Know Your Customer (KYC) processes are a complex and critical component of every wealth management firm’s due diligence and Anti-Money Laundering (AML) compliance program.
KYC is the process of verifying a client’s identity and their financial activities, including their source of funds and risk profile. This helps ensure that clients are legitimate and compliant with relevant regulations, helping to prevent money laundering and other crimes. In parallel, it ensures that wealth management firms are able to provide documented evidence of their own compliance protocols and safeguards in the event of a regulatory audit.
KYC involves collecting detailed information about clients, such as their name, address, date of birth, contact details, employment status and other identifying documents. Wealth management firms must also find out as much information as possible about their clients’ financial backgrounds, such as their income level, net worth and investment history. All this data is then analyzed for any inconsistencies or suspicious activity.
Know Your Business (KYB) is another key subcomponent of KYC/AML for wealth management firms. KYB involves examining all aspects of a business to assess its legitimacy, including identifying its Ultimate Beneficial Owners (UBOs) and/or shareholders, its corporate structure and affiliations, the products and services it offers — as well as its adherence to the relevant regulatory requirements.
KYB also requires exploring any potential links between companies or individuals associated with the business — such as suppliers or creditors — which can help identify risks to a firm’s operations or reputation. In order to properly assess these risks, wealth management firms will use various tools such as background checks, adverse media searches and public records searches to get a full picture of a business entity before allowing it access to services. These additional investigations are commonly referred to as Enhanced Due Diligence (EDD).
As wealth management firms are often involved in investing their clients’ funds in a wide range of sectors and asset types, it is also important to carry out KYB on their investment targets.
Robust KYC/KYB processes are essential for ensuring that wealth management firms comply with government regulations while maintaining secure relationships with their clients through verification and trustworthiness.
They help ensure that operations remain legal and fraud free — protecting both the firm itself from potential damage caused by illicit activities by its customers, as well as protecting customers from malicious actors using the service for criminal purposes.
Carrying out KYC/KYB/AML processes has traditionally been a time-consuming and resource-intensive endeavor for both parties involved.
Wealth management firms commonly carry out KYC checks using human teams. This approach involves compliance officers manually collecting and verifying a variety of documents such as identity cards, passports and bank statements in order to verify a client’s identity.
As manual processes are inherently prone to errors, this approach can lead to inconsistencies in data accuracy and delays in processing times due to its reliance on human input. In addition, manual KYC checks are labor intensive, requiring significant resources and creating additional overhead costs for organizations. They also take a significant amount of time — sometimes weeks or months — which leads to high abandonment rates for prospective customers.
Manual KYC checks are also vulnerable to security risks as data is often stored electronically on multiple devices or platforms and may not be adequately monitored for potential breaches.
For these reasons, many wealth management firms have begun exploring automated solutions to replace their traditional manual KYC processes in order to reduce costs, improve accuracy and provide better security measures for their clients.
Benefits of Digital KYC Onboarding
Digital KYC Onboarding or Automated KYC refers to the process of carrying out KYC checks on clients and/or associates or investment targets using a digital technology stack during an onboarding process.
There are numerous Automated KYC solutions that provide integrated KYC onboarding software that is able to carry out the types and scope of KYC/AML checks on clients that are required to remain compliant with the regulations a business is subject to.
Wealth management firms that leverage digital KYC onboarding experience a number of benefits.
First and foremost, digital KYC onboarding streamlines the client onboarding process, reducing the time needed to complete the necessary forms and identity checks. This makes it easier for clients to get set up with their wealth manager, creating a better customer experience.
Additionally, several manual processes can be automated with digital KYC onboarding, such as form filling or document scanning. This reduces operational costs for wealth managers and helps them stay competitive in an increasingly crowded market.
The enhanced security offered by digital KYC onboarding also provides a number of benefits for clients interacting with wealth management firms. Data is securely transferred through encrypted channels which protects sensitive information from unauthorized access. Clients can prove their identity quickly and easily without having to provide physical documentation or wait for approvals from third-party service providers.
The transparency offered by Automated KYC also increases trust between clients and their wealth managers as they have greater visibility into the verification process. Having an automated onboarding process also indicates to new clients that a wealth management firm takes security seriously and is a responsible actor.
KYC-Chain’s onboarding solution
KYC-Chain’s end-to-end workflow solution is an all-in-one digital onboarding tech stack that allows our clients from across a wide range of sectors – including the traditional finance, DeFi, crypto and many others — reach their compliance, AML and anti-fraud challenges efficiently and securely.
Our onboarding solution allows wealth management firms to carry out the following checks on their clients and investment targets:
- ID Document Verification (IDV) — this process includes automated scans of documents to ensure they are authentic and valid, as well as facial recognition checks to ensure the person submitting ID documents is who they say they are. IDV can also include Liveness checks that are able to verify whether an individual taking part in an onboarding process is in fact the individual being presented in an uploaded selfie image or video – and not an imposter or fabrication.
- AML Screening – checking an onboarded individual or entity name against a comprehensive selection of global watchlists that include sanctioned entities, Politically Exposed Persons (PEPs), and references in adverse media.
- Xmass Corporate structure visualization – KYC-Chain’s Xmass tree function can allow wealth management firms to quickly understand the corporate relationships and ownership structures of their corporate clients.
- Automated User Onboarding Restrictions – Many wealth managers need to limit access to customers from certain countries and jurisdictions in order to comply with global sanctions to tax planning and steering clear of certain regulatory regimes. A robust automated KYC process will be able to filter eligible customers according to where they or their main place of business is.
- Risk Scoring – Once an individual or corporate client’s identity and credentials have been established, an automated KYC tool will assign a risk score to them. This score will then determine whether to automatically grant them access to a firm’s services, to apply further checks on them, or if they are too risky — to just outright reject them.
- Enhanced Due Diligence (EDD) – For potential clients that have been determined to have a significant risk score, EDD processes can be applied that do not necessarily require human intervention from compliance teams. KYC-Chain also provides customizable options for high-risk subjects to be forwarded to a human compliance team, ensuring that restrictions on investment are checked and justified. Using KYC-Chain’s new Manager Fill function, compliance managers can also easily edit or delete client applications manually, allowing for full compliance with identity protection laws such as the GDPR.
- Crypto Wallet screening — For clients associated with the crypto industry, understanding the history of a wallet, as well as other key credentials, is a critical step for mitigating the risk that it is a conduit for money laundering and other financial crimes.
- Ongoing Monitoring – KYC-Chain’s onboarding solution offers ongoing monitoring capabilities for onboarded customers. Risk profiles and status can change after a company has started offering services to a customer, so it is important to keep track of any changes that can affect the level of risk they pose from both a financial crime and compliance perspective.
Interested in using KYC-Chain for your firm’s KYC onboarding needs? Get in touch and we’ll be happy to arrange a demo.