Know Your Customer – Meeting the Regulatory Compliance by combating fraudsters


Moving into the digital world, businesses are shifting their operations online. The explosion of technology is providing another gateway to fraudsters and cybercriminals to carry out their illegal transactions and other frauds.

In order to survive the technology wave and stay ahead of competitors, businesses need to properly know their customers, fulfill their demands and provide them a great customer experience while meeting the regulatory compliance.

We come across the term Know your customer (KYC) multiple times especially in financial sectors. It is basically a process obliged by the regulatory authorities on all financial institutes to verify the identity of their customers and consumers.

At first, KYC was imposed on banks only, but now every institution dealing with money needs to carry out the KYC process at the time of onboarding customers.

Fundamentals to meet KYC Compliance

After the incident of 9/11, the KYC laws were introduced as part of the Patriot Act 2011 to deter money laundering and terrorist funding. Originally, the patriot act is an extension of the Bank secrecy act (BSA) but with more details.

According to these regulations, all the institutions dealing with finance needs to verify their customers not only at the time of onboarding but also be monitored after the onboarding process. As per the Patriot Act, the organizations need to meet the following two fundamentals requirements:

Customer Identification Program

The customer identification program is to verify the identity of the users and ensure that the person is a real entity, not a fake or synthetic one.

In this process, the customers are required to provide their personally identifiable information and the organizations verify that information against the customers. In 2003, the CIP requirement was made mandatory for financial institutions.

As per this rule, the businesses need to develop and incorporate the customer identification program into their policies, designed to meet anti-money laundering (AML) compliance.

The customer identification process may vary from business to business. Some organizations may require utility bills and bank statements to verify the customer, whereas some work with driving license and passports etc.

Customer Due Diligence

Customer due diligence requirement covers multiple aspects of customer identification and customer verification. Knowing the identity of the customer isn’t enough, identifying the future risks associated with the customers is also important for secure business growth.

Customer due diligence is conducted to analyze the behavior patterns of the customers. On the basis of customer behavior, the organizations predict the transaction pattern of the customers.

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The CDD process aims to facilitate businesses in identifying suspicious behavior of the customers – i.e. anomaly detection – and assigning them the risk rating.

These risk factors determine the possible threats to the organization and the user accounts are monitored on the basis of risk factors assigned to them. For instance, the account of the user with a high-risk rating will be monitored more often – let’s say monthly.

Role of KYC in AML Compliance

KYC/AML are two different yet inter-linked terms. The KYC requirements are essential for businesses to know their customers in order to hinder the cybercriminals and fraudsters from exploiting business operations.

With the rising trend of money laundering and terrorist fundings, the organizations are obliged to develop the policies to meet AML regulations.

It is a common practice of the financial criminals that they rely on fake accounts and information to carry out their illegal transactions without getting caught.

The organizations that fail to report such activities to the authorities are held liable by the regulatory agencies leading to hefty fines and imprisonment.

To avoid such situations and combat criminals, the KYC solution plays a significant role in verifying the customers and detecting suspicious entities.

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