The question “what is KYC verification?” has become one of the most important queries for businesses and customers alike. Know Your Customer (KYC) verification has become so important that businesses could be fined by regulatory authorities for not complying with fixed standards. In this article, we are going to discuss this as well as other related questions to KYC.
What is KYC verification?
KYC verification simply refers to the process that a business undergoes to verify the identity of customers to ascertain their credibility and legitimacy. This is done to assess the risks associated with carrying out transactions with such customers and is part of the business's customer due diligence framework.
Although primarily used by banks, insurance and businesses in the finance industry, KYC verification has become important and even mandatory for organisations in more conventional industries like eCommerce and gig economy platforms.
Why have KYC verification?
KYC was born out of a need to establish a system that is able to track money introduced into the economy. Some important tracking details include where the funds are from, where it is being sent to, the personnel involved and other necessary details depending on the peculiarity of the situation. By monitoring them, the government is able to identify and restrict illegal activities to protect stakeholders of the business.
Know Your Customer (KYC) processes have been in existence for a long time, precisely since the 90s. However, they have become more stringent today since the rise in terrorist attacks, identity theft, and other cyber-related frauds.
As a business owner too, you can easily identify your customer and know the appropriate action to take depending on the result. For example, businesses can identify criminals or individuals with a history of money laundering or currently listed on the anti-money laundering watch list. They can also identify Politically Exposed Persons (PEP) and take necessary actions depending on their findings. If you own a business, you wouldn’t want to transact with a wanted money launderer, would you?
This process has become a key part of the Customer Identification Program (CIP).
Why KYC? The importance of KYC
The major objective of KYC is to prevent financial institutions from being used as elements for money laundering and possibly terrorism activities. However, it also helps banks/ financial institutions identify, assess, and understand their customers to better manage the risks associated with carrying out transactions.
Here are some of the most common reasons for mandating KYC verification in the business world today:
1. Identity Theft
Identity theft is a key major area that KYC addresses. Due to the lack of sophisticated systems in the past, criminals could simply use a fake name and address to transact with financial institutions. However, over time, technology that thoroughly carries out background checks was developed, forcing criminals to get smarter and use well-thought-out identity masks to escape checks.
However, KYC today is a thorough mix of both physical and digital identity verification, helping financial organisations detect identity theft from a mile. It ensures identity cannot be easily stolen or used under false pretence.
With KYC, institutions can easily validate the identity of customers to assess risks and prevent the opening of fake accounts.
2. Money Laundering
Money laundering is another major act used by criminal activities to perpetrate their acts. The term basically refers to the process of transferring money illegally. This includes human trafficking, racketeering, narcotics, and more. Criminal organisations make use of dummy accounts to save money in the bank, spreading it evenly across to avoid any form of suspicion. The money is then transferred via illegal means to subsequent offshore or local accounts for laundering.
A good example of this is money used to purchase stolen arts, jewellery, and gold. These items could alter be sold in exchange for money as a legal transaction.
3. Terrorist Financing
Terrorist financing became a major focus of the US and other governments around the world after the 9/11 incident that saw terrorists blow up the twin tower buildings in America. One of the major ways to crack down on terrorist attacks was to close down terrorist financing. Many terrorist attacks have been known to be funded by individuals in the country.
Like in the case of 9/11, it was later discovered that individuals and agencies were using funds generated in the U.S to sponsor the act. Basically, the money was generated by businesses in the country and then transferred to shell accounts of terrorists. With KYC the government was able to identify these accounts and their owners and stop subsequent money laundering activities.
As a business owner, KYC can save you too from getting into business with the wrong customers.
4. Financial Fraud
Financial fraud is another activity that KYC has helped reduce greatly. Basically, it refers to other financial fraudulent activities beyond terrorist financing and money laundering. For example, before the proper implementation of KYC, perpetrators were used to setting up dummy accounts using fake IDs for carrying out criminal activities. Such an individual could use the fake account to apply for a loan, obtain it and dupe the back of the amount while leaving the account docile for good.
This is the reason why banks today are known for the most stringent KYC processes.
How is KYC verification done?
Although primarily starting with banks and financial institutions, it is used by several businesses in other industries. This especially applies to online businesses. As a rule of thumb, organisations mostly design their KYC procedures using any of the following approaches:
- Risk Management
- Transaction Monitoring
- Customer Acceptance Policy
- Customer Identification procedure
KYC processes in organisations usually include the following:
- Collecting, scrutinizing, and verifying personal identity documents provided by customers.
- Matching ID documents against global money laundering and terrorism watch lists generated by international organisations.
- Identifying and assessing risks associated surrounding business transactions with customers based on past history and behavioural analysis.
- Observing and matching customer actions with expected behaviours during transactions.
Customer Acceptance Policy for KYC
Customer acceptance policy is the most foundational aspect of KYC that lays down the rules and regulations around a customer’s interaction with a business. Basically, the policy lays out the minimum requirements and other documentation necessary for the customer to provide.
These include personal identification documents (IDs), address verification, photo identity, and other documents requested by the organisation for proof of identity.
Customer Identification Procedures for KYC
After a customer accepts the presented KYC policy, the next step is for the organisation to proceed to identify the person through the documents he or she provided. On confirmation, a financial account can then be opened. The minimum KYC requirements for opening such an account include:
- Date of birth
- Identification number
However, the information is not limited to these alone. The exact requirements listed by a bank depend on the following:
- The type of account a customer intends to open
- The type of bank
- The banks' procedure for opening an account
- The bank’s size and customer database
This information is gathered and verified by the bank within a reasonable time as part of the KYC process. You can contact the best identify verifications service here. The verification process also involves comparing data from other sources like agencies and public databases to verify the customer’s claims. This helps the organisation satisfy AML and KYC requirements.
What are the methods of identity verification?
The various methods of identity verification include:
- ID verification
- Biometric verification
- Address verification
- Face recognition
- Digital ID verification/ liveliness checks
As a bare minimum, financial organisations request and verify government-issued IDs to determine the legal identity of the individual. Examples of this include driver’s licenses, NIN, BVN, passports, or more depending on the specific country.
These documents should also carry a picture of the individual as well as indicate the person's nationality as the bare minimum. The organisation could request one or more of these documents. This way, any doubts that arise from a document may be verified and therefore, mitigated in a supporting document.
Electronic identity verification for KYC
Electronic Identity Verification (eIDV) or Digital Identity Verification was introduced to further fortify the KYC procedures without hard copy documents. Today, eIDV offers some of the most secure levels of risk identification and control.
The major verification method used is in matching the information provided by a customer with what’s available in government and public databases and other agencies. This makes the KYC process faster, creating a smoother overall customer experience.
Institutions could also carry out background checks on the customer and go through their financial statements, though this is slower than outright eIDV.
For a more secure KYC process, institutions combine both digital verification, document verification, and non-document verification approach to confirm identities.
Verifying customers with KYC
The Customer Identification Program (CIP) is very important for risk assessment and monitoring of business-customer relationships and transactions. As a small business owner or organisation, you can scrutinize every individual you do business with using an excellent identity verification service.
Achieving KYC onboarding is easy when using Youverify’s operating system or YV OS. This innovative software is Youverify’s flagship product that simplifies the whole Know Your Customer process for you. You can create automated forms that perform a preset action based on the KYC needs of your business after verifying the identity and credentials of potential customers.
You can now onboard customers and complete KYC using just their mobile phone numbers. Keep in mind that it has to be the phone number linked to their bank account and NIN. By collecting their phone numbers, our “Advanced Search” can help you retrieve other relevant information like their NIN, BVN and full data.
The implication is that businesses and organisations can now onboard customers with just their phone numbers and complete KYC with full compliance. This greatly transcends the current use of customers' phone numbers for only user authentication like OTP.
Advanced Search is available on our flagship product, YV OS, and only available to customers in compliance with Nigeria Data Protection Regulation (NDPR).