According to Globe Newswire, understanding your customers through the Know Your Customer (KYC) process in today’s commercial world plays a crucial role in preventing financial fraud. This method of customer identification is used by various financial agencies and is particularly effective in dealing with fraudulent transactions.
The e-KYC market was worth approximately USD 1571.12 billion in 2021 and is expected to reach around USD 2792 billion by 2030. This growth is projected to have a compound annual growth rate (CAGR) of approximately 21.55% between 2022 and 2030.
Due diligence isn’t a new concept, but in this digital age, it can be harder than ever to accomplish. But that doesn’t mean it’s impossible. We’ve compiled the best practices for conducting KYC due diligence in a digital age that will help you keep your customers safe while still keeping your business running smoothly.
Implement Automated Tools
You can implement automated tools to collect and analyze customer data. This can help to streamline the KYC process, reduce errors, and ensure that all relevant information is captured.
Automated tools can also reduce errors by automatically flagging incomplete or inaccurate information for further review by your team. Additionally, they provide a central place to store customer data so that it’s readily available when you need it most, in real-time.
Use Multiple Data Sources
When conducting KYC due diligence, it’s important to use multiple data sources. This can include credit reports, public records, social media profiles, and other sources of information. The more types of data you use, and the more diverse those types of data are, the better your risk assessment will be.
Security Boulevard reports that according to research conducted by the U.S. Federal Reserve in 2019, non-cash payments totaling USD 97.04 trillion were made through 174.2 billion transactions in 2018. Unfortunately, this creates a large opportunity for con artists, thieves, and money launderers, who often employ increasingly sophisticated methods of attack.
Using different types of data includes:
- Use different countries’ records.
- Use periods that span several years (i.e., past five years) instead of just one year or less.
- Use regional variations. If someone claims they lived in California for ten years but all their friends live in New York City now, this would raise a red flag during KYC due diligence because it doesn’t match up with their stated location history.
Perform Ongoing Monitoring
KYC due diligence should be an ongoing process, not a one-time event. Regularly monitoring customer activity can help to identify any changes in behavior or risk level that may require further investigation. As such, it’s important to perform ongoing monitoring for all customers.
This includes reviewing and updating customer profiles on an annual basis (or more frequently if there is reason to believe they have changed), as well as regularly reviewing new information that could affect the risk profile of your business or customer base (e.g., regulatory changes).
To ensure the safety and progress of your business, Exiger, a third-party compliance, recommends ongoing due diligence whether you are onboarding new customers, updating an existing Know Your Customer (KYC) file, or exploring a potential partnership with a third party. Exiger suggests a team of skilled analysts who are well-versed in technology-enabled solutions and can quickly identify potential risks that may affect your business operations will help alleviate the pressures you face and keep your business safe and thriving.
Implement Risk-Based Approach
Implementing a risk-based approach is a foundational principle of KYC due diligence. This means assessing the risk level of each transaction or customer and tailoring the KYC process accordingly. The first step in implementing this approach is defining the problem before starting on a solution, which should not be done in isolation from your peers but instead as part of an ongoing discussion with them.
Once you’ve defined your problems, think about how they can be solved using tools available to you or other solutions that have been implemented elsewhere in your industry or company. Don’t worry too much about what other people’s solutions are. Focus instead on finding out what works best for you.
Train Employees
Training employees on best practices for conducting due diligence is an important step in creating a culture of KYC compliance. All employees who are involved with the KYC process should receive training on how to conduct due diligence and adhere to regulations properly.
This includes not only those who work directly with customers but also those who are part of any other aspect of your company’s operations that could potentially come into contact with customer data (such as IT professionals). Training should be ongoing so that all new hires receive the same level of instruction as existing staff members.
Keep Up-To-Date With Regulations
It is important to keep up-to-date with regulations. Requirements for KYC due diligence are constantly evolving, and businesses should ensure that their KYC processes are compliant with all applicable laws and regulations.
If you are not sure about a particular regulation, we recommend consulting an attorney or another professional who specializes in this area (e.g., an accountant).
According to Investopedia, to prevent illegal activities such as money laundering, the U.S. Financial Crimes Enforcement Network (FinCEN) mandates compliance with Know Your Customer (KYC) standards for both customers and financial institutions. Anti-money laundering (AML) is the overarching term for a variety of measures and procedures employed to achieve regulatory compliance. KYC represents a component of AML.
Use Secure Technology
When conducting KYC due diligence, it is important to use secure technology. This can help to protect sensitive customer information and prevent data breaches. Use a secure database, network, and authentication methods to access the data as well as encryption software that ensures only authorized users can view or manipulate it.
Conclusion
The KYC due diligence process is an important step in the onboarding process of any business. It helps to ensure that customers are who they say they are, which prevents fraud and gives companies peace of mind when dealing with consumers or clients.
In today’s digital age, it can be tempting to rely solely on online tools such as social media profiles and search engines when conducting this type of research on potential customers or employees. However, these platforms come with their own set of limitations (such as fake accounts), which means that other methods must also be employed when conducting comprehensive KYC checks.
