What Is KYC and When Should the Process Be Performed? (2024)

Here, we’ll explore the significance of KYC regulations in various sectors and dig into a crucial question: when should the KYC process be performed?

What you need to know about KYC

KYC serves as a foundational practice to verify customer identities, adhering to legal and regulatory standards. Understanding this intimately is a crucial first step—starting with important legal requirements.

Legal and regulatory requirements

The KYC process is more than best practice. It’s a legal imperative for financial institutions. Regulatory compliance involves stringent measures, with financial entities mandated to establish a customer identification program (CIP), among other things. This program ensures the collection of essential customer information, including name, date of birth, address, and identification number.

Components of effective KYC procedures

Effective KYC procedures encompass a multi-faceted approach, with customer due diligence (CDD) as a pivotal component. Beyond basic identification, CDD involves classifying information gathered during the CIP. Financial institutions must examine relationships, ensuring activities align with historical customer data.

Since financial landscapes evolve swiftly, continuous monitoring is also crucial, enabling the detection of unusual patterns or changes in sanction lists. In essence, the components of effective KYC procedures extend beyond mere identification, emphasizing a dynamic understanding of customer behavior and risk assessment.

Industries requiring KYC

The legal imperative for KYC extends across diverse sectors, each with its unique challenges and obligations. Some industries that require proper KYC processes include the following.

Financial institutions

Financial institutions play a pivotal role in upholding KYC obligations and are often on the front lines in the fight against illicit financial activity. This includes:

• Banks: As custodians of financial transactions, banks need strict KYC adherence. Rigorous identity verification, transaction monitoring, and due diligence constitute the backbone of these KYC processes.
• Credit unions: Like banks, credit unions are also responsible for KYC compliance. They must diligently verify the identities of individuals accessing financial services, ensuring the integrity of customer accounts.
• Investment firms: KYC checks are equally paramount in the world of investment. Investment firms use thorough KYC processes to assess clients’ risk profiles, safeguarding against fraudulent financial activity.

Online platforms

Online platforms have emerged as dynamic hubs in the digital age, requiring robust KYC mechanisms to combat evolving threats. Key players in this domain include:

• Cryptocurrency exchanges: The decentralized nature of cryptocurrencies heightens the need for stringent KYC compliance. Exchanges should implement identity verification protocols to mitigate the risk of fraud and illicit transactions.
• Social media networks: With the integration of financial features into social media platforms (ad buying, content monetization, etc.), these platforms must navigate identity verification to secure customer accounts.
• Gaming and gambling: The intersection of entertainment and finance necessitates KYC measures in the gaming and gambling industry. KYC protocols are integral in ensuring the legitimacy of transactions and preventing illegal activities in this sector.

Trigger events for KYC

KYC acts as the first line of defense against money laundering and financial crime. Timing is critical to preempt potential risks and ensure the integrity of financial transactions.

Here are some of the key events that should trigger KYC processes.

Opening a new account

Initiating a new account always necessitates KYC processes, particularly the CIP. Some examples:

• Banking accounts: Identity verification and due diligence are paramount in assessing money laundering risks associated with new accounts.
• Investment accounts: During onboarding, investment firms should employ KYC measures to assess clients’ risk profiles and ensure the legitimacy of financial activities.
• Online platform accounts: Since digital platforms are often conduits for financial transactions, onboarding new users demands KYC scrutiny. Online platforms must verify user identities as rigorously as any financial institution.
• New customer onboarding: Whether in traditional banking or digital platforms, new customer onboarding necessitates comprehensive KYC processes. Verifying identities and assessing the initial risk are foundational first steps in maintaining the integrity of financial systems.

Large transactions

Large transactions are often red flags for potential financial crimes:

• Threshold amounts: KYC processes should trigger when transactions surpass predefined threshold amounts. This proactive measure aims to assess anti-money laundering pings associated with large sums.
• Unusual activity: Any deviation from regular transaction patterns raises alarms. KYC compliance requires institutions to scrutinize and assess the potential risk linked to unusual financial activities to prevent identity theft.

Periodic reviews

Regular and periodic reviews are integral components of KYC compliance, offering a continuous assessment of customer information:

• Regular intervals: KYC processes are not one-time endeavors; they need regular review. Periodic assessments ensure customer information remains up-to-date and aligned with evolving regulations.
• Updates in customer information: Changes in customer information, be it personal details or transaction patterns, should trigger KYC reviews. Staying abreast of such updates is vital to assess and mitigate ongoing risk.

Ongoing updates based on risk

Tailoring KYC updates based on risk profiles is a strategic approach to allocate resources efficiently:

• High risk: Customers categorized as high-risk demand more frequent and in-depth KYC scrutiny. This approach ensures a proactive stance against these profiles’ potential fraud and laundering risks.
• Medium risk: Moderate-risk customers undergo periodic KYC updates, striking a balance between diligence and operational efficiency.
• Low risk: Customers with low-risk profiles receive streamlined KYC updates. This risk-based strategy optimizes resources while maintaining compliance.

Understanding the trigger events for KYC verification processes is pivotal in fortifying the financial landscape, proactively addressing risks, and ensuring robust compliance across diverse financial domains. Trigger events, in other words, are the answer to “when?” in KYC.

How automation can help you stay compliant

Staying compliant with KYC regulations can be resource-intensive, especially amid an evolving regulatory landscape. However, technological advancements offer a lifeline, notably in AI and blockchain.

Embracing AI-driven processes expedites processes like verifying a customer’s identity, customer due diligence, enhanced due diligence, risk assessment, and verification of KYC documents. Automation can also ensure real-time scrutiny of financial transactions with ongoing monitoring, promptly detecting and addressing any anomalies. This kind of per-transaction scrutiny is crucial for compliance with AML (anti-money laundering) regulations and for preventing fraud.

Efficient KYC solutions powered by automated systems and the right expert partner can not only streamline KYC processes but also fortify customer identity security, and leveraging automation isn’t just about modernization. It’s becoming necessary to ensure KYC compliance and keep the process realistic while balancing strict security with usability and customer satisfaction.

Prioritizing KYC excellence

The importance of KYC in any financial setting cannot be overstated. This fundamental practice, spanning customer identification, due diligence, and ongoing monitoring, is a regulatory requirement and a safeguard against financial crimes. To get it right requires the right timing, and automation is key there.

How Microblink can help

Enter Microblink with their document verification superpowers. We help organizations get KYC timing right with AI-powered technology built by people. That way, you know you’re in compliance regarding business relationships, building trust in customer relationships, and staying efficient everywhere else.

To learn more about how Microblink can help with your KYC process, get in touch.