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The Complete Guide to the "Know Your Customer" Journey

The Complete Guide to the "Know Your Customer" Journey

Getting to grips with KYC or looking to refresh your knowledge? Read our guide that has everything you need to know. KYC is the first step of the larger Customer Lifecycle Management (CLM) journey, and it’s the most daunting one. It doesn’t matter if you’re a seasoned professional or just starting out, getting your KYC right is the best move you can make for the future of your business.

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Introduction

It’s more important than ever to know your customer (KYC) as financial institutions face increasingly stringent fines from regulators and more demanding regulatory calls to truly understand their customers.


Financial crime is on the rise and set to soar with the innovative approaches of criminals to launder money and outsmart the global financial system.

On one side are malicious threat actors who continue to take advantage of the dynamic nature of financial crime, engineering new ways to launder their proceeds of crime by exploiting inherent weaknesses in banking systems. Criminals in the financial space have become nefarious pioneers of a multi-trillion-dollar illicit industry.

On the other is compliance teams, who form the backbone of the defense framework against financial crime and are fighting back using a combination of technology, data, and human experience to detect, disrupt, and prevent criminal activity.

One of the most valuable weapons in any compliance team’s toolbelt is the KYC journey, a tried-and-tested anti-money laundering (AML) process that reduces the risk of financial crime in banks and other financial institutions.

What is KYC?

KYC is the process of identifying and verifying customers. It is designed to protect banks and other financial institutions from fraud, money laundering, terrorist financing, and other economic crimes. 

KYC achieves this by enabling banks to collect and verify a customer or client’s identity and other information relating to them. The scope of identity information that’s collected varies between different jurisdictions but, at a minimum, it typically includes a customer’s full name, address, and date of birth. Personal identifying information that must then be verified.  

Under most AML regimes, businesses must also risk assess and screen their customers and clients to ensure they can be trusted. Or, in other words, that they’re not a politically exposed person (PEP), subject to sanctions, a financial criminal, or an otherwise high-risk entity. This can be achieved by cross-referencing KYC data against global sanctions lists, watchlists, and adverse media reporting.

KYC vs AML: What’s the Difference?

KYC and AML are two terms often used interchangeably, but it’s important to be aware of the difference between them.

In short, AML is the overall process of which KYC is one component. AML encompasses a variety of processes and procedures in addition to KYC, including customer due diligence (CDD), transaction monitoring (TM), ongoing KYC reviews, and suspicious activity reporting (SAR).

Who is KYC for?

KYC is primarily required of regulated organizations in industries that are subject to AML laws must undertake KYC checks as part of a wider AML regime. The exact industries that KYC requirements apply to depends on the legal jurisdiction but in most cases, it will always apply to:

Financial institutions: KYC requirements that focus on verifying customer identities and evaluating money laundering risk apply to banks and other financial service providers, such as payments companies, asset management and servicing firms, and fintechs like crypto platforms.

Insurance companies: Insurance providers need to be equipped to quickly assess risk factors associated with clients. Key risk factors might include claims history and whether a client has ever been convicted of any fraud-related offenses or had an insurance policy cancelled by another provider.

Payment institutions: KYC and AML are increasingly being used by payment institutions to verify the identities of account holders and their payment information when transacting.

This is just an indication of the industries that are typically be subject to KYC regulations. There can be significant variance between different jurisdictions and virtually any business that deals directly with money transfers can, in theory, be subject to them.

Why are KYC Checks Important for Banks?

It is a legal requirement in jurisdictions engaged with the global financial system for banks and financial service providers to conduct KYC checks during both the onboarding process and periodically throughout the lifecycle of the client relationship, in accordance with individual client risk profiles.

For the majority of jurisdictions, KYC requirements are as laid out by the Financial Action Task Force (FATF) in its Recommendations and legally expressed by legislation such as the European Union’s Anti-Money Laundering Directive (AMLD) or the Banking Secrecy Act (BSA) in the United States.

The FATF Recommendations set out a comprehensive framework of AML measures for member countries to implement in order to combat money laundering and terrorist financing. Although the FATF Recommendations are just that—recommendations—the AMLD, currently in its sixth iteration as 6AMLD, enshrines AML requirements and responsibilities in European law. The consistency of these regulations varies across the EU, however, as each Member State determines how the directive is transposed into regional law.

Failure to meet KYC requirements can lead to regulatory sanctions and reputational damage for regulated companies. A Danish banking giant was fined more than US$2 billion in December 2022 as a result of a long-term investigation conducted by the U.S. Department of Justice into to the bank’s failure to disclose deficiencies in its AML systems, such as inadequate transaction monitoring capabilities, and high-risk offshore customers. Fenergo shares the extent of the damage caused by AML fines in a yearly report.

How do Banks Conduct KYC Checks?

The KYC process for banks can be broken down into three main areas:

  • Identity verification
  • Customer due diligence (CDD)
  • Ongoing monitoring

The first two steps are completed during the initial customer onboarding stage while the third step, as the name suggests, continues throughout the lifecycle of the client relationship and is integral for banks to safeguard against the threats posed modern financial crime landscape.

STEP 1. Identity verification
Identity verification involves a range of different techniques and technologies that verify the authenticity of identity documents and prevent fraud. These include:

Standard identification: A government-issued ID or document is provided by the client and is first checked for authenticity against government databases.

Liveness checks: Face scanning, biometrics, and liveness checks can be used to  ensure that the client is a real, living person while also checking the client’s likeness against the photograph provided on the ID document.

Address verification: The customer provides proof of address, which is verified against any government-issued ID and other documentation such as bank statements or bills.
STEP 2. Customer due diligence
Knowing a customer goes beyond merely verifying their identity; anything can be hiding beneath the surface and it’s the role of customer due diligence (CDD) to unearth it.

CDD uses all available data and information to determine what risk, if any, a client carries and how this could impact the business. CDD aims to identify risk factors by analyzing information from a variety of sources, such as:

Anything provided by the customers themselves.
Sanctions lists published by governments and official authorities
Publicly available data, such ask company listings and media
Private data sources from third parties

Customers who are identified as high-risk following standard CDD checks may be subject to enhanced due diligence (EDD) checks. This might include searches of credit histories, litigation records, and Politically Exposed Person (PEP) listings, as well as screening of watchlists and adverse media checks.
STEP 3. Continuous monitoring
The final step of KYC is something of a misnomer because it's not a final step at all; it’s an ongoing process that is mission-critical.

Just because a client has been onboarded, verified their identity, passed CDD checks, and categorized as low risk does not mean that the KYC process ends there. Things can change quickly, particularly these days in our connected digital environment.

It’s therefore important to continuously monitor clients and their activity to ensure that changes to their risk status don’t go unnoticed and compliance teams can put in place the appropriate safeguarding measures if it does.

Continuous monitoring involves carrying out periodic checks to inform risk status by watching out for things like:
Sudden, unusual fluctuations in transactional activity
Unusual cross-border activity Adverse media references
Unusually large deposits and withdrawals Transactions involving sanctioned entities or those on watchlists

You can read more about continuous monitoring in our Comprehensive Guide to Transaction Monitoring.

Digital Transformation and KYC

In the not-too-distant past, businesses would conduct their KYC journey through entirely manual processes.

A business would first retrieve information from a potential client and then task a human operator with verifying it. Not only is this approach slow and expensive, but it is also error-prone; human employees are not infallible, after all.

Fast-forward a few years and KYC has been digitally transformed through electronic KYC (eKYC) solutions and digital ID&V (identity and verification) as the KYC needs of businesses have skyrocketed in response to the growing challenge posed by financial crime threat actors.

Although there are no fundamental differences between KYC and eKYC, and the behind-the-scenes processes are virtually the same—banks must still conduct identity verification, CDD, and ongoing monitoring—there are differences in the methods used to capture and check information.

Under the manual KYC journey, a client would have to visit a bank branch to open an account, taking along with them their identity documents which a human operator then manually checked against databases and watchlists.

This process has been reimagined through digital transformation into eKYC to be more digitally friendly and facilitate the needs of the client, using technology that echoes the digital experiences that clients have come to expect from every service they use.

A client now simply needs to provide a digital copy of an identity document which can be analyzed and verified alongside a biometric test. This digital transformation of KYC and its newfound flexibility means that it’s possible for banks to quickly and remotely onboard new customers, verify their identity documents, and check supplied information across countless data points in a matter of seconds.

It’s faster, more accurate, and can check a client’s information against more data points than is possible with a human operator, increasing the likelihood that risky clients are filtered out during the onboarding stage.

https://www.fenergo.com/the-complete-guide-to-the-know-your-customer-journey

How can Businesses Improve the KYC Journey?

Banks and other financial service providers are some of the most highly regulated businesses in the world. KYC plays a significant part in their CDD processes as the nature and scale of modern banking operations, alongside the nature and scale of modern financial crime challenges, makes it virtually impossible for them to carry out suitable KYC checks when relying on outdated methods.

The leaders at these financial institutions know this and are overwhelmingly choosing to implement automated KYC solutions within their workflows. Such solutions make their KYC processes agile and accurate, making it easy for compliance teams to run multiple checks on new clients during the initial KYC process while simultaneously monitoring existing customers in the background. 

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KYC Compliance in 2 Minutes

KYC is a huge challenge for every financial institution, so here’s a two minute explainer that will give you the overview you need to know where to go next on your journey. Digitalizing and automating KYC will help futureproof your business against any incoming regulatory demands.

Visit the KYC Solution page

Talk to Fenergo about Transaction Monitoring

Learn how Fenergo Transaction Monitoring will transform AML Compliance for your organisation.