According to the United Nations, criminals are laundering between $1.6 to $4 trillion (between 2 to 5% of global GDP) annually. Stricter KYC/CDD processes are helping to stop that.
Financial institutions’ stakes are very high in light of the current global anti-money laundering (AML) and combating the financing of terrorism (CFT) scenario. Strong directives like AML 4 and 5 and preventative procedures like "KYC" for customer identification have been included in national legislation following international rules inspired by standards like The Financial Action Task Force (FATF).
It's not easy to do the necessary background checks on new hires. Significant financial, time, and resource considerations are involved in deciding whether or not to conduct business with a particular party. Nearly half of those surveyed for Thomson Reuters’ Anti-Money Laundering Report concurred, citing difficulties in verifying data as their primary challenge.
Automation is the most effective strategy for overcoming this barrier. Information and communication technologies have allowed for streamlined procedures for onboarding and verifying customers. For instance, many businesses already have remote identification, automatic document verification, and risk assessment systems.
This article will introduce the Know Your Customer (KYC) concept, contrast a manual KYC process with an automated one, and then describe three scenarios in which KYC automation might be helpful.
What Exactly is Know Your Customer (KYC)?
Know Your Customer (or Know Your Client) refers to a process wherein you get necessary information about a business's clientele. The Know Your Customer (KYC) procedure involves identifying and validating the client's identification at the time of account establishment and regular intervals afterward.
Compliance with Know Your Customer requirements may aid in the detection and prevention of fraudulent activities such as money laundering, terrorist funding, and other types of unlawful financial activity. To protect themselves against fraud, banks and other financial institutions must conduct client identification checks. When creating a new account, financial institutions must verify the customer's identification and the nature of their business dealings with the institution. That is to say, financial institutions must verify the identity of their customers. If a customer does not fulfill the essential Know Your Customer (KYC) criteria, the bank may refuse to create an account or end their business relationship. In the USA, the Social Security Number (SSN), is used widely for identification and documentation purposes. The Social Security Administration (SSA) provides U.S. citizens, permanent residents, and qualified nonimmigrant employees in the United States with nine-digit Social Security numbers (SSNs). For reporting salaries to the government, keeping track of Social Security payments, and other identifying reasons, the Social Security Administration (SSA) employs Social Security numbers (SSNs). A Social Security Number (SSN) is required for every F and M student who is granted job permission by the U.S. Citizenship and Immigration Services (USCIS).
- The Know Your Customer (KYC) procedure is crucial due to several reasons:
- To verify the identity of their clients, evaluate the level of risk posed by such clients, and keep an eye on things, banks have developed methods known as "know your customer" (KYC).
- These procedures for onboarding new customers aid in the detection and prevention of corrupt financial activities, including money laundering and the funding of terrorism. Biometric verification, identification cards, and other forms of documentation (such as invoices showing current address) are all part of the Know Your Customer (KYC) procedure.
- Financial institutions must follow the Know Your Customer and Anti-Money Laundering rules to reduce the potential for financial crime.
- Financial institutions are ultimately responsible when it comes to knowing your customer requirements.
- There are severe consequences for noncompliance. In the last decade (2008-2018), penalties for failing to comply with AML, KYC, and sanctions have totaled USD26 billion throughout the Americas, Europe, the Middle East, and the Asia Pacific. This doesn't even account for the reputational harm that has been done, which cannot be quantified.
Documents, data, or information used in Know Your Customer checks come from a third party that has shown to be trustworthy. Every customer has to verify their identity and address with proper documentation. The U.S. Financial Crimes Enforcement Network (FinCEN) imposed a new rule in May 2018 requiring financial institutions to confirm the identities of the beneficial owners, officers, and directors of any new business accounts they create.
The bottom line is that when a corporation creates a new account, it must furnish Social Security numbers and copies of picture identification and passports for each worker, director, and stockholder.
For What Reasons is it Crucial to do KYC Procedures?
Know your customer (KYC) practices and let your business verify the identity of the people it serves. Your business will be protected from potential scammers while adhering to all applicable regional, national, and international laws and ordinances. Liability, reputational harm, and financial penalties may all be mitigated as a result.
Your company might suffer irreparable harm if your KYC checks are inadequate. A bank, for instance, could let a customer who is engaged in money laundering or using a fraudulent identity create an account. Identity theft, tax evasion, money laundering, fraudulent statements, and so on are just a few of the many forms of fraud that might impact your business. Identity theft and false claims of age are the most prevalent types of fraud.
What exactly are the elements of these fraudulent actions? This is only a quick explanation, so here it is.
Identity fraud refers to the illegal use of someone else's personal information. Common examples of commercial impersonation include making fraudulent credit applications, creating bank accounts for illicit purposes, and submitting fraudulent tax returns.
The legal identification of consumers may be verified with more confidence if businesses use an accurate identity verification as part of their KYC process. Legal and financial concerns may be avoided by not accepting the registration of a client using a false name or identity or papers that have been stolen or are otherwise fraudulent.
Concealment of Age:
Age fraud is when a person, often a juvenile, uses a false identity to get entry to an area or business that requires proof of age, such as one that sells alcohol, cigarettes, or gambling.
Kids may be exposed to inappropriate material or potentially hazardous goods if businesses cannot properly check a customer’s age. What's more, companies might face stiff penalties if they're found guilty. Due to its significance, the KYC procedure must be carefully and thoroughly carried out. Companies' continued reliance on labor-intensive processes (such as manual data input) is unexpected in light of this. Let's take a look at what a classic KYC procedure is like and the difficulties it poses.
The Difficulties of the Conventional Know Your Customer Procedure
In most cases, the Know Your Customer (KYC) procedure begins when a financial institution requests personal and account information from a potential client. Information such as social security numbers, bank account details, and the identity of the "ultimate beneficial owner" (UBO) might fall into this category. Financial statements and other documentation may also be necessary.
The conventional Know Your Customer (KYC) procedure is laborious and time-consuming. Let's look at traditional KYC management processes’ various difficulties and drawbacks.
- Manual Know Your Customer (KYC) checks take a long time. Teams must manually extract data from documents and input it into a system or database. Your teams may likely need to handle many papers simultaneously. This is a laborious process that requires considerable time. The Chamber of Commerce, a utility bill, or any other difficult-to-obtain source may need to be consulted to verify specific details.
- Slow response times: Customer wait time is defined as the duration of the KYC procedure. A substantial delay in responding to your client when doing KYC manually might increase their dissatisfaction levels. All of your employees will be overworked and stressed. The time it takes to respond to the customer's request is too lengthy. Therefore, delays in service delivery are a significant source of customer frustration.
- The likelihood of a mistake due to careless typing is high. Several papers to be handled may be thought of as one customer. In addition, workers often have to juggle competing demands from many customers at once. Human mistake is a serious threat to every business. A single missing digit or letter might lead to the incorrect person's information being stored permanently. A manual Know Your Customer check has an error rate between 2% and 5%.
The Advantages of a Completely Automated Procedure
The Know Your Customer (KYC) process may be streamlined and improved using automation. You'll find a list and descriptions of the most important ones below. It's important to remember that various businesses will discover and enjoy different but equally helpful advantages.
- Efficient Use of Time: As a result of automation, time and money may be saved. Automated Know Your Customer checks take just a few seconds, often 3–5. This frees up your staff to concentrate on higher-impact initiatives for your business.
- Strengthened Dependability: Automating the data extraction and identification verification process using the software may minimize the likelihood of a human mistake.
- Improvements in the Lives of Both Consumers and Workers: One positive aspect is the shortened time it takes to respond to your clients' form submissions. They are saved from days of waiting. Conversely, a tedious and annoying duty is no longer assigned to your teams. They excel at work that is critical to your company's development.
- GDPR Compliance: It might be challenging to manage the identification papers of a large group of individuals. The data is susceptible and must be handled following GDPR. To ensure compliance, documents may be automatically masked or particular data points removed using an automated approach. The software is the only one with access to the data; thus, it is kept strictly private.
Automating your company's Know Your Customer processes might be a game-changer. The key to maximizing your output is optimizing your efficiency. There isn't a single scenario where KYC automation wouldn't be useful. In the next part, we will examine three typical applications to help you see the potential.
We need to know why electronic identification is becoming so widespread.
- This is because almost all adults in the nation now have a digital identity. By the beginning of 2022, 1.3 billion people will have an identity number.
- eKYC may also refer to the use of certified digital identities and face recognition for online identity verification in addition to the capture of information from IDs (OCR mode) or the extraction of digital data from government-issued smart IDs (with a chip) with a physical presence.
- Mobile devices may therefore be used for the onboarding process.
- AI has increased confidence in the viability of electronic Know Your Customer processes (eKYC, or online KYC).
- Customers and financial institutions have been encouraged by Covid-19 to depend more on digital platforms and mobile applications. In the second quarter of 2020, most new primary checking accounts (64 percent) were opened digitally, compared to 36 percent in person.
- According to a new analysis by Visa and BAI, the pattern will continue beyond the pandemic. Furthermore, as mobile use continues to rise, organizations are under increasing pressure to prioritize mobile strategies and create optimized onboarding processes for mobile users.
- To prevent spoofing attacks using a static picture, identification software often includes a liveness detection element during the identification process (a selfie). When a selfie is taken, it is essential to know that a real person took it. It's common practice for bitcoin trading applications to do a KYC check similarly. Financial institutions may meet the needs of modern customers by adopting digital onboarding practices like video KYC (video identification) and biometrics through digital and mobile platforms.
- In Europe, a new set of laws designed to safeguard financial institutions from the dangers of money laundering and the funding of terrorism came into effect in June 2017 under the auspices of the fourth Anti-Money Laundering (AMLD4) directive. As of January 10, 2020, the revised version of the fifth anti-money-laundering directive (AMLD5) became law, posing additional hurdles for banks.
The following four pillars are often included in the framework of banks' KYC policies:
- Data gathering, identification, verification, and a check against politically exposed persons and sanctions lists are all part of the Customer Identification Procedures/Program (CIP).
- Management of risks and their evaluation (due diligence, part of the KYC process).
- Continuous tracking and documentation.
- This requires a document reader, powerful document verification software, and a national ID document to confirm the customer's identification.
New Techniques for Know-Your-Customer Verification are Encouraged
The Federal Reserve and other US authorities released a joint proclamation in November 2018 urging certain financial institutions to experiment with artificial intelligence and digital identification technologies in order to improve their ability to detect and prevent fraud.
Earlier this year, European Supervisory Authorities advocated innovative methods to solve targeted compliance issues. They support a unified strategy to ensure uniformity in EU standards. They expect many forms of regulation, including "a built-in computer program that automatically identifies and validates a person from a digital picture or a video source (facial biometrics)" Alternatively, "an inbuilt security mechanism that may identify photos that are or have been altered with (for example, face morphing) by making such photographs look pixelated or blurry."
Local and regional laws can obstruct the widespread use of biometrics (GDPR in the EU, CCPA in California, to name a few).
How VisionERA is helping its Clients?
With extensive experience in government-level ID verification, we aid private clients by delivering a solution that enables them to meet the new regulations, including CDD (Customer Due Diligence) and KYC (Know Your Customer) requirements.
Identification Authentication aids financial institutions in reducing fraud risk and adhering to Know Your Customer (KYC) guidelines throughout the onboarding process.
Our system promptly and mechanically supplies the following in a couple of seconds:
- Customer information is collected digitally and then automatically filled into business databases.
- Adaptable security measures for multi-channel authentication of identification documents.
- Identification of customers through biometric methods.
- The choice to evaluate a client's potential risk by checking them against a list of politically exposed persons (PEPs), sanctions, or watch lists
- Our technology takes an artificial intelligence approach, meaning it can learn from experience.
- It plays a crucial role in the cutting-edge algorithms used by Thales' ID Verification systems.
To sum up, as the system learns and improves over time, your onboarding rate will skyrocket.
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