ID Verification: What is the KYC Process in Banking?
By Leor Melamedov
The last thing any financial institution wants is to be an unwitting safe haven for bad actors who engage in activities such as money laundering or terrorist funding. That’s where Know Your Customer (KYC) efforts, including ID verification, come into play. Banks that carefully follow governmental bodies’ compliance recommendations can be greatly helped by KYC technological solutions.
What is KYC, and How Does it Relate to ID Verification?
Know Your Customer (KYC) refers to the process by which banks ensure prospective customers are legitimate both before opening an account, and while conducting transactions while maintaining an account.
The first KYC laws in the United States were passed in 2001 in the Patriot Act to help curb the spread of international terrorist financing. This section of the Patriot Act made additions to the Bank Secrecy Act of 1970 that up until then was the main source of governmental regulations for financial institutions. The 9/11 attacks accelerated government interest in passing regulatory laws for banks, making KYC a mandatory part of banks’ activities since then.
According to Title III of the Patriot Act, financial institutions are responsible for two areas that contribute to KYC compliance: the Customer Identification Program (CIP) and Customer Due Diligence (CDD).
Customer Identification Program (CIP)
According to the regulations, CIP requires that banks ask customers for official forms of identification. The specific types of ID verification required can vary from bank to bank, but frequently government-issued ID such as a passport, social security card, or driver’s license are acceptable for an individual to provide.
For commercial banks onboarding companies, valid ID might include a partnership agreement, proof of incorporation, or a government-issued license.
Both individuals and companies may be asked for additional information such as a financial statement or financial references.
However a bank decides to verify the individuals and companies it onboards, KYC regulations require this identification process to take place.
Customer Due Diligence (CDD)
While the Patriot Act doesn’t explicitly require banks to conduct Customer Due Diligence (CDD), it does require them to report suspicious activity. But in practice, the only way for banks to accurately report on suspicious activity is through CDD.
When banks conduct due diligence, they are trying to predict what kinds of transactions their customers are most likely to conduct. To get these answers, banks may request customers for the origin of their funds, purpose of opening an account, company name, financial information, explanation of business, and so on.
Based on the information they glean about a person or company during the due diligence process, they are able to determine how much of a risk they pose. Customers who are seen as too risky will not be permitted to onboard.
However, there are other customers who are moderately high risk but still allowed to open an account. To offset the risk, the bank will monitor their account more closely. Wire transfers (especially of large amounts), unusual spikes in activity, or connections with offshore banks accounts may raise flags, prompting the bank to contact the account holder and provide an explanation. Further investigation may occur if a sufficient explanation isn’t received.
The Financial Crimes Enforcement Network (FinCEN) strictly regulates CDD. It works with the FDIC, the Fed’s Board of Governor, and the Office of the Comptroller of the Currency of the U.S. Treasury to maintain these regulations. The SEC, IRS, and U.S. Treasury regulate other financial institutions.
Why is the KYC Process Important to the Banking Industry?
KYC is critical to the banking industry because it ensures that criminals and other bad actors can’t easily disguise or hide illegitimate funds. KYC processes protect banks from financial and reputational harm, and help ensure compliance with government regulations.
In the past, money launderers could easily hide funds by opening up anonymous accounts. Now that KYC is mandated by the government, there is greater reporting of suspicious activity. That doesn’t mean that more illicit banking is happening, but rather that banks are getting better at catching it thanks to stricter KYC and ID verification measures.
Banks that fail to comply with KYC regulations face steep penalties, which are only getting steeper over time. Financial institutions faced $4.3 billion in fines in 2013 and 2014, four times the amount of fines in the previous nine years combined.
Worldwide, a total of $10 billion was leveraged against banks for non-compliance with KYC regulations. Even large banks that are generally the most compliance-focused faced hefty fines; 12 out of the world’s 50 biggest banks faced non-compliance fines in 2019.
In this post-9/11, globalized world, KYC is no longer an option for financial institutions, and those that fail to properly enforce regulations will pay the price.
What is eKYC?
With more transactions increasingly taking place online, KYC needs to come to the online realm as well. Thus, Electronic Know Your Customer was born, meeting this need for digital compliance. A host of tools have sprung up to make it easier for financial institutions to verify customer identities and prevent fraud.
The major advantage of eKYC is that it’s far less time-consuming and cumbersome than traditional KYC, while maintaining or increasing adherence to regulations and rules.
How can I Fulfill KYC and ID Verification Compliance Requirements with Lightico?
Lightico makes fulfilling KYC compliance requirements simple for both banks and their customers through digitization. Customers simply send a government-issued ID to their bank, along with a live selfie with their mobile phone camera. Lightico uses forensic-level forgery and spoofing auto detection to determine whether there is a match. Lightico’s technology exceeds the regulatory requirements, making it a good choice for both security-minded and convenience-minded banks.
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