Kyc Compliance for Virtual Asset Service Providers

As a Virtual Asset Service Provider (VASP), you're likely aware that KYC compliance is a crucial aspect of your business. In fact, the Financial Action Task Force (FATF) requires VASPs to implement effective KYC measures to prevent money laundering and terrorist financing.

The FATF recommends that VASPs collect and verify customer information, including their name, date of birth, and address. This information should be verified through government-issued documents, such as passports or driver's licenses.

VASPs must also be able to identify and verify the beneficial owner of a customer, which can be a complex process. The beneficial owner is the person who ultimately owns or controls the customer.

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KYC is a set of procedures critical to assessing customer risk and is legally required to comply with Anti-Money Laundering (AML) laws. This process involves knowing a customer's identity, financial activities, and risk.

The KYC process is used by financial institutions to prevent individuals or companies from using the asset class to commit financial crimes. It's a fundamental practice to protect your organization from fraud and losses resulting from illegal funds and transactions.

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To establish customer identity, KYC procedures require verifying a customer's personal information, including their legal name, birthdate, address, and national ID number. Each country has different KYC requirements, with some calling for ID documents and others requiring customers to fill out an online form.

The primary goal of the KYC process is to satisfy that the source of the customer's funds is legitimate. This is done by understanding the nature of the customer's activities and assessing money laundering risks associated with that customer.

Here are the key elements involved in the KYC process:

Crypto exchanges are often legally obligated to preserve account information with advanced security technology. This helps protect the exchange and the financial system from money laundering, fraud, and other financial crimes.

VASP Compliance is a must for any Virtual Asset Service Provider (VASP) operating in the cryptocurrency industry. VASPs undertake a multi-step KYC process to prevent fraudulent activity, including collecting personally identifiable information, verifying government-issued identification, and checking against official databases.

To comply with the Travel Rule, VASPs must identify and verify the identity of their customers, as well as share customer information with other VASPs. Notabene offers a market-leading FATF Travel Rule solution to help VASPs comply with these regulations.

The advantages of cryptocurrency and virtual asset compliance are immense, with future business opportunities including better access to traditional banking and easier access to institutional investors. Compliance with the FinCEN Travel Rule presents the most significant opportunity for virtual assets to become widely accepted in everyday use cases.

To determine the risk of money laundering and terrorist financing, VASPs must perform ongoing due diligence, including Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD). This involves classifying customers into risk categories and defining their type, as well as conducting periodic due diligence assessments.

Perpetual KYC applies ongoing customer due diligence for end-to-end security, helping to control and maintain compliance. This involves keeping records of all CDD and EDD performed on each customer, as well as monitoring customer activity for suspicious behavior.

Here are the three levels of due diligence:

By following these guidelines and using eKYC verification, VASPs can improve the speed and accuracy of their KYC processes, reducing the risk of errors and increasing customer satisfaction.

Implementing virtual asset compliance can have a significant impact on businesses operating in the cryptocurrency market. Vigorous identity verification can reduce fraudulent activity and improve market reputation.

Between January 1, 2021, and March 31, 2022, more than 46,000 consumers reported losing over $1 billion in crypto to fraudsters. This highlights the importance of robust KYC processes in preventing fake identity instances and money laundering.

Compliance with the FinCEN Travel Rule presents a significant opportunity for virtual assets to become widely accepted in everyday use cases. Cryptocurrency companies that comply will have better access to traditional banking, allowing easier access to institutional investors.

By implementing perpetual KYC, reviews can be triggered following the near real-time detection of anomalous patterns of customer behavior. This ensures ongoing due diligence and helps protect against the risk of money laundering and terrorist financing.

Following onboarding, the focus must be on maintaining ongoing due diligence through perpetual KYC, rather than periodic reviews. This approach helps to build trust and safety with customers.

By complying with virtual asset regulations, businesses can reduce legal and regulatory risks, freeing time to focus on increasing conversion rates, expediting transactions, and ensuring compliance.

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Financial institutions, including banks and cryptocurrency exchanges, must comply with Know Your Customer (KYC) regulations to prevent money laundering and financial crime.

KYC compliance is a multi-step process that involves collecting and verifying customers' personally identifiable information (PII), such as their name, date of birth, and address. This information is compared to official government-issued identification, such as a passport or driver's license, and proof of residence.

To prevent money laundering, VASPs must undertake a multi-step KYC process, which includes verifying customers' identities against official databases that contain information on Politically Exposed Persons (PEP) and sanctioned individuals.

The goal of KYC is to better protect and maintain the assets and privacy of consumers in the onboarding process. This involves gathering more information and analyzing it more intelligently, using technologies such as APIs, AI/ML, biometrics, and advanced optical character recognition (OCR).

In the United States, AML and KYC measures are mandatory for most crypto exchanges because they are defined as money service businesses (MSBs) under federal regulations. MSBs must register with FinCEN and are subject to AML controls and regulatory compliance regarding record keeping and reporting requirements.

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To implement an effective corporate KYC program, financial institutions should follow four general steps: retrieve company vitals, analyze ownership structure and percentages, identify ultimate beneficial owners (UBOs), and perform AML/KYC checks on individuals.

The cost of running a comprehensive KYC compliance program continues to rise, with the average annual cost being $60 million for 800 financial institutions surveyed. Compliance professionals will have no option but to bear the weight of these new requirements and expectations going forward.

Here are some common red flags for KYC compliance:

The compliance process is a crucial step in ensuring that virtual currency exchanges and financial institutions prevent fraudulent activity and money laundering. VASPs undertake a multi-step KYC process to achieve this, which includes collecting customers' personally identifiable information, comparing it to official government-issued identification, and verifying their identity against official databases.

To maintain ongoing due diligence, perpetual KYC is recommended, where customers are continually monitored rather than periodically reviewed. This helps protect against the risk of money laundering and terrorist financing.

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Achieving perpetual KYC is simple with the right software, such as Napier's Customer Activity Review, which aggregates data from all third-party KYC streams and transaction monitoring systems. This provides a comprehensive 360° view of the customer and their behaviour.

The Customer Activity Review is part of Napier's Intelligent Compliance Platform, which also offers options for real-time client screening, transaction screening, transaction monitoring, and customer risk assessments. This platform can stitch disparate systems together to enable intelligence-driven KYC reviews.

The Risk-Based Scorecard is Napier's customer risk assessment tool, which generates a real-time risk level for each customer, in line with an organisation's risk-based approach, policies, and procedures. This captures more information than a traditional KYC system and forms part of perpetual KYC.

Here's a summary of the steps involved in the compliance process:

By following these steps, financial institutions and virtual currency exchanges can ensure that they are complying with KYC regulations and preventing fraudulent activity.

Compliance tools are essential for any business that wants to stay ahead of the game. They help you identify and mitigate risks, ensuring you're always in line with regulations.

A robust Customer Identification Program (CIP) is a must-have for any organization, as it helps deliver regulatory compliance and prevent fraudulent activities (Example 6). This is especially important for Virtual Asset Service Providers (VASPs), who undertake a multi-step KYC process to prevent fraudulent activity (Example 1).

Napier's Intelligent Compliance Platform is a great example of a compliance tool that can help you achieve perpetual KYC. This innovative software layers on top of any existing AML/KYC system to monitor customer transactional activity against their pre-established profile (Example 4).

Perpetual KYC is not just about periodic reviews, but rather about ongoing customer due diligence. This helps keep awareness of unthe risks they pose through thorough ongoing CDD procedures (Example 5).

Some of the key features of Napier's Intelligent Compliance Platform include:

These features provide a comprehensive 360° view of the customer and their behavior, helping you identify and mitigate risks in real-time (Example 4). By using these compliance tools, you'll be able to provide more visibility and trust around each transaction for your customers, ultimately leading to better access to traditional banking and institutional investors (Example 2).

KYC requirements are not one-size-fits-all, and different sectors have varying levels of complexity. Banks, for instance, are often the first to reflect new KYC requirements due to the significant amount of trust they have built with their customers.

In the banking sector, technology is improving KYC and AML programs with better identity verification speed, accuracy, and reliability. This is achieved through the use of APIs, AI/ML, biometrics, and advanced OCR technologies.

Financial services, similar to banks, also have KYC requirements to prevent money laundering. They need to monitor customer transactions and verify the origin of larger sums to ensure they aren't part of a money laundering scheme.

Crypto, on the other hand, presents a challenge due to the varying approaches of countries towards cryptocurrencies. The FATF has noted several red flags around KYC, including creating separate accounts under different names and customers providing forged or falsified identity documents.

To ensure effective KYC procedures are in place, it's essential to maintain ongoing due diligence, as recommended by Napier. This can be achieved through the adoption of perpetual KYC, where customers are continually monitored rather than periodically reviewed.

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Here are the key customer due diligence measures as set out by the FATF:

Compliance in different sectors requires a tailored approach to meet specific needs and regulations. Banking regulations often reflect new KYC requirements to prevent money laundering.

Banks need to maintain trust with customers while deploying digital processes, with 62% of US consumers expecting to verify their identity when opening an account digitally. This can be achieved with technology that improves KYC and AML programs, such as leveraging APIs, AI/ML, biometrics, and advanced optical character recognition (OCR) technologies.

Most other financial services have KYC requirements similar to banks, requiring them to perform KYC and monitor customer transactions to prevent money laundering. This includes verifying the origin of larger sums and reporting cash transactions exceeding threshold limits.

In the crypto sector, creating a KYC crypto program is challenging due to varying country approaches. The FATF noted several red flags around KYC, including creating separate accounts under different names and customers declining requests for KYC documents.

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A robust Customer Identification Program (CIP) helps deliver regulatory compliance and prevent fraudulent activities. This is achieved through ongoing due diligence, with perpetual KYC recommended to continually monitor customers rather than periodically reviewing them.

The Financial Action Task Force (FATF) stipulates a risk-based approach to ensure measures to prevent or mitigate money laundering and terrorist financing are proportionate to the risks identified. This includes identifying and verifying the customer's identity, understanding the purpose and intended nature of the business relationship, and conducting ongoing due diligence on the business relationship.

Here are some key requirements for sectors:

Mobile compliance is crucial in today's digital age, and it's not just about verifying identities. The combination of mobile data with traditional data sources can take KYC to the next level.

Mobile data can add an extra layer of authentication to help deliver a convenient, immediate and effortless customer experience. This is especially important for mobile-minded customers who expect a seamless experience.

Connecting with real customers and foiling fraudsters in the mobile world is a challenge. Mobile KYC solutions can help reduce fraud risk and improve KYC standards.

Mobile data can be used to ensure that specific criteria are met by legitimate customers, adding an extra layer of protection. This is another tool to help secure an effortless experience for customers.