BlogUnderstanding KYC Laws

When it comes to managing risk, knowing your client is critical. The more information you have about your clients and their needs, the better decisions you can make. Keeping your businesses and clients safe is paramount in significant industries, where data breaches can cost businesses millions of dollars. Hence, companies are implementing Know Your Client (KYC) programs as an accessible and cost-effective solution to protect their business.

Read on to learn more about KYC and how it protects global companies:

  • What is KYC?
  • Why is KYC required?
  • What is Digital KYC/e-KYC?
  • How does KYC protect global businesses?
  • How to implement a KYC program?

Globally, governments have imposed strict laws and regulations that require companies to screen new clients according to a range of criteria, and non-compliance can even lead to imprisonment in some countries. Increasing global KYC regulations have prompted businesses to streamline their compliance processes through onboarding and screening tools. The Know Your Client procedure is essential to evaluating and monitoring customer risk.

What is KYC?

KYC means Know Your Client or Know Your Customer, identifying and verifying the client’s identity when they open an account. Customer relationship management practices like KYC are essential for businesses interacting with users and clients. One of the best ways to improve your customer understanding is to conduct Customer Due Diligence (CDD). Generally speaking, CDD understands how your customers use your products and services and the information they provide.

Furthermore, this helps you better understand your customers’ risks when making decisions, such as closing their accounts or transferring funds. In short, CDD enables you to comply with regulations such as the KYC requirements, which are intended to protect your customers and the financial system’s integrity.

KYC goes beyond verifying clients alone; businesses around the globe also use KYC to verify their employees, merchants, partners, etc. With the change in purpose, KYC also takes on a new name, such as Know Your Employee (KYE), Know your Merchant (KYM), or Know Your Business (KYB). KYC programs are used in many industries and can range from a simple document-based verification to a more rigorous process that includes face-to-face meetings and background checks

Why is KYC Required?

In the financial services industry, KYC checks are a legal requirement, intending to limit money laundering, terrorist financing, corruption, and other illegal activities. The most important reason for a KYC program is to protect against fraud and losses resulting from unlawful capital and transactions. The range of businesses that need and want to perform KYC checks is growing as regulations tighten worldwide. A successful KYC program is to strike the right balance between customer experience and compliance requirements. You don’t want to turn away your clients due to overly stringent compliance rules, but you also don’t want to risk your business and customers by not being thorough enough.

Depending on your location, KYC requirements may differ. For KYC in Europe, GDPR and AML5 directive (or 5AMLD) are the two most relevant pieces of legislation, and businesses will also want to familiarize themselves with eIDAS regulations. Individual countries can also levy additional requirements.

In the U.S., AML regulation is primarily handled by the Financial Crimes Enforcement Network (FinCEN), money laundering is addressed by the Bank Secrecy Act (BSA), and terrorism-related financial crimes are addressed by the USA Patriot Act. The U.S. is also an associate of the Financial Action Task Force (FATF).

What is Digital KYC/ e-KYC?

There are several types of Know Your Customer (KYC) checks, but the most popular is the digital KYC/e-KYC. By extracting a document’s data, checking security features, and comparing them against templates, e-KYC solutions can determine whether documents are authentic by combining the results of these checks and algorithms. Switching from manual checks to an automated KYC solution has many advantages; automating the process reduces human error and manual labor, lowering associated costs.

As more and more interactions occur online, it is crucial to verify the identity of your online customers. KYC is how businesses ensure customers are who they claim to be. Furthermore, it is easy to conduct customer risk assessments and due diligence if you have confidence in your customers’ identities.

Businesses can automate and expedite their onboarding workflows by integrating with e-KYC solutions, enabling them to verify customers, vendors & employees in minutes. In addition, by preventing identity fraud and financial crime, e-KYC helps ensure compliance with KYC and AML regulations.

How does KYC protect global businesses?

Keeping KYC compliant helps businesses avoid reputational damage from external breaches. Of course, your KYC process depends entirely on your business type; a general rule of thumb is to adopt a strategy equal to the level of sensitive data your company handles.

KYC programs are critical to protecting your business and customers. They help you identify fraudulent customers and mitigate risk by weeding out people who don’t meet your compliance standards. A KYC program also benefits your customers by making the onboarding process quicker and more seamless, which will help you grow your business and sustain a digital ecosystem.

How to implement a KYC program?

There are two standard approaches you can take when implementing a KYC program. You can include KYC services as part of your onboarding process or outsource your KYC services to an agency. Full-service KYC programs can add significant time and cost to your onboarding process. Rather than trying to do everything yourself, it may be more effective to outsource your KYC services to a service provider. A third-party agency can perform the required screenings quickly and cost-effectively.

How Global Upside can help

At Global Upside, a Safeguard Global company, our goal is to simplify the process of onboarding customers and monitoring businesses so that companies can get the most out of their efforts. Our services include client identification, verification, due diligence, and KYC screening, as well as registration and maintenance of identification and KYC documents.