What is a know-your-customer (KYC) check?
Know Your Customer (KYC) is part of an overall due-diligence program that businesses put in place to verify the identity and research the backgrounds of customers, clients and suppliers. A KYC check is the actual exploratory and verification procedure – a mandatory process that involves evaluating the potential risks for illegal activity that the relationship with your customer, client or supplier poses to your business.
With increasingly tighter regulations and more and more banks, insurance companies and creditors demanding that organisations furnish anti-bribery and corruption (ABC) information, KYC checks are more important than ever. Plus, they’re essential for your company’s peace of mind so you can feel confident that you’re doing business with reputable individuals and entities.
With a KYC check, customers typically must provide proof of identity, proof of address and sometimes other pertinent documentation. Additionally, you can check to see whether they appear on any politically exposed person (PEP) lists.
First Things First, What is KYC?
KYC is a standard banking practice adopted globally to verify the identity of clients. It is the cornerstone of a robust anti-money laundering (AML) and counter-terrorist financing (CTF) policy. KYC is pivotal in maintaining the integrity of banking systems by preventing identity theft, financial fraud, and illegal activities like money laundering and terrorist financing.
In essence, KYC involves obtaining key information about a customer, such as their full name, contact information, address, and date of birth. It also includes ascertaining the nature of the customer's business and predicting the likely patterns of transactions. For individual customers, this usually involves providing proof of identity and proof of address. For corporate clients, the process is more complex, requiring details such as corporate registration, operating licences, and information on directors and beneficial owners.
The significance of KYC in financial transactions is immeasurable. KYC checks help to increase trust and safety in financial transactions, reducing the risk of fraud and aiding the fight against financial crime. They also ensure that businesses are compliant with relevant laws and regulations, protecting them from penalties and reputational damage.
KYC regulatory frameworks exist worldwide, mandated by each country's respective financial regulatory authority. In the UK, the Financial Conduct Authority (FCA) sets out the KYC check requirements under the Money Laundering Regulations. Globally, the Financial Action Task Force (FATF) - an intergovernmental organisation - has set out recommendations for KYC and AML regulations, which have been widely adopted by countries across the globe. These global and national regulations necessitate that financial institutions establish formal customer identification programmes and continuously monitor customer transactions for suspicious activity.
Importance of KYC Checks
KYC checks play a pivotal role in safeguarding the financial landscape. They act as the first line of defence in the battle against financial crime, such as fraud and money laundering. By verifying the identity of each client, KYC checks help to ensure that financial institutions are not inadvertently facilitating illegal activities. This, in turn, assists law enforcement agencies in tracking and apprehending criminals who seek to exploit these institutions.
KYC checks also help businesses understand their customers on a deeper level. By gathering and analysing data about customers' transaction behaviours, financial institutions can get insights into their customers' needs, preferences, and financial habits. This increased understanding fosters better customer relationships, as businesses can tailor their services to meet individual customer needs. It also aids in risk management, as businesses can identify any changes in a customer's behaviour that may signal a potential risk.
In addition to preventing fraud and enhancing customer relationships, KYC checks also serve to protect financial institutions from reputational risks. The consequences of facilitating financial crime extend beyond the legal realm; being associated with such activities can severely tarnish an institution's reputation, leading to a loss of customer trust and potential business. By conducting rigorous KYC checks, financial institutions can show that they are committed to maintaining a clean, transparent, and ethical financial environment. This not only helps to avoid regulatory penalties but also bolsters the institution's image and credibility in the market.
The KYC Process: A Step-by-Step Guide
The KYC process can be broken down into a series of key steps: customer identification, verification, risk assessment, and ongoing monitoring. Each of these stages plays a vital role in ensuring the robustness of the KYC process.
Customer IdentificationThe first step in the KYC process involves gathering key identification information about the customer. This typically includes basic details such as name, address, date of birth, and contact information.
For individuals, acceptable identification documents usually consist of government-issued IDs like a passport or driver's licence. A utility bill or bank statement, dated within the last three months, can often serve as proof of address.
Once the identification information has been collected, the next step is to verify this data. Verification serves to confirm that the customer is who they claim to be.
Typically, the verification process involves cross-checking the provided information with reliable and independent sources. For instance, the details on a customer's passport would be cross-verified with government records.
Following verification, a risk assessment is conducted. This is a crucial stage in the KYC process, as it involves assessing the potential risk that the customer may pose in terms of engaging in illegal activities such as money laundering or terrorist financing.
The risk assessment is often based on various factors, including the customer's occupation, transaction behaviour, geographic location, and the nature of their business. For instance, a client involved in cash-intensive businesses may be deemed high-risk.
The final stage in the KYC process involves ongoing monitoring of the customer's transactions. This allows financial institutions to identify any unusual or suspicious activity, which might indicate potential illicit actions.
KYC Checks for Businesses
While the above steps outline the KYC process for individuals, conducting KYC checks for businesses requires additional steps and documents. Besides the basic identifying information, financial institutions also need to understand the ownership and control structure of the company.
This may involve obtaining corporate documents like articles of incorporation, business licences, and details about directors and beneficial owners. The purpose of this enhanced due diligence is to prevent businesses from being used as a vehicle for money laundering or other illicit activities.
Challenges with KYC Checks
Despite their importance, KYC checks can present certain challenges for both businesses and customers alike. Some of the most common hurdles include reliance on manual processes, dealing with outdated information, and creating friction in the customer journey.
Manual Processes and Outdated Information
Traditionally, KYC processes have often been manual and time-consuming, requiring a significant amount of resources. Manually updating customer data can lead to errors and discrepancies, leaving businesses vulnerable to fraud and non-compliance.
Outdated or inaccurate information also poses a significant challenge. As customer information changes over time, KYC data can quickly become obsolete if not regularly updated. This can result in ineffective risk assessments and potential regulatory breaches.
Another common challenge is customer friction. Extensive KYC checks can sometimes lead to a more complicated and lengthy onboarding process. This can deter potential customers and lead to a negative customer experience, affecting the company's growth and reputation.
The Role of Technology in KYC Checks
Advancements in technology, specifically in Artificial Intelligence (AI), Machine Learning (ML), and Blockchain, are revolutionising the way KYC checks are conducted, helping to streamline processes, reduce fraud, and improve customer experiences.
AI & ML
AI and ML have shown enormous potential in automating and enhancing KYC procedures. These technologies can automate data collection and verification processes, significantly reducing the time and resources required.
In addition, ML algorithms can analyse vast amounts of data to identify patterns and anomalies, helping to predict and detect fraudulent activities more accurately and rapidly.
Blockchain technology can also play a crucial role in KYC processes. Its decentralised nature ensures the immutability and transparency of data, which can prove beneficial in verifying customer information and preventing document tampering.
It can also enable a shared KYC network where verified customer data can be securely shared between institutions, reducing redundant checks and improving efficiency.
Digital KYC and Remote Customer Onboarding
The concept of digital KYC, made possible through these technologies, enables remote customer onboarding, providing a seamless and frictionless customer experience. Customers can now complete KYC processes online, from anywhere, and at any time, using digital verification methods like selfie checks and document scanning.
Ensure Your KYC Check Bases are Covered with Nexis Solutions UK
With LexisNexis, you’ve got your KYC check bases covered.
Nexis Diligence+™ is our investigative research tool for comprehensive due diligence in the UK and internationally. With Diligence®, you’ll know that your customers, clients and third-party suppliers are who they say they are and ensure that you’re complying with regulatory requirements.
The tool combines an unrivalled collection of global business intelligence and easy-to-use technology and pulls together all the information you need in one place. It enhances your due diligence practices and helps you minimise your business risk.
With Nexis Diligence+™, you can:
- monitor government sanctions lists, watchlists and PEP lists
- retrieve executive, company and industry data
- conduct thorough third-party background checks that draw on more than 26,000 sources, including global, national, and regional newspapers; blogs; and a news archive that dates back more than 40 years
- access international court cases that involve bribery and corruption, so you can keep abreast of litigation that could disrupt your business
- use the integrated Report Builder to generate date- and time-stamped due-diligence reports, so you have a verifiable audit trail to demonstrate your compliance efforts and meet regulatory expectations
- access premium content, including millions of public and private company profiles, in-depth risk-analysis reports and biographical sources
Nexis Diligence+™ helps you better understand your customers, employees and vendors and informs and improves your decision-making.
Nexis® Entity Insight
Another essential in your KYC check toolbox, Nexis® Entity Insight provides you with greater visibility into your business risk and arms you with the information you need to prevent or minimise that risk. Nexis® Entity Insight is a supply-chain risk-management tool that performs global adverse media monitoring and delivers relevant and empowering business intelligence on your supply chain and third-party network so you can make well-informed, smarter business moves.
Nexis® Entity Insight employs a PESTLE (political, economic, sociocultural, technological, legal and environmental) framework to help reinforce your company’s risk-based approach and enables you to more quickly identify risk. For organisations you’re doing business with or contemplating a relationship with, this framework looks at an organisation from numerous angles so you can keep track of these as you move forward with business decisions.
With access to a vast array of market intelligence and thousands of premium news sources typically unavailable on the open web, Nexis® Entity Insight provides you with a 360-degree view.
Nexis® Entity Insight’s user-friendly dashboard allows you to:
- analyse a snapshot of risk levels and trending risk areas, so you can then drill down into specific risk profiles
- manage active and pending entities, as well as the related RSS feeds (you can view these RSS feeds either individually or integrate them with other business systems, enabling you to read negative news coverage associated with each feed in real time)
- visualise news volume for all active entity mentions, colour-coded by PESTLE category
- identify the top 10 news volume trends among active entities and risk topics
- monitor adverse media mentions and mitigate emerging risks
Boost your KYC checks, make smarter decisions and ultimately protect yourself from reputational, regulatory, financial and strategic threats with Nexis® Entity Insight.