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The Signicat Blog
Alba Zaragoza

Communications Manager

How KYC requirements for banks are helping fight financial crime

An estimated 2 trillion U.S. dollars of criminal money makes its way into the banking system every year. Know Your Customer, commonly referred to as KYC, is a bank’s or financial service provider’s first line of protection against financial crime. In response to the increasing levels of profits from crime infiltrating the banking system, regulators such as FATF, have upped their compliance measures, and are now calling on companies to adopt innovative RegTech solutions, such as ID Verification (IDV), as best practice for KYC compliance.

# What is KYC in banks and why is it important?

KYC, which stands for “Know Your Customer”, refers to the process that banks undertake to verify the validity of a client’s identity. KYC processes include features such as ID verification, Politically Exposed Persons (PEPs) and sanctions lists screening, face liveness detection, as well as document and biometric verification. Effective KYC compliance is of paramount importance for banks and financial institutions as it ensures they do not do business with customers involved with money laundering and financial crime.

Financial service providers play a key role in stopping the proliferation of dirty money making its way into the global financial system. As such, developing a nuanced understanding of what is KYC in banking is imperative for all financial service providers. To provide a concrete example of KYC in action, individuals on sanctions lists seek to launder their money using illicit methods such as fake IDs and spoofing mechanisms, and shell companies to conceal their real identity and move criminal funds into the international financial market. Effective KYC safeguards detect and stop these types of schemes.

Yet too often, companies are ill-equipped to prevent these illicit activities from slipping through their system. It is not just the case of small operators, such as neo-banks, making these mistakes. The FinCEN files spanning from 1999 to 2017 show that major Wall Street banks continually failed to stop suspicious transactions, allowing trillions of dollars to move through the banking system from suspected criminals globally.

Where banks or financial institutions fail to meet their KYC compliance obligations, they become subject to hefty fines and penalties. Globally, banks and financial institutions were fined approximately 20 billion U.S. dollars in 2020 for failing to comply with KYC regulations.

Maintaining strict adherence to KYC compliance is necessary, not simply for avoiding enormous financial penalties, but also for avoiding the costly reputational damage associated with money laundering scandals. Put simply, this is why KYC is so important for banks.

KYC, Know Your Customer in banking, involves more than screening an ID document. The initial onboarding of a customer is only the first step in KYC bank compliance. Customer Due Diligence is then performed on an ongoing basis. Depending on the risk level that was determined during onboarding, the frequency and intensity of bank KYC checks are adjusted. In addition, the customer’s risk assessment level feeds into AML continuous monitoring, with AML rules becoming stricter for riskier customers.

# KYC forms for banks

When a customer opens their bank account, they are required to fill out a number of bank KYC forms and prove their identity. This first step of KYC at account opening aims to gather information about your identity, employment, business, and sources of income. This is why banks request documents from individuals such as passports, driver’s licences, social security numbers, proof of address, tax numbers, employment contracts and recent utility bills. For KYC, bank statements may also be required. For companies opening an account with a bank, the bank’s KYC form will include additional financial information and data relating to the structure and activities of the company.

All these bank’s KYC checks taken together form the first step of KYC screening. This KYC banking process allows the bank to verify a customer’s identity and assess the level of risk they pose regarding their involvement in financial crime such as corruption, money laundering and fraud.

# What are KYC documents for banks?

KYC processes aim to triage customers according to their relative risk for banking and financial service needs. KYC documents provide banks with the proof required for identity verification and customer risk level assessment. The complexity of required documents increases for any bank or financial institution aiming to operate globally. Every country, and each jurisdiction within a country, has different document requirements, as well as different languages. In reality, this amounts to screening thousands of documents in hundreds of languages – a task far beyond a human-powered KYC team. For financial institutions aiming to expand globally, an AI-powered KYC solution such as the qualified electronic signature based on video identification has become the simplest and most cost-efficient way to maintain compliance.

# KYC process in banks: identity verification

KYC processes for banking and financial service providers are an intricate process, but we can streamline an overview of the primary functions and emerging trends in the industry. Depending on the business domain and the bank-specific KYC rules, KYC processes vary. In addition, KYC processes in investment banking have a different scope than KYC in open banking.

Nevertheless, the central pillar of KYC is validating the authenticity of a new customer during the onboarding process. For business onboarding, this also involves untangling the complex business structures and identifying the ultimate beneficiary owner. More and more, this part of the KYC process in banking is being taken online thanks to the onboarding standard of automatic video identification.

# KYC challenges for banks

As Know Your Customer banking regulations ramp up in response to increasing financial crime, so do the challenges for banks and financial institutions aiming to meet their compliance obligations. The tension for all financial service providers is adhering to increasingly stricter KYC measures, whilst maintaining the rapid onboarding of customers, which has become the fighting ground of all FinTech and alt-banking service providers.

In the past year, 4 in 10 UK businesses aborted their application due to cumbersome and lengthy due diligence processes. This figure reflects the financial service providers who haven’t incorporated cutting-edge technology. By strategically leveraging KYC technology, banks and financial service providers can automate the more time-consuming aspects of due diligence and instead focus on improving their customer experience.

Today, attempting to achieve KYC compliance for banks in-house, whilst developing your own product in an increasingly competitive field, has become a wasted effort. The ability to maintain an excellent customer experience can mark the difference between winning or losing valuable clients. Tapping into advanced KYC measures that use 2-step process authentication has increasingly become the industry standard.

With the rise of AI-powered solutions and KYC automation for banks, the industry has leaned towards outsourcing these processes to third-party providers with the technology to overcome the regulatory burden with bespoke KYC software for banks.

Signicat leads the use of AI and machine learning technology in this field, providing the first end-to-end solution for KYC compliance, ensuring the highest level of KYC security globally, whilst offering rapid customer onboarding.