KYC is a crucial component in the fight against financial crime. It involves establishing customer identity, assessing money laundering risks linked with customers, understanding the nature of customers’ activities, and qualifying that their sources of funds are legitimate. Also known as Know Your Client, Know Your Customer standards are meant to safeguard financial institutions against fraud, money laundering, corruption, and terrorist financing.

Successful KYC processes are the foundation for any successful risk management and compliance program. Financial institutions must deliver on Customer Due Diligence (CDD) and Customer Identification Program (CIP) to comply with KYC obligations. Below are the reasons why Know Your Customer is important.

Prevents identity theft

Identity theft occurs when someone steals and misuses your customers’ personal data, including using their credit card information and other data to access their bank accounts, make online purchases, create new bank accounts or commit other types of fraud. This is why insurance companies, banks, and other financial institutions should reassess their KYC processes to minimize fraud instances while onboarding new customers.

Know Your Customer checks enable you to do your due diligence on your customers’ identities to verify their credibility and legal identity. This prevents identity theft from stolen or forged identity documents and the creation of fake accounts.

Reduces money laundering risks

Money laundering hides crimes, including tax evasion, drug trafficking, public corruption, and terrorist financing. It’s used by criminals to make their money seem like it’s from legitimate sources. Financial institutions’ anti-money laundering efforts make it difficult to conceal proceeds from crimes. KYC aims to prevent money laundering schemes at the initial deposit window.

Thanks to Know Your Customer checks, banks and other financial institutions can determine the nature of client activities and verify that the deposited funds are legally acquired. The KYC processes require banks to screen new clients against lists of criminal suspects, companies, and persons under economic sanctions.

Tracks tax evaders

Tax evasion is a form of fraud in which the perpetrators defraud the government of tax owed. To evade tax, some high-earning individuals may use financial institutions for their real incomes, allowing them to avoid high government taxes. Through customer identity verification and confirmation, KYC procedures and anti-money laundering laws prevent tax evasion.

Mandatory compliance and document checks collect and keep referential data from clients. This can assist tax authorities should investigations on such customers become necessary in the future.

Ongoing monitoring of customer transactions

Checking a customer’s background once isn’t enough to establish long-term trust. For effective KYC management, it’s crucial to ensure regular compliance checks and transaction monitoring. It tracks and reports potentially suspicious transactions, including transferring huge sums of money to prevent money laundering and terrorist financing.

During customer monitoring, consider looking at media mentions on illegal undertakings or fraud, the inclusion of your customers on sanction lists, and more. This prevents black market funds from entering the financial system and ensures funds don’t flow into terrorist dens.

Prevent financial fraud

With the financial sector shifting into digital, fraudsters are now employing deceptive ways to swindle innocent customers. These frauds can occur via SMSs and emails where fishy links are shared to urge customers to open it and input personal data. KYC checks can help mitigate fraudulent financial activities, including using stolen or fake IDs to apply for loans.

The bottom line

KYC is essential in preventing money laundering, financial fraud, identity theft, and more. Consider applying KYC processes to protect your business.