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September 5, 2022

KYC Checks: Importance & Role of KYC in AML & Other Sectors

KYC checks (know your customer checks) take place at onboarding to help identify & verify your customer. Click here to know about the role of KYC checks in different sectors!

KYC checks are important for ensuring the safety and integrity of a financial system. If you are working with a financial institution, ensure you understand their KYC and AML policies.

KYC stands for "know your customer." It is a set of guidelines and procedures that financial institutions use to verify the identity of their customers. This process helps to prevent money laundering and other financial crimes.

AML stands for "anti-money laundering." It is a set of laws and regulations that aim to prevent criminals from using the financial system to launder money.

The difference between KYC and AML

AML refers to the laws, regulations, and procedures designed to detect and prevent money laundering. This includes reporting suspicious activity, maintaining records of customer transactions, and implementing policies and procedures to prevent money laundering.

KYC, on the other hand, is the process of ascertaining and verifying the identity of customers. This usually involves collecting customer information like name, address, date of birth, etc. It is important for preventing money laundering, but it also helps businesses to know who they're dealing with and to comply with other regulations.

So, to sum up, AML is about detecting and preventing money laundering, while KYC is about identifying and verifying customers.

Why is KYC important?

Know Your Customer (KYC) is a process banks and other financial institutions use to ensure that their customers are legitimate and have the right to transact. Banks use KYC checks to prevent money laundering, terrorist financing, and other illegal activities.

The use of biometrics, for example, is becoming more prevalent in KYC as it offers a more secure and efficient way of verifying customer identities. Other new technologies such as artificial intelligence (AI) and big data are also being used to help organisations streamline their KYC processes.

KYC is an important part of the banking and financial services industry, and technology plays a key role in making it more efficient and effective.

The importance of KYC in banking

KYC checks are important because it helps assure financial institutions that their customers are safe to deal with. If a bank has a client who has been involved in money laundering, faking identities, or other crimes, it can curtail their activities by banning them from opening accounts or taking loans. However, if they do not know who their client is, they cannot keep track of that customer unless they monitor all of their transactions.

Secondly, KYC compliance helps to protect the financial institution itself from potential fraud and legal liability. If a customer is involved in criminal activity, the financial institution could be held responsible. By having KYC compliance in place, financial institutions can ensure that they are not doing business with any high-risk individuals or organisations.

Lastly, KYC compliance helps to build trust between the financial institution and its customers. Customers are more likely to do business with a financial institution that they know is taking steps to prevent money laundering and other criminal activity.

The KYC process can be time-consuming and expensive, but it is essential for banks. Without KYC, banks would be at a much higher risk of being used for illegal activity. KYC is the backbone of the banking industry and is essential for keeping the financial system safe.

The importance of KYC in Fintech

The fintech industry is constantly evolving and growing. With new technologies and innovations emerging constantly, it is important for businesses to keep up with the latest trends. One of the most important aspects of fintech is customer due diligence or KYC.

There are a number of ways to verify a customer's identity, but the most common method is to require them to provide certain documents, such as a passport or driver's licence. Newer, more reliable methods include using biometric data, such as fingerprints or iris scans.

KYC is an important part of the fintech industry, and businesses must ensure that they have robust KYC processes in place.

The importance of KYC in Blockchain

Because blockchain technology is still relatively new, there is a lot of mistrust and scepticism of it. That’s why businesses need to be transparent about their KYC process.

The world of blockchain and cryptocurrencies is evolving rapidly, and with it, the way that companies are raising funds. Initial coin offerings (ICOs) and security token offerings (STOs) have become popular methods to raise capital for companies in this space.

ICOs are typically unregulated, meaning there are no KYC or AML requirements. However, many ICOs choose to comply with KYC and AML guidelines voluntarily. This is often done to instil confidence in investors and avoid problems down the road.

STOs, on the other hand, are typically subject to KYC and AML regulations. This is because STOs are typically securities, and as such, they are subject to the same regulations as other securities.

So, when considering participation in an ICO or STO, it is necessary to understand the KYC and AML requirements (if any) that apply.

How to run a KYC check

There are a few key steps involved in running KYC checks:

  1. Define and identify the key metrics of user authentication based on which profiles will be screened over time.
  2. Collect the necessary information from the customer. This usually includes their full name, date of birth, and government-issued ID number.
  3. Verify the customer's identity. This can be done by checking their ID against a government database or using a third-party service.
  4. Check for any red flags. This includes things like previous fraud reports or suspicious activity.
  5. Make a decision. After you've collected all the necessary information and done your checks, you'll need to decide on whether or not to approve the customer.

Conclusion

HyperVerge's identity platform allows businesses to conduct KYC/AML checks, fraud prevention, and customer onboarding in seconds. Our system works for all industries globally and is geography agnostic.

FAQs

What are the benefits of KYC?

Almost everywhere in the world, you need to comply with KYC regulations. When a financial ecosystem is KYC compliant, fraud and other crimes are less likely to occur since there are fewer ways for criminals to launder money or do other types of financial misdeeds. Protecting your brand and earning the trust of consumers and rivals on a global scale both necessitate KYC compliance. 

What’s a PEP in KYC? 

One who holds a position of great influence in society is considered to be a "politically exposed person" (PEP). Legislators, state legislators, judges, governors, and other high-ranking government officials, as well as their immediate families, would be considered politically exposed persons (PEP) (people in direct contact). Financial institutions classify PEPs as high-risk clients and require more KYC as a result.

FAQs

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