KYC - Know Your Customer

KYC stands for "Know Your Customer". It is a significant element in today's world which is very helpful in the fight against money laundering and financial crimes. To fight all these crimes in today's world, customer identification is the first most step and very critical aspect to perform better in the other stages of the fight. The CFT (countering the financing of terrorism) and global AML (Anti-money laundering) landscape have raised tremendous stakes for all the financial institutions.

All the international regulations are mostly influenced by the standards of many high authorities and governing bodies such as the FATF (Financial Action Task Force). These standards are now implemented in the national laws. While implementing the standards set by FATF in the national laws, it also encompasses very strong directives like AML 4 & 5 and many preventive measures such as 'KYC' for identity verification of customers.

In this article, we will first learn what KYC is, then we will learn about E-KYC, and we will also look at the advanced system and technologies for ID verifications that can make the KYC smoother and better.

What is the KYC process?

KYC, the short form for Know Your Customer, or sometimes we call it Know Your Client, is a process for the verification of a customer's identity.

KYC check or simply KYC is a mandatory process in which identification and verification of a customer's Identity are done while opening an account, purchasing a sim card, etc. In other words, we can say that bank or any other service provider should have to ensure that they actually are what they are claiming to be. The KYC process is done periodically in the banks and is not a one-time process like in other places.

Now, banks or any other service provider can refuse to provide the service if the customer fails to meet the minimum standard requirements for the KYC process.

Why is the KYC process so important?

The KYC process is very much important to prevent various financial crimes and money laundering cases. According to the UN (United Nations), crimes related to money laundering are between 2 to 5% of global GDP (between $1.6 to $4 trillion) annually, and the stricter following of KYC or CDD process is helping to reduce these numbers. Other than this, the KYC process can also help a financial institution as well as a nation to reduce all the financial crimes happening.

KYC (Know Your Customer) process is very important in many ways from which we have mentioned some of them below:

• This client onboarding process, i.e., KYC, helps in identifying and preventing various terrorism financing, money laundering, and various other illegal crimes or corruption schemes.
• When banks or any other financial institution comply with the Anti-money laundering regulations and KYC regulations, they can easily limit the frauds happening at their place.
• The responsibility of compiling with the KYC regulations totally depends upon the banks and various other financial institutions.
• When banks or other financial institutions do not comply with the KYC process, penalties can be imposed on them for breaking the regulations.
• KYC procedures defined by the national laws and banks involve all the required actions to ensure that clients availing a service is real & genuine, and service providers can monitor risks and assess them.
• The process of doing KYC step includes the following mandatory verifications:
  1. ID card verification
  2. Documents Verification (such as utility bills, i.e., gas bill, electricity bill, etc., for proof of address)
  3. Face recognition or verification
  4. Biometric verification

Note: In the past ten years, from the Middle East, US (United States), the Asia Pacific, and Europe, a total of $26 billion has been accumulated in terms of fines for not compiling with the rules and regulations regarding KYC, AML and sanctions files.

Documents required for KYC process

Till now, we have learned in this article that why the KYC process is so important and how it is helpful in preventing money laundering and various financial crimes. Now, we will look at the documents that are required to complete the KYC process and verify your identity as a customer or client.

Actually, a KYC check is an independent process, and it can be done through a reliable and independent source of data, documents, or information from the customer. Each client who wants to avail of the service has to provide some mandatory credentials and supporting documents regarding it to prove their identity and address.

• In May of 2008, FinCEN (Financial Crimes Enforcement Network) of the US (United States) added a new requirement of documents for banks.
• US FinCEN added this requirement for the bank to identify the natural person of legal entity clients who actually own, can control, and make profit from the companies when such organizations open accounts in the bank.
• Bottom line for Organization for KYC: When an organization or corporate company opens a new account in the bank, it will have to provide some sort of social security such as numbers, passports, or copies of the photo ID for their employees, shareholders, and board members during KYC process.

What is eKYC?

In the eKYC process, digital data from the smart IDs (IDs having a chip or bar code in it) issued by the government is extracted to Verify the Identity of the client.EKYC or electronically Know Your Customer process is referring to capturing the information of the customer or client from the IDs (ID proof) provided by them using OCR mode. This extraction of digital data from smart IDs has been done in the physical presence of ID or using the certified digital method of identities with a facial recognition process for online identity verification.

Onboarding customer (Doing KYC of the customer) process can also be done online via Smartphone too. Because of the improvement in the utilization of using AI (Artificial Intelligence), eKYC or online KYC is becoming more accurate and feasible and improving day by day.

If we talk about India specifically, here in the process of eKYC, the Aadhaar card is predominantly is used as the identity proof as well as the address proof to verify the identity of the client. Since the Aadhaar card in India is a nation's biometric eID scheme for all Indian residents, therefore it becomes very important for every Indian to do Aadhaar authentication while doing eKYC.

Why the eKYC process became so popular in India?

As we can see today's trend in India, the process of eKYC has become so popular in India. This is because 99% of the country's adult population has their digital Identity. As per the data released by the Indian government, 1.29 billion Indians have their own Aadhaar number (have a digital ID) as of May 2021.

eKYC: Facial recognition and digital service availing

As we have learned about the eKYC process and what it is, we can now even move forward to do learn more about eKYC and what it includes in it. In this section of the article, we will learn about how facial recognition is helpful in the eKYC process and how we can avail services digitally with the eKYC process. We will learn separately about each of them and see how they are helpful in the eKYC process.

Facial recognition and eKYC

The customer onboarding process by eKYC with the help of facial recognition technology is a very hot topic in the year 2021.

But why?

This is because we all are facing the covid-19 or corona pandemic, and because of it, we all are forced to stay inside our homes. Now, when we all are staying inside our home, we can only rely on the eKYC to complete the onboarding customer process. The Covid-19 pandemic also forced the banks and other institutes to move towards the inclusion of facial recognition in the eKYC process as it is also important to check if the person who is doing the eKYC of itself is also important the same person who was supposed to be.

• We can least expect the use of facial recognition in the banking area, but this trend is changing in the current scenario. In the second quarter of 2020 (Q2 of 2020), 64% of the total primary checking of account opening (which includes 36% of the branches) process were done online and with the help of facial recognition in the United States alone.
• If we think this trend might change after the pandemic, then we are wrong because we can't see in any foreseeable future that the trend of eKYC is going to change.
• As per the recent study of BAI and VISA, the trend of eKYC in the banking area will also continue.
• Other than this, the increased usage of mobile urges all businesses to have the focus first on mobile and develop user-friendly mobile experiences to perform the eKYC process very smoothly.

eKYC and digital service availing

Now, we have learned that how eKYC is dominating the market since the pandemic has hit. So, after customers and service providers are forced to move towards eKYC and online services, and it became very easy for customers to avail many services digitally after completing the eKYC process. In many services, the most highlighted service is opening a bank account digitally.

Before the pandemic, we have to go to the bank and wait for hours to complete the KYC process and open our bank account. But now, all the scenario has changed and now we can avail this service online and open an account in a bank digitally. To open an account in a bank digitally, we have to visit the bank's website of our choice and fill in the particulars of details in the account opening section. After completing this process, we have to upload all the necessary documents and take an online photograph (sometimes an extra photo is needed with an ID proof document holding in hand). By doing this, we have completed the eKYC process, and the primary opening of our account is done. Now, you have to visit the bank to complete the rest formalities, and your account is opened in the bank.

Other than opening an account digitally in the bank, we can avail of many other services digitally, such as purchasing a new SIM card & completing KYC for it, and many other services.

Standards for KYC

The main objective of doing KYC and compliance with its guidelines is to prevent businesses from money laundering and various other financial criminal elements in the country. Procedures related to KYC also enable businesses to understand their customers and their financial dealing in a better way. By keeping track of this, the business can easily assess and manage its risks in a well-judged manner.

All the businesses usually frame their KYC policies including the following four elements and taking them as the base:

• Customer identification procedures;
• Risk management;
• Customer acceptance policy; and
• Monitoring of transactions.

The stringent regulatory environment established KYC as a crucial procedure and mandatory process for all the institutions (financial as well as non-financial). As KYC identifies the suspicious elements at a very early stage, it minimizes the risk of fraud in the business-client relationship. A client/customer/user can be defined as follows for the purposes of KYC policy:

• A client is a person on whose behalf the account is maintained, and we call it the beneficial owner.
• A user or customer can be any person or entity which is connected with a financial transaction that can pose significant reputational or other risks to the bank. Example: Issue of a high-value demand draft or transfer of a wire for a single large amount transaction.
• A client can be an entity or a person who maintains a business relationship with the reporting entity or have an account in reporting entity.
• A businessperson or beneficiaries for the transactions conducted by intermediaries such as CA (Charted Accountant), solicitors, or stockbrokers as permitted under the law of the nation.

KYC criticism

Like any other policy or law, KYC is not a perfect policy, and it has its own drawbacks, due to which it faces criticism from various financial institutions and experts. Following are the criticism included in the KYC policy:

• Many customers can feel that the information required from their side to be intrusive and burdensome, and this might result that they don't want to enter into the business relationship.
• Many retired people who want to enjoy their retirement life and want to travel to many places within a country can't have a permanent address. This might come as a disappointment to them and put such people in a disadvantageous position in the KYC policy.
• KYC or Know Your Customer process places a very hefty and costly burden on all the businesses operating in the financial sector, especially for all the small and medium-size industries where the cost of compliance with KYC policies is very high.
• Many law-abiding and innocent individuals of the country, such as digital nomads, etc., are very disappointed with the KYC policy as it puts such people in a very disadvantageous position. This is because living a nomadic life makes it very difficult or sometimes even impossible to hold any formal banking relationship anywhere in this world because of the lack of many supporting documents such as bills, ID proof, address proof, etc., as required during the KYC process.

Conclusion

In this article, we have studied about KYC process first, and then we learned how eKYC is dominating in this pandemic era and how it changed the current scenario completely. Other than this, we have also read about the standards and criticism faced by the KYC policy due to its limitations.