KYC (Know Your Customer) is a fundamental practice for businesses in the financial sector, ensuring security, regulatory compliance, and trust. In this article, we’ll explore Know Your Customer and its process to better understand why it plays a critical role in preventing fraud, identity theft, and other financial crimes such as money laundering (ML).
What is KYC (Know Your Customer)?
Know Your Customer (KYC) refers to the process that financial institutions and regulated companies must undertake to verify the identity of their clients. This ensures that customers are who they claim to be, helping to prevent fraud, identity theft and Financial crimes, including money laundering and terrorist financing.
That is the primary objective of KYC: to protect businesses and the financial system from being exploited for illegal activities.
By thoroughly understanding their customers, financial institutions can assess and mitigate risks effectively while ensuring compliance with anti-money laundering (AML) regulations. This safeguards the integrity of the financial ecosystem and promotes transparency.
How does the KYC process work?
KYC involves collecting, verifying, and monitoring customer information at the time of account opening and on an ongoing basis. This includes obtaining personal details, assessing the nature of the client’s activities, and evaluating their potential risk. The depth of the KYC process varies depending on the customer’s risk profile.
The KYC process consists of three fundamental components:
- Customer Identification Program (CIP): The first step in KYC, CIP involves collecting basic identifying information, such as the customer’s name, date of birth, address, and identification number. The goal is to establish and verify the true identity of the individual before engaging in any financial transactions.
- Customer Due Diligence (CDD): Building upon CIP, CDD involves assessing a customer’s financial behaviour and risk profile. Financial institutions analyse the nature of a client’s activities to ensure that transactions align with their profile. This helps detect and prevent suspicious or illicit activities.
- Enhanced Due Diligence (EDD): For high-risk customers, EDD requires a more detailed investigation. This includes verifying the source of funds, analysing business relationships, and continuously monitoring transactions to detect any irregularities. EDD is essential for managing higher-risk clients, such as politically exposed persons (PEPs) or entities in high-risk industries.
In Switzerland, the Financial Market Supervisory Authority (FINMA) enforces KYC regulations as part of its anti-money laundering framework. Financial institutions must comply with strict AML guidelines, including the monitoring of transactions and reporting of suspicious activities to FINMA.
Conclusion
Implementing a robust KYC process is essential for financial institutions to comply with regulations, mitigate risks, and protect against financial crimes.
By partnering with a Swiss provider like YAPEAL, businesses can benefit from comprehensive KYC solutions while ensuring compliance with FINMA regulations.
The Author
Charline Dulac
Growth Marketing Manager at YAPEAL