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Know Your Customer (KYC) and Customer Identification Procedures (CIP) are vital for business operations. KYC involves knowing a customer’s identity and the business activities they engage in. CIP, in contrast, involves verifying the information provided by a customer. The primary goal of this is to establish the level of risk a customer poses to the business. Banks conduct KYC and CIP in compliance with anti-money laundering rules. Cases of money laundering and terrorism financing are on the rise, and identity theft has become commonplace with over 3.2 million cases in the US in 2019. To combat this menace, having a sound customer identification procedure is paramount.

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How Do You Know a Customer Is Who They Say They Are?

To ensure a customer is who they claim to be, the bank should collect basic customer information and authenticate it. Banks do this by cross-checking with authentic and independent identification documents. Customer identification is first carried out during the account opening. Basic requirements are name, date of birth, address, and identification number. The bank may also carry out CIP on suspicion that a customer’s account activity is fraudulent, and verify a customer’s identity before every transaction. This prevents losses that result from impersonation.

Elements of a Good Know Your Customer Policy

Anti-money laundering procedures regulate KYC policies of both financial and non-financial institutions. A good KYC policy verifies a customer identity and finds out their activities. It is then easy to create a risk profile.

 

Below are key elements of a good KYC policy:

Customer Acceptance Policy

Banks should outline the requirements for the admission of a customer. They should not allow anonymous or third party opening of accounts. They should also put risk parameters in place. These help to determine the risk profile of a customer. Furthermore, banks should outline all the documents they need for account opening.

Monitoring of Account Activity

Financial institutions should be on the lookout for suspicious activity. They can do so by verifying all transactions to ensure that they are legitimate. Banks need relevant documentation such as the source of funds and recipient/sender information, and should also perform random regular checks to see if a customer’s risk profile has changed.

Risk Management

A good KYC policy should enable the bank to assess and determine a customer’s risk profile. This helps them to decide what risk management procedures to apply. To ensure adherence to KYC policies, a regular internal audit process should be in place.

Customer Identification Procedure

Banks should verify customers’ identification information within a “reasonable time”. CIP should include both documentary and non-documentary methods. Financial institutions should get enough information before the classification of customers. This enables them to come up with ways to mitigate risk, should any occur in the future. Due to increasing transaction volume, banks may come up with internal identification procedures. These prevent delays and to maintain efficiency.

In case of suspicion of fraudulent activities, banks should conduct a full-scale CIP. They should also schedule periodical updates on customer information. This is because customer information such as addresses may change over time. But, customer identification procedures vary from bank-to-bank.

Banks should consider the following factors when coming up with an effective CIP:

  • The size, location, and customer base of the bank
  • The types of accounts the bank offers
  • The identification information provided by the customer
  • The banks’ account opening methods

Adopting Digital Customer Identification Procedures

Although customers would like hassle-free banking services, they need assurance on their security. So, when adopting digital CIP, a bank should ensure compliance with anti-fraud measures.

A good digital customer identification system should allow verification across all channels. Both digital and face-to-face verification ought to be possible and seamless. Besides, faceless transactions are very prone to fraudulent activities. The system should mitigate and manage this risk.

Digitization of CIP should ensure complete automation of the process while maintaining efficiency. For instance, is conducting background checks automated in the system? This system involves the eradication of paperwork and wet signatures. It should capture the consent and purpose of the transaction with accuracy. This is for audit purposes.

A digital CIP should be in line with the existing identity verification regulations. Moreover, the agreement between the bank and its customers should be legally enforceable. This is important in case of incidences that lead to a loss.

Electronic KYC Verification

Digitization of the KYC process in the future. In E-KYC, banks query an identification system to verify customer information. An effective electronic KYC system should have a robust infrastructure that prevents manipulation by hackers.

E-KYC is effective due to the following reasons:

  • It is fast: An E-KYC system is easy to work and input data. This saves a lot of time when on-boarding new customers to the bank.
  • Accuracy: The technology used to make an E-KYC system ensures that there are no errors. It automatically checks for errors and fixes them
  • Tracking/Reporting: It is easy to classify and track customer activity. A good E-KYC system makes it easy to audit the CIP and generate reports.
  • Improved customer experience: A good E-KYC system is fast and caters to customer needs in real-time. This makes its use seamless.

Biometric KYC and Its Advantages

Biometric KYC involves using biometrics such as fingerprints to verify a customer’s identity. It is the most advanced method of customer identification and is the safest and quickest KYC procedure. It is almost impossible to forge biometric data, which reduces the chances of identity theft. Its integration in banking eliminates paperwork and complex record-keeping procedures.

The Future of Know Your Customer and Customer Identification Procedures

The coronavirus outbreak has prompted the digitization of KYC and CIP processes. Most countries imposed lockdowns and curfews, preventing customers from easily accessing physical bank branches. Banks have had to incorporate remote banking. The incorporation of digital customer identification systems should be following government guidelines.

Additionally, they need to be strong enough to discourage hackers and fraudsters. The system should also have authentication controls that prevent unauthorized use. Institutions that have already adopted digital CIP have a better advantage. This is because they will find it easier to fit in a fully digital world. Learn more about KYC and CIP procedures at lightico.com.

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