These processes help prevent and identify money laundering, terrorist financing and other illegal corruption schemes. All workflows should use digital processes whenever possible. There may be situations, such as outdated laws or legacy requirements that are difficult to change, where digital techniques cannot be used for KYC. However, these are the exception and endangered; Fully digital KYC is the future and companies that fight against it will find themselves on the losing side. KYC regulations have profound implications for consumers and financial institutions. Financial institutions are required to follow KYC standards when working with a new customer. These standards were introduced to combat financial crime, money laundering, terrorist financing and other illicit financial activities. Know Your Client or Know Your Customer is an investment industry standard that ensures that investment advisors know detailed information about their clients` risk tolerance, investment knowledge and financial situation. KYC protects both clients and investment advisors. Clients are protected when their investment advisor knows which investments are best suited to their personal circumstances. Investment advisors are protected by knowing what they can and cannot include in their clients` portfolios. KYC compliance typically includes requirements and policies such as risk management, customer acceptance policies, and transaction monitoring. Limit money laundering, terrorist financing, corruption and other illegal activities.
Other jurisdictions have similar provisions; More than 190 jurisdictions around the world have committed to abide by the recommendations of the Financial Action Task Force (FATF), an intergovernmental anti-money laundering organization. These recommendations include identity verification procedures. It is important to note that the proposed requirements provide only a basis for the implementation of CDD measures, which should be complemented by each client`s own risk profile assessment. [3] While the proposal clearly sets out its essential requirements, the criteria for internal risk assessment for clients remain largely open to interpretation. This lack of clarity has led to some confusion in the industry, particularly with regard to the identification of “beneficial owners” of customers that are legal entities (i.e. the identification of individuals who own a large portion of the legal entity`s customer), as the ownership threshold triggering the proposed KYC requirements is partly determined on the basis of the internal customer risk assessment of the institution. While KYC regulatory requirements can be costly and negatively impact the consumer experience, failure to comply with these requirements can be much more costly. Organizations have accumulated millions of dollars in fines for non-compliance in recent years. Banks may refuse to open an account or terminate the business relationship if the customer does not meet the minimum KYC requirements. Anti-money laundering refers to measures taken by financial services companies to prevent financial crime – particularly money laundering – under their supervision. These measures are no longer optional since the Bank Secrecy Act of 1970, and more recent laws require these companies to work to prevent customers from “laundering” their illicit gains through a legitimate business or individual account.
These laws are designed to deter drug cartels, terrorist cells and other criminal organizations from hiding their ill-gotten gains. Their legal and compliance teams are highly paid, intelligent and valuable resources. eKYC enables a better working environment, which translates into a more engaged workforce. Identity theft: KYC helps financial institutions provide proof of a customer`s legal identity. This can prevent fake accounts and identity theft through forged documents or stolen identity documents. Do you know your customer? In any case, you should do it. If you are a financial institution (FI), you can expect fines, sanctions and reputational damage if you deal with a money launderer or terrorist. Most importantly, KYC is a fundamental practice to protect your business from fraud and losses due to illicit funds and transactions. Financial institutions should act now to put in place the necessary policies, procedures and practices. Institutions that operate globally have a particularly long way to go as they have to take into account the differences in KYC requirements. The Court`s observations indicate that efforts are well advanced in most of these institutions, but that much remains to be done, in particular as regards consolidating efforts to ensure as far as possible compliance with cross-border rules. With respect to the requirement to obtain beneficial ownership information, financial institutions must identify and verify the identity of any person who owns 25% or more of a legal entity and a person who controls the legal entity.
KYC protects businesses and customers from the negative effects of financial crime, including fraud and money laundering. Compliance may seem cumbersome, but it doesn`t have to be. You can implement software that integrates KYC requirements into your workflows. Knowing who your customer is and putting protocols in place to prevent financial crime are constant challenges for financial institutions. Significantly, financial institutions (including banks, credit unions, and Fortune 50 financial companies) must comply with an increasingly complex set of customer identity verification regulations known as KYC. In this article, we cover KYC requirements in the US. KYC is an essential process to determine customer risk and whether the client can meet the institution`s requirements to use its services. It is also required by law to comply with anti-money laundering (AML) laws. Financial institutions must ensure that customers do not engage in criminal activity by using their services. Just as individual accounts require identification, due diligence, and monitoring, corporate accounts also require KYC procedures. Although the process is similar to KYC for individual customers, its requirements are different.
In addition, transaction volumes, transaction amounts and other risk factors tend to be more pronounced, making procedures more complex. These procedures are often referred to as Know Your Business (KYB). As part of an effective customer due diligence program, FinCEN`s proposal requires financial institutions to verify the identity of a customer`s beneficial owner, which is a legal entity. The basic definition of beneficial owner in the proposal is a person who owns at least 25% of the shares of the legal person. [5] However, financial institutions should lower this threshold for customers with a high anti-money laundering risk. While the proposal does not impose a specific ownership threshold for these customers, our observations on industry best practices and regulatory expectations suggest that a 10% threshold is generally appropriate. [6] Although our market research shows that trust is allowed in all major jurisdictions [9], there are jurisdictional differences. Therefore, institutions with a global presence should consider the relevant regulatory requirements in each of their operating jurisdictions before relying on third-party information. In the future, compliance professionals will have no choice but to bear the brunt of these new requirements and expectations.
However, it is important to know that these regulatory restrictions perform an important function: to fight fraud, eliminate money laundering, terrorist financing, bribery, corruption, market abuse and other financial misconduct. While the fight is complex and often costly, value is crucial to protect both consumers and the entire financial system from manipulation by bad actors. Given the consequences of non-compliance (as evidenced by the unprecedented anti-money laundering penalties imposed on industry in recent years), institutions should begin their implementation efforts as soon as possible based on industry requirements and best practices. This is particularly important for global institutions that are subject to similar requirements in other jurisdictions (e.g. EU Anti-Money Laundering Directive IV [4], which need to compensate for regulatory differences between jurisdictions, and for institutions that are currently taking corrective action in response to regulatory review. Financial institutions must also keep records of transactions and information obtained through customer due diligence. Those requirements should apply to all new customers as well as to existing customers on the basis of materiality and risk. These methods form the core of the CIP; As with other anti-money laundering (AML) compliance requirements, these guidelines should not be followed arbitrarily. They need to be clarified and codified to provide ongoing guidance to staff, managers and in the interest of regulators. The RBI fined four public sector banks 1.75 crore in 2019 for failing to comply with KYC compliance requirements when opening current accounts. The banks included Punjab National Bank, UCO Bank, Allahabad Bank and Corporation Bank.
Finally, institutions currently implementing corrective actions should not wait for FinCEN`s KYC requirements to be finalized to implement them. A proactive approach to compliance will send a positive message to regulators that these institutions prioritize their anti-money laundering risk management, thereby improving the institution`s regulatory position.