The Internet of Things has significantly transformed people’s lives within the first two decades of this century. A new realm of technological revolution is observed with the rise of artificial intelligence. AI and machine learning imitate the human brain in computers and act as a means to ease human life. Thus, every sector, including public and private firms, has shifted its focus to adopting digital technology. Likewise, financial organizations like banks have transitioned to high-tech solutions to ease their customers and enhance efficiency. KYC verification online is one of the digitally-optimized measures banks must adopt.
It is essential to understand what compliance actually means. In simple terms, compliance refers to abiding by the established laws, rules and regulations regarding a particular sector. In the context of financial institutions, compliance means that they are obligated to follow the anti-money laundering and counter-terrorism financing laws and regulations. Banks and other financial organizations must be compliant with the mentioned regulatory standards to save themselves from the threat of financial crimes and monetary penalties or even sanctions due to compliance failures. KYC, or know your customer compliance, means that every financial institution must implement customer identification and verification processes during customer onboarding and at regular intervals. It should implement measures such as KYC verification online to ensure regulatory compliance.
Overview of the KYC Process in Banks
The KYC process developed by a bank includes all the necessary measures to ensure their customers’ legitimacy, assess risks and vigilantly monitor them. Banks use digital tools to conduct KYC verification online during customer onboarding to identify and prevent financial crimes, specifically money laundering and terrorist funding. It consists of verification of government-issued identity documents like national ID cards, address poofs, such as utility bills, and biometrics. The most significant components of the KYC verification online process are enlisted below.
- The Customer Identification Program is mandatory for ensuring the legitimacy of the customer. Banks must collect the client’s information, such as the name, date of birth, residential address and ID card number. This plays a critical role in preventing illegal activities and financial malpractices.
- Customer profile risk assessment lets the bank know which client can possibly threaten the organization’s security or have any record of criminal activities. So it assigns a risk profile to every profile. This process is a part of client due diligence (CDD). The high-risk customers undergo enhanced due diligence (EDD) to keep a strict track of transactions to identify potential criminals.
Ongoing know-your-customer monitoring is another vital part of the KYC verification online process.
Perpetual KYC is also known as ongoing or continuous monitoring in KYC verification online. It refers to the tracking of customers’ accounts at regular intervals. Banks regularly perform ongoing KYC monitoring of high-risk customers to mitigate the risk of financial crimes. Also, it enables banks to detect suspicious financial activities and anomalies in monetary transactions. They can report to regulatory authorities for legal action after identifying such customers.
The most significant advantage of perpetual monitoring is that it reduces the risk of money laundering and terrorist financing and boosts compliance. It also protects the bank’s customer database from malicious activities. Furthermore, it saves the organization from heavy legal punishments such as fines. For instance, a staggering total of 26 billion US dollars in fines have been imposed in the U.S., Asia Pacific, the Middle East and Europe as a result of compliance failures in the decade 2008 to 2018. Thus, banks must perform continuous monitoring of high-risk customers to evade such circumstances.
As mentioned, document verification is a significant procedure while performing KYC verification online. Therefore, banks must seek automated KYC solutions to boost the verification of documents process. Several SaaS-providing firms offer services to enhance data extraction from customers’ documents. They make the entire process instant, efficient and transparent. Optical and intelligent character recognition (OCR/ICR) software is an AI-powered software solution that extracts data from documents and converts it into digital content. ICR can scan handwritten documents and detect anomalies, such as fake signatures and photoshopped content. It allows the bank to confirm if its customer holds a legal identity or is involved in document counterfeiting.
State governments have proposed relevant legislation and KYC regulations for financial organizations like banks as part of international AML/KYC standards. It is significant to identify money launderers and other corrupt entities and levy punishments on them. For example, the Financial Crimes Enforcement Network (FinCEN) has developed sufficient laws for AML/CFT compliance in the US. Since introducing KYC regulatory guidelines, FinCEN has revised them multiple times. For instance, in 2018, it introduced an additional requirement in banks’ KYC verification online process to verify the legal identity of natural persons. Therefore, banks’ customers must prove their identity and ownership through documents like social security cards or national IDs.
The above discussion comprehensively sheds light on multiple dimensions of the KYC verification online process. Banks must implement transparent KYC methods to ensure AML/CFT compliance and prevent financial crimes.