kyc life cycle: A Comprehensive Guide to Know Your Customer

The Know Your Customer (KYC) life cycle is a crucial process that helps businesses verify the identity of their customers and assess their risk. This process is mandatory for financial institutions and other organizations that deal with high-risk clients.

KYC regulations require businesses to collect and verify customer information at the onboarding stage, which is the first step in the KYC life cycle. This involves gathering personal and financial data, such as identification documents, proof of address, and employment information.

At the onboarding stage, businesses must also assess the risk associated with each customer, which involves evaluating their financial history, business activities, and other relevant factors. This helps them determine the level of due diligence required to onboard the customer.

The KYC life cycle also involves ongoing monitoring and due diligence to ensure that customers continue to meet the risk assessment criteria. This may involve regular updates to customer information and risk assessments.

KYC is a critical function to assess customer risk and comply with Anti-Money Laundering laws. It's a fundamental practice to protect your organization from fraud and losses.

KYC procedures involve knowing a customer's identity, financial activities, and the risk they pose. This is a legal requirement for financial institutions to prevent money laundering and terrorist financing.

To establish customer identity, you need to understand the nature of the customer's activities. The primary goal is to satisfy that the source of the customer's funds is legitimate.

Here are the essential elements of a KYC program:

These elements are crucial to creating and running an effective KYC program.

The AML onboarding process is a crucial step in the KYC lifecycle. It involves verifying the identity of customers and ensuring they are not on any sanctions lists.

Financial institutions can leverage the same processes and technologies already in place for managing third-party vendor and supplier risks for assessing and monitoring KYC risks as well. Consider these capabilities at every stage of the relationship.

To verify a customer's identity, a financial institution must collect the applicant's name, address, date of birth, and social-security number or other government-issued ID numbers. In addition, the applicant's name must be compared against global sanctions lists and politically exposed persons (PEPs) databases to determine if the applicant is subject to any sanctions or other legal restrictions.

Here are the minimum requirements for a Customer Identification Program (CIP) for individuals:

For businesses, some additional information is required, including corporate/business registration documents, the company's registration number (CRN), and ultimate beneficial ownership (UBO) information, which includes the names of the business's owner(s) and top management employees.

The AML onboarding process is a crucial step in ensuring that financial institutions comply with anti-money laundering regulations. Financial institutions can leverage the same processes and technologies already in place for managing third-party vendor and supplier risks for assessing and monitoring Know Your Customer (KYC) risks as well.

KYC risks can be assessed and monitored at every stage of the relationship, just like third-party vendor and supplier risks. This means that financial institutions can use a similar framework to manage both types of risks.

To implement this, financial institutions can follow the three steps to implementing KYC processes with the third-party risk lifecycle. This involves considering capabilities at every stage of the relationship, from initial assessment to ongoing monitoring.

Mobile onboarding is a crucial step in the AML process. Mobile KYC solutions can take customer verification to the next level by combining mobile data with traditional data sources.

New technological developments, such as AI, are offering better ways to identify customers and run due diligence checks. This can help deliver a convenient and immediate customer experience while maintaining necessary compliance and fraud mitigation measures.

Accessing mobile data and leveraging it to ensure specific criteria are met by legitimate customers adds an extra layer of protection. This can help reduce fraud risk and improve KYC standards.

Mobile onboarding can be a challenge, but it's another tool to help secure an effortless experience for customers.

The Customer Identification Program (CIP) is a critical element in any AML onboarding process, requiring institutions to verify the identity of customers and assess the level of risk involved.

The CIP mandates that any individual conducting financial transactions needs to have their identity verified, with a minimum of 4 pieces of information required: name, date of birth, address, and identification number.

A risk assessment is also necessary, both at the institutional level and at the level of procedures for each account, to determine the exact level of risk and policy for that risk level.

Procedures for identity verification include documents, non-documentary methods, or a combination of both, such as comparing the information provided by the customer with consumer reporting agencies or public databases.

The exact policies depend on the risk-based approach of the institution and may consider factors such as account types, opening methods, identifying information available, and the institution's size, location, and customer base.

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

In addition to the CIP, ongoing due diligence is also necessary to maintain compliance, with perpetual KYC (Know Your Customer) recommended to continually monitor customers rather than periodically reviewing them.

This involves adopting real-time monitoring to detect anomalous patterns of customer behavior, such as creating separate accounts under different names or initiating transactions from non-trusted IP addresses.

Continuous monitoring is a crucial step in the KYC life cycle, as it ensures ongoing compliance and detects suspicious activity. This process involves regularly reviewing a customer's account and risk profile to identify any changes or red flags.

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

A Suspicious Activity Report (SAR) may be required if the account activity is deemed unusual. Periodical reviews of the account and associated risk are also considered best practices, including checking if the account record is up-to-date and if the type and amount of transactions match the stated purpose of the account.

The level of transaction monitoring relies on a risk-based assessment. In fact, the need for due diligence does not stop when a customer is onboarded, as ongoing monitoring is necessary to protect the institution and detect suspicious activity.

Here are some key factors to monitor for changes in client financial, operational, and reputational status:

Compliance and risk management are critical components of the KYC life cycle. A robust Customer Identification Program (CIP) helps deliver regulatory compliance and prevent fraudulent activities.

To maintain ongoing due diligence, organizations should adopt perpetual KYC, where customers are continually monitored rather than periodically reviewed. This approach enables the near real-time detection of anomalous patterns of customer behavior.

Compliance professionals must stay up-to-date with changing regulations and maintain constant vigilance against fraudsters and criminals whose tactics continue to adapt and evolve. This includes keeping track of sanctions lists, terrorist watch lists, and cryptocurrency trends.

Here are some key risks that KYC procedures can help mitigate:

By verifying institutional client information, conducting due diligence, and implementing ongoing monitoring, organizations can reduce the risk of financial crimes and maintain compliance.

Regulatory Requirements are a crucial aspect of Compliance and Risk Management. Regulatory bodies require Know Your Customer (KYC) processes to be followed to prevent illegal activity, specifically money laundering.

The Financial Industry Regulatory Authority (FINRA) has two rules that govern KYC: Rule 2090 and Rule 2111. Rule 2090 requires broker-dealers to maintain client accounts and keep records accordingly. Rule 2111 requires broker-dealers to have a reasonable belief that a recommendation is suitable based on the client's financial situation.

The U.S. Financial Crimes Enforcement Network (FinCEN) also requires customers and financial institutions to comply with KYC standards. This includes reporting suspicious activity and maintaining up-to-date customer records. FinCEN began compiling a database of corporate beneficial ownership information in 2024, which financial institutions can use to corroborate customer information.

To stay compliant, it's essential to keep up with changing regulations and maintain constant vigilance against fraudsters and criminals. This includes staying informed about emerging threats, such as the use of artificial intelligence (AI) in criminal activities. By following regulatory requirements and staying ahead of emerging threats, organizations can reduce the risk of financial crimes and maintain a strong reputation.

Here are some key regulatory requirements to keep in mind:

Risk Mitigation is crucial for businesses operating in a complex financial and regulatory environment. It's a fundamental risk management tool that helps protect against financial crimes and maintain compliance.

Implementing KYC (Know Your Client) practices provides valuable insights into potential risks clients pose, enabling businesses to implement appropriate risk mitigation measures. This is achieved through the adoption of perpetual KYC, where customers are continually monitored rather than periodically reviewed.

Understanding the risks associated with specific institutional clients enables organizations to tailor their risk management strategies accordingly. This is particularly important for banks, which can be a substantial conduit for money laundering if left vulnerable.

Effective KYC procedures can help deter money launderers and other financial criminals from becoming active on a service. This is achieved by ensuring that customer information obtained at onboarding is complete and accurate, and that monitoring processes are in place to detect suspicious activity.

Technology is improving KYC and AML (Anti-Money Laundering) programs for banks with better identity verification speed, accuracy, and reliability. Leveraging APIs, AI/ML, biometrics, and advanced optical character recognition (OCR) technologies enables banks to gather more information and analyze it more intelligently.

Here are some red flags to watch out for when it comes to KYC for crypto:

By implementing effective KYC practices and monitoring customer activity, businesses can reduce the risk of financial crimes and maintain compliance. This is a strategic imperative that enables companies to navigate risk effectively and thrive in a rapidly evolving business landscape.

Security and Verification is a crucial aspect of the KYC life cycle. It's the process of verifying a customer's identity to ensure that they are who they say they are.

Identity theft is a widespread issue, with almost $23 billion lost to fraud in 2023. To mitigate this risk, the Customer Identification Program (CIP) mandates that individuals conducting financial transactions have their identity verified.

The CIP requires institutions to accurately identify their customers, and a risk assessment is a critical element of a successful CIP. This involves determining the exact level of risk and policy for that risk level, which can include factors such as the types of accounts offered, the bank's methods of opening accounts, and the types of identifying information available.

A robust CIP helps deliver regulatory compliance and prevent fraudulent activities. It involves gathering necessary documentation to verify the identity of clients, such as government-issued identification, proof of address, and other relevant information.

Here are the minimum requirements to open an individual financial account, as delimited by the CIP:

Electronic verification is the way of the future, and it's not just because it's convenient. eKYC verification, which stands for electronic Know Your Customer verification, can reduce the onboarding process for new clients from months to mere minutes.

Faster eKYC processes can improve client relationships, brand reputation, and revenue growth. In fact, a Thompson Reuters survey found that 30% of respondents stated it takes over two months to onboard a new client.

eKYC can automatically check for errors and quickly fix any mistakes, reducing the risk of human error and saving time. This is especially important in industries where speed and accuracy are crucial.

While eKYC systems do have costs, their faster speeds, improved accuracy, and better utilization of compliance resources make them a better investment in the long run. In fact, eKYC workflows can change almost on the fly, making them more scalable and adaptable to changing regulations.

eKYC is also about using APIs to easily add functionality, with new APIs being added all the time. This means that companies can integrate new capabilities with ease, making it a seamless experience for both the customer and the business.

Layered identity proofing can significantly enhance security and trust by balancing digital assurance with user experiences. This approach helps minimize onboarding friction, making it easier for customers to complete the verification process.

Digital assurance is crucial in identity proofing, as it helps prevent identity theft and ensures that the customer's identity is legitimate. Electronic KYC Verification (eKYC) uses APIs to easily add functionality, making it a quicker and more efficient process.

To achieve layered identity proofing, financial institutions and businesses must gather necessary documentation to verify the identity of clients. This includes government-issued identification, proof of address, and other relevant information. CIP involves gathering this information to ensure accurate client identification and reduce the risk of fraud.

The effectiveness of identity proofing strategies depends on various factors, including the type of business and the level of risk involved. For example, businesses involved in industries prone to illegal activity, such as cryptocurrency or gambling, may require enhanced due diligence (EDD) to clarify or catch behavior that may indicate involvement in illegal activity.

Here are some reasons why a customer may require EDD:

By implementing layered identity proofing, businesses can ensure that their customers are who they claim to be, reducing the risk of identity theft and financial loss.

Client management is a crucial aspect of the KYC lifecycle, and it's essential to have a comprehensive approach to managing institutional clients. A single data point, such as a client's EIN (Tax ID), can be automatically rolled up into their profile, simplifying the onboarding process and enabling tracking of court judgments and other legal proceedings.

To build a comprehensive client profile, you should include company demographics, such as beneficial ownership, legal name, year founded, number of employees, estimated revenues, industry, and sector of the client organization. This information should be automatically included in the client profile at the time of onboarding.

Having a Corruption Perceptions Index (CPI) score associated with every client institution provides a baseline of information to help your organization take a firm stance on bribery and corruption. A CPI score ranks countries/territories based on how corrupt a country's public sector is perceived to be by experts and business executives.

Modern Slavery checks should also be conducted as part of the comprehensive client profile. This involves checking public records to determine if the institutional client has published Modern Slavery statements. Having a client's Modern Slavery statement means that your organization takes seriously the risk of slavery in all its forms.

To continuously monitor client financial, operational, and reputational status, you should look for updates such as data breaches, adverse media and negative news, global regulatory and legal sanctions, state-owned and government-linked enterprise activity, politically exposed persons (PEPs), operational updates, and financial performance.

Here are some key sources to monitor for these updates:

By continuously monitoring these updates, you can stay on top of potential risks and take action to mitigate them.