KYC Compliance Requirements: Your Top 10 Questions Answered

KYC Compliance Requirements: Your Top 10 Questions Answered

Got questions about KYC compliance requirements? Consider this your crash course! In this brief but informative post, you’ll learn everything you ever wanted to know about KYC but were afraid to ask. Ready? Let’s go!

1. What does KYC stand for?

KYC is an acronym for Know Your Customer. In some instances, financial institutions (FIs) that serve corporate customers consider KYC an acronym for Know Your Client. Don’t let this confuse you! ‘Customer’ and ‘Client’ are used interchangeably when it comes to KYC.

2. What is KYC?

KYC is a federal regulation aimed at reducing financial crime—from bank fraud to money laundering to terrorism funding.

KYC mandates that FIs verify each consumer’s identity and assess the individual’s fraud risk prior to commencing a new customer relationship.

In short, KYC requires institutions to answer two critical questions about their potential customers:

  • Is the individual who they claim to be?
  • What is the likelihood that the individual will commit fraud or other financial crimes.

3. What are the elements of KYC—and when are they required?

The two main elements of KYC are the Customer Identification Program (CIP) and Customer Due Diligence (CDD). These two programs work together—during account opening—to ensure that FIs have a clear view of who they are dealing with before they onboard any new customers.

A third central element of KYC is Enhanced Due Diligence (EDD), or continuous monitoring. The need for EDD is determined based on the customer’s risk rating.

Let’s look at the details of each.

 

This light blue and gray chart outlines the 3 main KYC compliance requirements and the details of each.

 

4. Why does KYC focus mainly on the account opening process?

When bad actors succeed at establishing accounts based on stolen, synthetic or otherwise fraudulent identities, they enjoy a level of anonymity that sets the foundation for fraud. Once a bad actor makes it into the system, they have a greater opportunity to commit financial crimes down the road.

CIP and CDD are critical first steps for managing fraud risk. By requiring FIs to verify identities and assess risk—at the point of application—these two programs work together to ensure banks do exactly what the regulation spells out: Know your customer.

5. What’s the difference between CDD and EDD?

While CDD is required for all new customers at onboarding, EDD is used to keep tabs on customers who are deemed a high-risk for fraud. By continuing to monitor high-risk customers, FIs can accept more customers—while staying on the alert to proactively identify any unusual patterns of behavior or suspicious activities.

6. What happens if FIs don’t comply with KYC requirements?

FIs that fail to comply with KYC can be hit with significant fines and penalties.

7. What is a Customer Acceptance Policy?

FIs are responsible for developing their own KYC initiatives. They must establish their own standards and policies for complying with the various elements of KYC (CIP, CDD and ongoing monitoring). And that includes developing a Customer Acceptance Policy (CAP)—which defines the level of risk the institution is willing to take on when accepting new customers.

8. What is AML and what does it have to do with KYC?

The KYC processes an FI puts in place must adhere to anti-money laundering (AML) standards. As the name implies, AML standards are designed to prevent money laundering—and “knowing your customer” is a critical component of the AML framework.

9. What are common KYC challenges?

  • Customer experience: Adhering to KYC processes (e.g. verifying identities and determining a risk rating) can add friction to the account opening process—leading to increased account abandonment and loss of potential revenue.
  • Maintaining compliance: Establishing KYC processes and staying compliant can be difficult in the financial landscape—where regulations are constantly evolving.
  • Digital shift: As account openings move to digital channels, many FIs are finding it more difficult to authenticate an applicant’s identity and ensure they are who they claim to be.

10. Can banking technology help FIs comply with KYC requirements?

Modern tools are available to help FIs verify identities, assess risk and monitor customer profiles.

Verify Identity by Early Warning® can enhance an FI’s CIP and KYC initiatives by combining predictive scoring with rules-based solutions to help them quickly and confidently verify customer identities and assess fraud risk. Simply put, as you gather identity elements from your customers to meet your CIP requirements, you can use Verify Identity to validate the required elements against the National Shared DatabaseSM resource.

Learn more about how Early Warning can help you simplify and enhance your KYC initiatives.

IMPORTANT DISCLAIMER: While your usage of Verify Identity may help you as you work on your internal legal and compliance efforts, Early Warning® is not offering legal or compliance advice regarding your efforts. You are advised to consult with your internal legal and compliance teams to determine how such programs may apply to you specifically.
*Verify SSN does not verify identities, eliminate synthetic identity fraud or reduce fraud. Verify SSN is only available to financial services organizations. Visit earlywarning.com/products to learn more.