. This means it was also far more vulnerable to illegal activities like money laundering. But with KYC, businesses can:

1. Detect and prevent money laundering and fraud.

2. Identify the identity of their customers.

3. Assess the risk levels of their clients.

4. Maintain accurate and up-to-date customer information for better decision-making and operational efficiency.

It is important to note that when KYC is done properly, businesses can better understand their customers' behavior. This information can then be used to market specific products or services based on this behavior and identify unusual patterns, if any, that could indicate fraudulent activity.

Which Businesses are Required to Perform KYC?

Money launderers do not only target banks or financial institutions but they also aim at mostly cash-intensive businesses. Below, we mention three examples of popular businesses that money launderers target other than financial institutions (which makes it necessary for these businesses to adhere to KYC components):

1. Insurance companies: Life insurance and investment-linked policies are amongst the most popular types of insurance services that attract money launderers because they offer a way to integrate illegal funds into the legal financial system.

2. Payment institutions: Money launderers see these types of institutions as one of their best options to move their money fast, often across borders. This is likely because of the large number of transactions these institutions can handle.
   They also allow for digital and, in some cases, anonymous payments, like electronic transfers or online wallets, which are difficult to track. Criminals care about speed, anonymity, cross-border transactions, and high transaction volumes, which can be achieved through payment institutions.

3. Ecommerce companies: Ecommerce is characterized by its online financial transactions, but unfortunately, due to the nature of these electronic transactions, it attracts money laundering criminals.
   Criminals may create fake accounts or set up front companies on eCommerce platforms to make purchases with illicit funds and generate fake sales, thus laundering the money.

What Are The 3 Components of KYC?

The 3 components of KYC work together to keep FIs safe, it is those elements of KYC that protect these institutions from potential risks. KYC components list is:

1. Identity Verification (Customer Identification Program - CIP)

The first element of KYC components is Identity Verification, which is also called the Customer Identification Program (CIP). This step, as part of the KYC components list, is super important because it helps banks and financial companies know exactly who their customers are.

Key Points of CIP:

• Collecting Information: Banks ask for basic information like name, address, date of birth, and ID numbers. This usually means showing documents like a passport or a driver's license.

• Checking IDs: FIs have different ways of checking whether the documents are real. They might use technology to scan IDs or check against official databases.

• Understanding Risk: While conducting identity verification, FIs assess any potential risks associated with each customer. They consider factors such as the customer's geographic location, the nature of their business, and their expected usage of financial services. This comprehensive risk assessment helps AML professionals determine the appropriateness of onboarding a customer and whether additional due diligence is required to comply with regulatory standards.
  

2. Customer Due Diligence (CDD)

The second element of KYC components is Customer Due Diligence (CDD). This step is all about getting to know the customer better and figuring out how risky they might be for the bank or FI.

Key Elements of CDD:

• Risk Levels: Banks group customers by risk—low, medium/moderate, or high. They base this on things like how the potential customer handles their money, their background, and what kind of services they want.

• Extra Checks for High-Risk Customers: If someone is considered high-risk, the FI does extra checks. They might ask more questions about where the money comes from and how they plan to use it.

• Keeping an Eye on Transactions: Banks keep watching customers' transactions over time. This helps them spot anything unusual that might suggest fraud or money laundering.
  

3. Ongoing Monitoring & KYC Remediation

The third element of KYC components is Ongoing Monitoring. This means that banks don't just check the customer once; they keep an eye on their transactions and activities after they've signed up.

Key Aspects of Ongoing Monitoring:

• Analyzing Transactions: FIs use technology to look at their customers’ transactions in real time. This helps them catch any strange activities quickly.

• Regular Account Reviews: FIs regularly check customer accounts and their risk levels. They update information if needed, so everything stays current.

• KYC Remediation: If FIs find something suspicious or see that the customer’s information doesn’t match up, they take action through KYC remediation. This might mean asking the customer more questions or even deciding to close their account if necessary.

Why is FOCAL The Best Provider for KYC Automation?

More and more organizations are choosing FOCAL’s automated KYC solutions because, simply, they make things easier. FOCAL helps FIs quickly check new customers, keep an eye on existing ones, and most importantly all without hassle. This means customers can get onboarded faster, and organizations can ensure they follow the rules as they grow.

KYC regulations give a basic guideline, but there are many details and steps required to do it right. That’s why having a solid KYC provider like FOCAL is key. They help businesses set up the best practices and use the right technology to stay compliant with the laws and regulations in different jurisdictions.

Conclusion

KYC components are important in many processes like opening an account, applying for a loan, and KYC refreshes depending upon the risk level. If it is ignored or tolerated, the financial institution will be liable for fines and legal liability.