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KYC Processes — Everything You Need To Know

Know Your Customer (KYC) is the process of identifying an individual or corporation before entering into a business relationship.

Since the passing of the Patriot Act, KYC processes have become increasingly important as they help to:

  • Verify the identity of the customer
  • Assess the risk of money laundering and terrorism financing
  • Understand the source of funds and the legitimacy of the business relationship.

As a result, banks, financial institutions and cryptocurrency platforms are compelled by regulators to implement strict KYC processes. Additionally, KYC is typically paired with Anti-Money Laundering (AML) checks, to ensure that the business relationship is not misused for illegal activity. Basically it means that both large and small financial institutions need to get to know you by collecting personal data and verifying your identification documents..

No wonder then that the cost of KYC checks increased by 19% last year for businesses. No matter how strong a business is performing, exploding KYC costs are a growing cause for concern. New regulation, like GDPR, place a significant burden on platforms to gather and maintain an array of personal information about each customer.

Naturally, your customers don’t care about the regulatory pressures that businesses face, and instead expect a fast and intuitive on-boarding experience.

Additionally, your business most likely services an international user base. From a KYC and AML perspective, this adds a significant amount of complexity, because you now have to deal with identification documents from all over the world.

Did you know that the national Italian ID is made of paper, or that the new Indian passport does not contain a hologram? Do you allow driving licenses in your KYC?

This is the kind of information that you and your KYC provider need to be aware of when dealing with an international client base. There are a vast number of different ID types out there and some carry much higher compliance risks than others.

Thankfully, great KYC software is available that is not only cost-effective but compliant as well. Let’s take a look at what your KYC process should include in 2019.

Why are KYC processes required?

KYC and AML belong to a larger category called “Customer Due Diligence”. Regulators have been increasingly active in this space, hoping to tackle international money laundering and terrorism financing.

As a business, you are compelled to comply with the mountain of legislation and therefore need to verify the identity of each customer. Good KYC processes allow you to do just that.

What information do customers need to share?

KYC processes vary by country and by industry. Financial services typically involve diligent KYC checks, whereas telecommunications companies have more lax requirements. Nevertheless, customers always need to share information that is verifiable. The bare minimum is usually:

  • Full name,
  • Date of birth
  • Residential address.

Additionally, prospective customers need to prove that they are not politically exposed persons and that they are the ultimate beneficial owner. In order to verify both, the business typically performs AML sanction screenings.

Any Questions?

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What does a KYC process involve?

#1. Global & historical coverage for identity documents

As of 2019, there are over 150 different passports and around 100 national IDs. Then there are also old versions of passports and identification documents that are still widely used.

Therefore, tt’s not enough for your KYC process to be able to identify current versions of international IDs. Instead, businesses should use historical databases — like Prado — that can verify legacy passports and IDs as well.

Source: Prado

#2. PEP & sanctions screenings

In the post 9/11 world protecting against terrorist financing and money laundering has become a central part of any company’s KYC/AML strategy.

With the proliferation of the internet, individuals and businesses located anywhere in the world can become customers. Malicious actors are continually trying to misuse services created to help people, in order to further their own agendas.

The most striking example of this occurred in 2015, when terrorists in San Bernardino financed a mass shooting with a loan from a prominent online lender.

With this in mind, it is absolutely crucial that your KYC process can identify terrorists and other criminals from all over the world. In order to achieve this, your KYC provider needs to continually screen sanctions and PEP lists.

Make sure that your KYC tool has this functionality in 2019!

#3. KYC and AML for corporate clients

The old acronyms of B2C and B2B are often no longer valid. The reality is that many businesses are required to deal with both retail and corporate clients in 2019.

Naturally, both have different KYC and AML requirements that are not to be taken lightly. As a result, it is crucial that your KYC process can check company houses all over the world in order to verify the legitimacy of any registered business.

Gathering and verifying information about the business owners is the first and most important step in corporate KYC. The company house will tell you:

  • The Business registration numbers
  • The Incorporation date
  • Activity status
  • The Director list
  • and more

Whether you are planning on onboarding corporate clients, or even raising venture capital, make sure that your KYC process is able to handle non-retail clients.

#4. GDPR compliant

The EU General Data Protection Regulation (GDPR) proved that regulators are willing to make drastic changes that affect thousands of businesses.

Indeed, GDPR fundamentally changes the way in which customer data must be handled, and threatens organizations that are not compliant with a hefty fine. More specifically, the EU can levy fines of up to 4% of annual global turnover or €20 million (whichever is greater).

Importantly, GDPR does not just affect data privacy laws across Europe, but it also protects all EU citizens. As a result, all companies with European customers are legally obliged to manage data in a GDPR compliant manner.

But what does GDPR compliant mean? At the very least a business must be able to show that:

  • The user provided explicit consent to the collection of data
  • A cookie consent notice was agreed upon
  • The user’s age was verified
  • The user provided a double opt-in
  • The business’ privacy policy must explain how data is collected and the user must be made aware of it
  • A contingency plan for the event of a data breach has been made

And that’s just the tip of the ice-berg. Save yourself a lot of time and pain by opting for a KYC software that offers many of these features out of the box.

#5. Your KYC process needs to be scalable

Scalability is crucially important in 2019 — but it’s still wildly underrated. How do I know this?

Well, when we demo our KYC solution to potential clients, the question of scalability never comes up. People never ask: “Can your KYC software handle a sudden influx of thousands — maybe even hundreds of thousands — of customers?”

In KYC the old adage is true: If you fail to plan, you plan to fail. How painful would it be, if you’re marketing team hits it out of the park, just for the huge influx of customers to be met by a rigid KYC process that can’t handle a larger volume of applications? It could kill any momentum you worked so hard to generate.

Instead, make sure to devise a KYC process that can process hundreds of thousands of applications. If you’re going to a KYC service provider, always ask the sales rep how many applications the software has processed so far. If the number seems small to you, make sure to look for alternatives.

(Bonus feature) Choose cost-effective KYC software!

Did you know that major financial institutions spend about $500 million per year on KYC and compliance? JP Morgan even added a staggering 5,000 employees just to deal with the exploding compliance and KYC requirements.

It’s not just banks who are feeling the pinch however. Both the cost and labour required to fulfill increasingly stringent regulations are spiraling out of control. In such an environment, many KYC processes are breath-takingly expensive, but businesses are caught between a rock and a hard place.

Luckily, cost-effective KYC solutions exist and you should never settle for a solution you deem too expensive. Customer onboarding software is not something that is easily changed, so you might be stuck with your choice for a substantial amount of time.

Besides the obvious cost of onboarding a client in a compliant manner, a hidden but much more substantial cost regards the hours of work done by your compliance staff.

When researching KYC providers, make sure to find out how long it typically takes for a staff member to process one application. Saving money on a cheap KYC solution is poorly spent, if dealing with applications becomes a time-intensive task.