Know Your Customer (KYC) processes have been a key component of global anti-money laundering (AML) efforts for decades.
Financial Institutions (FIs) such as banks, credit unions and other financial service providers have long been obliged to collect information on the individuals and businesses they provide services to.
More recently – following the rise of cryptocurrencies and other blockchain-based transactions – Virtual Asset Service Providers (VASPs) have also been brought into the regulatory fold. For anyone who has been following our Knowledge Base, you’ll know that the evolving regulation of VASPs (and how they can reach compliance efficiently) is a frequent topic we cover.
However, FIs and VASPs are not the only organizations that need to institute KYC.
Companies from a wide range of different sectors that act as effective “gatekeepers” to the financial system either conduct – or should be conducting – KYC checks on the customers they onboard.
These include real estate brokers and agents, law firms, auditing firms, corporate service providers, precious metal providers – essentially any company that provides access to assets or the financial system in a way that could be manipulated for money laundering.
AML processes have become firmly entrenched and standardized within the traditional financial industries, with a wide range of sectors and companies that provide financial or asset-related services being subject to AML regulations.
In parallel, the governments that host them also face the threat of varying degrees of sanctions from global regulators if they fail to adequately regulate sensitive industries.
Typical KYC processes involve verifying prospective corporate and individual customers across a range of different identifiers and factors.
For corporate customers the process generally involves:
- Verifying the business – this initial step in a Corporate KYC process involves checking a business’ name against global corporate registry databases, ensuring that the company is real, licensed, has a verified address/place of business and is active.
- Watchlist screening – The second step involves vetting the entity for known involvement in illicit financial activity, as well as assessing the risk that it might be. This involves checking the company and its registered principals and Ultimate Beneficial Owners (UBOs) against global sanctions and watchlists, including global lists of Politically Exposed Persons (PEPs) and adverse media.
- Establish Risk Profile – Once these elements of a business’ identity have been established, the potential customer can be assigned a risk profile based on risk assessment procedures.
A KYC process for individual customers will:
- Perform ID Document Verification (IDV) through technologies such as OCR extraction and Passive Liveness checks
- Check the individual’s name against AML and other global watchlists
- Establish a risk profile for the individual
- If the AML risk is determined to be high, transfer the application to a human compliance team for Enhanced Due Diligence (EDD).
So what kind of KYC processes do non-FI/VASP industries need?
Auditors and accounting firms are considered to be a highly sensitive industry in the global fights against money laundering and criminal / terrorist financing. This is because they are often used – either wittingly or unwittingly – by criminals seeking to legitimize their funds.
For this reason, audit and accounting firms need to carry out at least base-level KYC and due diligence on their clients. In many jurisdictions, such as Dubai, auditors are required by law to carry out AML checks on the companies and individuals they provide services to, to ensure they are not facilitating their financial crimes.
However, even in countries with more relaxed regulations governing the checks audit firms carry out prior to taking on a new client, they nevertheless will be well advised to have an accurate understanding of who they are dealing with – or risk being implicated in financial crimes that they may unwittingly facilitate.
Real Estate agents and brokers
The Real Estate sector has long been used for money laundering, with property being one of the most preferred assets for financial criminals to invest in. Real estate tends to gain in value in the long term and can also be easily liquidated. In parallel, AML checks tend to be very lax in the industry, with many unscrupulous agents willing to turn a blind eye to clients with money to spend.
Nevertheless, regulators around the world have long been trying to rein in the sector, with numerous jurisdictions classifying real estate agents as non-financial regulated businesses. This means that real estate agents and sellers should be conducting KYC and AML checks on their prospective clients that include screenings against global watchlists, as well as requesting proof that funds used for investment are legitimate.
And as the so-called Proptech movement continues to evolve, opening up access to real estate assets to investors around the world through tokenized real estate – it is probably only a matter of time until regulators begin to take a much stricter approach to that exciting new segment of the industry too.
Precious Metals and Stones traders
The precious metals and stones industry has long been associated with both glamor and criminal exploitation. Precious metals and stones are a favorite among money launderers as they are compact and hard to trace, providing a highly valuable medium for converting illegally acquired funds into “washed” liquidity.
For this reason, jurisdictions around the world have been taking steps to regulate the industry, compelling businesses and agents that sell the assets to gather KYC on their customers.
For instance, in April 2021, the United Arab Emirates (UAE)’s National Anti Money Laundering and Combatting Financing of Terrorism and Financing of Illegal Organisations Committee (NAMLCFTC) adopted new Anti-Money Laundering (AML) guidelines designed to strengthen its existing AML and CTF protocols.
This also involved classifying dealers in precious metals and precious stones (DPMS)as Designated Non-Financial Business and Professions (DNFBPs) regulated by the Ministry of Economy.
Other regulatory regimes around the world, such as the EU’s 4AMLD and 5AMLD also have AML / KYC requirements governing sales of precious metals and stones above certain thresholds.
Tools for conducting KYC checks
For many companies – particularly small-to-medium sized businesses with limited resources – the prospect of implementing KYC / AML and other compliance checks on their customers can often seem like a daunting and expensive prospect.
However, as regulations around the world continue to become more comprehensive and more strictly implemented, the risks of avoiding compliance requirements in most cases outweigh any short-term benefits.
In addition, there is now highly efficient, scalable and cost-efficient technology that can carry out automated KYC / AML checks on potential customers, providing businesses with the peace of mind that they have fulfilled their compliance responsibilities, while also building trust among the communities they do business with.
KYC-Chain’s end-to-end workflow solution is being constantly upgraded to meet the complex compliance challenges faced by companies from a wide range of industries and jurisdictions, allowing them to grow their businesses with confidence and integrity.
Are you looking for an automated KYC solution for your business? Get in touch and we’ll be happy to discuss how to make it happen.