In 2018, a renowned financial institution, had to pay a €775 million penalty for its passivity to prevent money laundering. Prosecutors who prosecuted the case concluded that the bank’s clients “were able to launder hundreds of millions of euros because no one was supervising them.” And this occurred between 2010 and 2016, i.e. continuously. In addition to paying the fine, the organization launched a program to prevent further fraud and, therefore, new penalties, in years when regulations are particularly demanding in this respect for sectors such as finance, insurance and real estate. One of his maxims when talking about this plan was “know your customer”. In other words, KYC (know your customer), the key concept that you will read about in this article and which, if well managed, not only helps you comply with regulations but also offers you operational and efficiency advantages.
What does KYC mean?
You know what the acronym stands for: know your customer. KYC is a globally extended concept, not only as business jargon but also at the legislative and regulatory level. If we summarize a lot, KYC requires any company to know some facts about its customer and to verify that what it has told you is true.
Do you remember the last time you opened a new account at a bank they asked you if you were self-employed or employed and how much income you earned per year? Well, it’s a KYC classic. But it is a practice that not only refers to the beginning of the relationship between the company and the user, it has to be periodic (more banking requests: “please send us your ID card as the one we have of yours has expired” or “we need you to justify this deposit you have made”). These requests for information also occur in other sectors with long-standing relationships such as insurance, especially health and life insurance.
KYC processes and especially KYC results have to comply with regulations such as AML (Anti Money Laundering), RGPD (General Data Protection Regulation) and eIDAS (European Digital Identification Regulation), as well as their national harmonizations. These regulations have a special impact, as you might have guessed, at the time of onboarding.
onboarding
whether digital (a challenge since identification, authentication and the contract are concluded remotely) or face-to-face.
How do you apply KYC in your company?
KYC Onboarding
Generally, companies that have to apply KYC prerogatives, because of their activity or sector, are confronted with two distinct phases but closely related in terms of “know your customer”: that of the customer’s arrival or start of the relationship and the subsequentThe customer’s account, which starts from the effective discharge and ends when the customer ceases to be a customer. This also makes KYC a process shared by several departments of the company in question.
The beginning of the relationship tends to be entirely at a distance, in what we know as
digital onboarding
. And here two concepts come into play, both for onboarding and subsequent operation.
Identity verification
Verify and certify the identity of the future customer at the moment of initiating the registration process.
Identity authentication
Analyze the digital credentials provided by the identified user to access the system or service.
Both concepts are part of Customer Comms’Certified Digital Identification solution and we have explained them in an expanded form with benefits, system types, features, biometric authentication and electronic signature, in this
white paper
.
Obviously, face-to-face onboarding has the same objective as digital onboarding, but here the human factor provided by your employee is fundamental and simplifies the identity verification of the future user. Ideally, though, at some point in the process, both types of onboarding should converge, the earlier the better, to find maximum automation. This offers cost and time savings, efficiencies and error prevention.
Beyond customer registration
As you have read in this article, the KYC concept extends to the entire customer lifecycle, not just at the time of registration. This regulatory requirement demands complex and systematized processes and a large team of people. In fact, some banks dedicate 10% of their staff to AML (prevention of money laundering) in order to comply with KYC regulations (AML is an essential part of KYC in the financial world).
In the most regulated sectors, proper KYC management has ethical, regulatory and operational aspects. The regulatory prism translates easily: failure to act in accordance with regulations entails heavy penalties and the obligation to invest heavily to bring obsolete processes up to date within a limited timeframe.
The intervention of regulators also affects the normal operations of each company, and may result in the suspension or cancellation of contracts, policies or banking products for not having a complete KYC. The cost of regularization of these cases can be extensive, as well as the reputational cost.
Each organization must be prepared to develop a continuous and periodic KYC on each customer, make the periodic checks provided for in the regulations, activate the necessary controls, detect alerts and manage incidents in a timely manner. Also act accordingly with uncooperative or suspicious customers.
For this purpose, it is ideal to have internal processes that are as clear, internalized and automated as possible, as well as specialized and reliable external partners. At Customer Comms we can accompany you not only in the
onboarding
of your customers but also in the management of certified legal communications with them (for example, to request documentation or changes in their work or health circumstances, among others, and to store and safeguard their responses to requests).
Know Your Customer Checklist: step-by-step checks
As you have read, KYC processes have to be applied at customer onboarding, but also on a regular basis during the life of the customer. This is applicable in those sectors for which the regulations, mainly AML5, AML6 and eIDAS at the European level, make it necessary.
The procedure is complex and can involve significant investments in time, resources and technology. But the steps, in broad strokes, can be summarized in a 3-point checklist:
- Identity of the person. This is the first step and the starting point of the whole process. Each company has to unequivocally establish the identity of the person who wants to start a customer relationship with it.
- Nature of its activities. Very relevant in all matters related to the prevention of money laundering and financing of terrorism. Banks must know the origin of their clients’ funds and activities to ensure that they do not have a criminal origin.
- Risk of money laundering. The title of this item says it all. The company, before admitting the customer or throughout the customer relationship, must assess the risks that the person or entity is laundering money through its accounts, savings products, investment products or other operations.
Advantages and benefits of applying KYC
Quality KYC management offers several advantages to companies:
- Remote, but also face-to-face, efficient and fast customer acquisition processes.
- An engaging user experience early in the customer lifecycle.
- Operational cost savings.
- Simplification and reliability of authentication processes, once the customer has been registered.
- Agility in updating processes or practices in the event of regulatory changes or requirements from regulatory agencies.
- Prevention of heavy penalties.
- Regulatory compliance with guarantees.
- Obtaining and safeguarding certified customer information for use in potential litigation or to respond to requests from judicial authorities.
How do you apply KYC in your company?
Do you want us to accompany you in your KYC practices? We are specialists in digital onboarding processes through the management of omnichannel communications, even with legal value.
Tell us your needs and we will help you in the design and execution of a reliable, effective and flexible KYC process to adapt to the new requirements. Shall we talk?