The 3 Key Components of Effective KYC / AML Compliance

3 Key Components of Effective KYC AML Compliance

What is KYC?

Know Your Customer (KYC) refers to a set of practices and procedures that are used to understand a customer’s identity and activities and assess their risk from an Anti-Money Laundering (AML) perspective. Implementing effective KYC is often required by law for many companies such as Financial Institutions (FIs), Virtual Asset Service Providers (VASPs) and other regulated businesses. KYC for regulated businesses usually involves the following processes: 

• Establishing a customer’s identity
• Understanding and verifying the customer’s activities and the legitimacy of their source(s) of funds
• Establishing a risk profile for the customer based on key AML factors such as their activities and location

1) Identity Verification (IDV) 

IDV is a process of identifying and verifying who a customer is. In the US, it’s known as a Customer Identification Program (CIP), and is set out in regulations such as the Patriot Act as a key element of preventing money laundering, terrorist financing and other financial crimes such as fraud and corruption. 

Other countries and jurisdictions have their own versions of IDV enshrined in their AML regimes. The vast majority of countries in the world have committed to implementing the recommendations from the Financial Action Task Force (FATF).

Beyond authenticating a customer’s identity, the next major objective of IDV is to create a foundation for establishing an accurate risk assessment and profile for them.

2) Customer Due Diligence

The process involves assessing all of the risks associated with a client or business relationship. It includes carrying out Know Your Customer (KYC) checks, which are then followed by analyses of overall client conduct, their transactional history and behavior and other key indicators to determine if they are suspicious and indicative of heightened risk to your business –-- such as if they are classified as a politically exposed person (PEP) or are on any international or national watch lists and sanctions lists. 

Companies that offer financial services are usually obliged to carry out CDD as part of their AML compliance and anti-fraud protocols.

CDD can be separated into three tiers: 

1. Simplified Due Diligence (SDD) is carried out on individual or business customers that are deemed to present a low AML risk, such as those with low value accounts in highly regulated and transparent jurisdictions.
2. Basic Customer Due Diligence (CDD) refers to the process of collecting baseline information on customers to verify their identity and assess their associated risks. 
3. Enhanced Due Diligence (EDD) involves carrying out more detailed checks on a customer and their background, and is usually reserved for those that are deemed to be high risk. EDD can involve searching relevant litigation records, credit histories, PEP, sanctions and watchlist screenings, and adverse media searches.

3) Ongoing monitoring

Ongoing monitoring involves carrying out periodic checks to identify risk factors such as: 

• Sudden fluctuations in transactional activity
• Unusual cross-border activity
• Transactions involving sanctioned entities or individuals or those on watchlists 
• Adverse media references 

If suspicious activity is detected, this might prompt further EDD and/or the submission of a Suspicious Activity Report (SAR) to relevant regulatory authorities.

The good news is that these processes can in most cases be covered by automated digital KYC technologies that quickly carry out multiple necessary checks on customers, smoothing and expediting the onboarding process. This makes for both better customer experiences and allows FIs, VASPs and other regulated businesses to quickly scale both in their home countries and in new foreign markets.

Need a market-leading, dynamic KYC onboarding solution for your business? Get in touch and we can talk about how KYC-Chain can make it happen.