In today’s rapidly evolving digital world, financial companies face severe consequences due to the inefficiencies in the identity verification system. Moreover, fraudsters are using sophisticated techniques to bypass verification systems. Therefore, it becomes essential for banks and other financial firms to implement the latest know your customer checks in their system.
KYC verification helps companies authenticate their customers’ identities to ensure their legitimacy. Thus, companies can effectively discourage fraud while protecting their essential credentials from fraudsters.
Let’s discuss how automated KYC verification helps organizations mitigate risk in business operations.
What are the Components of KYC Verification?
Know Your Customer (KYC) verification is the set of protocols that helps companies authenticate their clients’ identities before doing business. However, terrorist financing and anti-money laundering laws require businesses to adopt stringent authentication procedures to combat fraudulent activities. It helps companies collect and analyze client details from the sanction list. Thus, thorough KYC verification checks help companies to create their customers’ risk profiles while automating the identification procedure and risk management.
The following are the four components of KYC verification, mandated differently according to the jurisdictional AML requirements.
● Customer Acceptance Policy
The initial step in KYC verification requires creating a firm policy regarding the customer’s identity validation. This policy determines how companies can validate their clients during their onboarding process. It identifies the verification criteria for the acceptable documents and the requirements to be complying during KYC verification.
● Customer Identification Program (CIP)
The customer Identification Program (CIP) helps to ensure the client’s legitimacy while analyzing their identity details. However, this procedure uses the OCR, an AI-powered document verification technique. Moreover, the minimum information required for CIP includes address, name, ID card number, and date of birth.
Customer identification can be carried out in three different steps;
● Possession
In this step, customers are validated with their possession, including government-issued documents, photo IDs, or an OTP acquired on their Aadhaar-registered number.
● Inherence
This step verifies the customer’s identity with unique biological features, such as fingerprints, retina, iris, etc.
● Knowledge
This step requires identity verification according to the customer’s knowledge of their password, private key, pin, etc.
The most common method to verify the client’s identities is through their official government-issued documents, such as,
- GST certificate
- Passports
- Aadhaar
- Driving Licence
- Voter ID
For businesses, the CIP usually requires –
- Certificates of Incorporation
- Business Licences
- Partnership agreements
● Customer Due Diligence (CDD)
CDD is the third component of KYC verification, helping businesses to validate the customer’s identities. Nowadays, fraudsters are breaching firms’ financial systems through sophisticated techniques to misuse essential credentials for their purpose. Thus, businesses must conduct thorough risk assessment screening on their clients. In this way, companies analyze the customer’s risk level they pose when doing business.
The CDD is done through three different types.
● Simplified Due Diligence
When it comes to low-value accounts with limited potential for money laundering, simplified CDD procedures are used.
● Basic Due Diligence
When money laundering concerns are not low enough to justify simplified due diligence, this level of due diligence must be completed.
● Enhanced Due Diligence
When financial institutions require detailed information about the client’s transaction, EDD procedures are performed. Moreover, these procedures are also used to identify Politically Exposed Persons (PEPs).
Why do Organizations conduct KYC Verification in their Business?
The following are the significant reasons to implement KYC verification in the business dealings:
● Restrict Money Laundering & Financial Crimes
KYC verification helps to eliminate illegal financial activities and terrorism financing in business operations. However, money laundering easily occurs when banks and financial institutions have loopholes in their verification system. Thus KYC/AML verification helps businesses quickly analyze the fraudsters and restrict them from misusing essential credentials.
● ID Fraud & Risk Mitigation
In today’s rapidly evolving digital world, financial fraud is a significant challenge many companies and banks face. According to PwC, 51% of businesses face fraud in their business dealings which is the highest percentage in the past 20 years. To combat this issue, firms implement robust know-your-customer verification procedures in their business operations.
KYC verification’s Customer Identification Program (CIP) employs robust facial matching methods and AI-driven profile filters to confirm client identities. Customer Due Diligence (CDD) initiatives contribute to risk management, evaluating and assigning risk ratings while enabling ongoing activity surveillance for financial institutions.
Final Thoughts
Due to the ever-evolving technological innovation, businesses must execute robust customer due diligence protocols. Moreover, business experts can collaborate with a third-party vendor to implement the latest KYC verification services.
The latest digital solution can help concerned businesses to forgo manual procedures and stick to the latest KYC & AML regulations. The cutting-edge system supports thousands of AI & machine learning models, instantly producing high-quality results.