What Is KYC Law and How Does It Impact Businesses

KYC law, or Know Your Customer law, is a set of regulations designed to prevent money laundering and terrorist financing.

It requires businesses to verify the identity of their customers and understand their financial activities.

KYC law applies to financial institutions, such as banks and credit unions, as well as non-financial businesses, like casinos and real estate companies.

Businesses must implement effective KYC procedures to comply with the law.

eKYC is a game-changer for financial institutions, offering numerous benefits that traditional onboarding processes can't match. eKYC is far faster than traditional onboarding, which used to last months, and can have a negative impact on client relationships and hurt revenue growth.

One of the biggest advantages of eKYC is that it prevents or minimizes fraudulent activities, terrorism, and crimes by thoroughly following KYC regulations. This is a crucial aspect of maintaining a positive reputation for financial institutions.

eKYC also enhances financial institutions' reputations by avoiding negative publicity associated with illegal activities, which can be devastating to a company's image. This is especially important in the financial sector, where trust is everything.

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A strong eKYC process develops transparency and builds a relationship of trust between customers and financial institutions, which is essential for long-term success. This is achieved through a combination of ID card verification, face verification, document verification, and biometric verification.

eKYC also saves financial institutions time and money by streamlining the onboarding process. According to the United Nations, criminals are laundering between $1.6 to $4 trillion annually, and stricter KYC/CDD processes are helping to stop that.

Here are the benefits of eKYC at a glance:

The Bank Secrecy Act (BSA) is a crucial regulation that establishes program, recordkeeping, and reporting requirements for national banks, federal savings associations, and other financial institutions. It's a complex piece of legislation that has undergone changes over the years, including the incorporation of the USA PATRIOT Act.

The OCC's implementing regulations for the BSA can be found in 12 CFR 21.11 and 12 CFR 21.21. One of the key requirements of the BSA is the establishment of a customer identification program (CIP) as part of a bank's BSA compliance program.

Curious to learn more? Check out: Kyc Procedures for Banks

Financial institutions must verify the identities of customers and anyone who owns at least 25% of an entity. For entities with a high risk of money laundering and terrorism financing, there's additional scrutiny and a lower ownership threshold. This is in line with the recommendations from the Financial Action Task Force (FATF).

To comply with the BSA, financial institutions must also establish effective customer due diligence systems and monitoring programs. This includes screening against Office of Foreign Assets Control (OFAC) and other government lists, as well as establishing an effective suspicious activity monitoring and reporting process.

Here are the minimum requirements to open an individual financial account as per the CIP:

These requirements are clearly delimited in the CIP, and institutions must verify the identity of the account holder "within a reasonable time." The exact policies depend on the risk-based approach of the institution and may consider factors such as the types of accounts offered, the bank's methods of opening accounts, and the types of identifying information available.

Financial institutions must verify the identity of their customers, which is a critical element of KYC law.

The Customer Identification Program (CIP) mandates that any individual conducting financial transactions needs to have their identity verified, and this is designed to limit money laundering, terrorism funding, corruption, and other illegal activities.

To comply with the CIP, institutions must gather certain minimum requirements to open an individual financial account, which include name, date of birth, address, and identification number.

These procedures are at the core of CIP, and institutions must verify the identity of the account holder “within a reasonable time.”

A risk assessment is also a critical element to a successful CIP, both at the institutional level and at the level of procedures for each account.

Institutions must determine the exact level of risk and policy for that risk level, and this approach may consider factors such as the types of accounts offered, the bank’s methods of opening accounts, and the types of identifying information available.

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eKYC (electronic KYC verification) is a digital process that enables a bank to automatically capture customer demographic data, which can be integrated into enterprise systems like CRM.

eKYC can streamline the customer onboarding process, conduct further due diligence and risk assessment, and review for PEPs (Politically Exposed Persons).

The minimum requirements to open an individual financial account are clearly delimited in the CIP:

Institutions must verify the identity of the account holder “within a reasonable time,” and procedures for identity verification include documents, non-documentary methods, or a combination of both.

The exact policies depend on the risk-based approach of the institution and may consider factors such as the types of accounts offered, the bank’s methods of opening accounts, and the types of identifying information available.

Financial institutions can also use digital onboarding, including video KYC (video identification), and leverage biometrics through online and mobile channels to adapt to customer preferences.

To comply with international regulations against money laundering and terrorist financing, reinforced Know Your Customer procedures must be implemented in the first stage of any business relationship when enrolling a new customer.

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Banks usually frame their KYC policies incorporating the following four key elements:

For any financial institution, one of the first analysis made is to determine if you can trust a potential client, and Customer Due Diligence (CDD) is a critical element of effectively managing your risks and protecting yourself against criminals, terrorists, and Politically Exposed Persons (PEPs) who might present a risk.

There are three levels of due diligence:

Ongoing Monitoring is crucial for maintaining compliance with KYC law. It's not enough to just check your customer once, you need to have a program to monitor your customer on an ongoing basis.

This includes oversight of financial transactions and accounts based on thresholds developed as part of a customer's risk profile. Some other factors to monitor may include spikes in activities, out of area or unusual cross-border activities, inclusion of people on sanction lists, and adverse media mentions.

You may need to file a Suspicious Activity Report (SAR) if the account activity is deemed unusual. Periodical reviews of the account and the associated risk are also considered best practices.

Related reading: Kyc Risk

Here are some specific things to check:

The level of transaction monitoring relies on a risk-based assessment. This means that the level of monitoring will vary depending on the customer and your risk mitigation strategy.

Perpetual KYC helps keep awareness of unthe risks they pose through thorough ongoing CDD procedures to help control and maintain compliance. This is achieved by ongoing monitoring of customer activities and transactions.

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Industry approaches to KYC law are evolving rapidly, with innovative solutions being encouraged by regulatory bodies. The Office of the Comptroller of the Currency (OCC), the Federal Reserve, and other US agencies issued a joint declaration in 2018, encouraging banks to experiment with artificial intelligence and digital identity technologies to improve KYC verification.

Banks are taking the lead in adopting new technologies, such as facial biometrics, to identify and verify customers. The European Supervisory Authorities also promoted new solutions to address specific compliance challenges, suggesting a common approach for consistent standards across the EU.

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In the financial services sector, KYC requirements are similar to those in banking. Financial institutions need to perform KYC and monitor customer transactions to prevent money laundering. They must verify the origin of larger sums and report cash transactions exceeding threshold limits.

The use of biometrics can be challenging due to local or regional regulations, such as GDPR in the EU and CCPA in California. However, technology is improving KYC and AML programs for banks with better identity verification speed, accuracy, and reliability.

Here are some red flags for KYC in the crypto sector:

By implementing effective KYC procedures, financial institutions can deter money launderers and other financial criminals.