Quiktrak KYC Identity Verifications Help Financial Institutions

The Quiktrak Know Your Customer / KYC Verification report is a turnkey solution for customers to meet their KYC verification needs. Our verification process is versatile to allow for both on-site and virtual verification document collection. If you are looking for person-to-person verification, we offer turn around in as little as 24 hours or less. With the increase in digital technology, Quiktrak keeps customers on the cutting edge of innovation with its key feature of capturing images of KYC identity verification documents. Not only does Quiktrak collect pictures, but its virtual verification feature also allows date, location, and time stamps so that each asset can be marked as verified to keep businesses in compliance and mitigate risk.

Quiktrak’s KYC Verification is a trusted tool for KYC identity verification, but why would an organization need this tool? KYC identity verification is a regulated requirement for financial institutions and a best practice for other organizations that want to reduce risk and legal implications that may arise from doing business with criminal entities. Here is some additional information on KYC and how it can benefit your business.

Learn more about KYC inspections here: https://quiktrak.com/quiktrak-know-your-customer-kyc-verifications/

What Is KYC Identity Verification and How Can KYC Compliance Benefit Your Business?

The KYC identity verification policy is a compulsory set of guidelines for financial institutions, which requires the verification of a customer’s identity to prevent criminal or terrorist activities. KYC compliance ensures that institutions or organizations operate within the legal requirements of most international regulators who adhere to standards set by The Financial Action Task Force and those that recognize the rules of the U.S. Financial Crimes Enforcement Network.

Although mandatory for financial institutions, KYC is also used by other organizations to ensure that they are not conducting business activities with criminal elements. Here is some information on the KYC guidelines and compliance requirements, the KYC process, the documents required for verification, which can help you ensure your organization is compliant, and the importance and benefits of being KYC compliant.

What is KYC Identity Verification?

KYC is the acronym used to identify the terms “know your customer” or “know your client.” KYC guidelines originated from the Patriot Act to prevent criminal and terrorism activities through identity and address verification of customers wanting to do business with financial institutions.

What Is the Purpose of KYC?

The KYC guidelines are in place to prevent money laundering, the funding of terrorism, and criminal financial activities.

Within the banking industry, KYC is used to remain in compliance with the law by:

  • Identifying and verifying  customers
  • Ensuring the customer information is accurate
  • Identifying  and verifying owners or beneficiaries of the business
  • Determining the purpose of the customer’s relationships
  • Reviewing and monitoring the accounts of customers for suspicious activities.

Within the investment industry, KYC guidelines allow:

  • Evaluation of a customer’s risk tolerance
  • Determination of a customer’s financial position

Within the global business sector, KYC guidance:

  • Prevent tax evasion
  • Prevent  terrorism financing
  • Prevent anti-social activities

Although it may seem that the KYC guidelines are mainly for initial account setup, the guidelines reach far beyond establishing a customer/ client relationship and expand into continued monitoring of a customer’s account to prevent suspicious transactions or activities. The purpose of the KYC guidelines seems heavily financial-focused, but who really needs to follow these KYC guidelines?

Who Uses KYC?

The primary entity that is required to utilize KYC is financial institutions. Others entities, although not required, use KYC as a best practice to reduce risk, maintain integrity, and better serve clients.

KYC Within Financial Institutions

Banks are the leading and heaviest users of KYC identity verification guidelines. The information gathered from customers is used to conduct further identity checks and determine the business’s risk.

While conducting their due diligence, most financial institutions also review customer information to identify politically exposed persons. Once an account is created for the customer, the financial institution will continually check the customer’s account to determine data accuracy and risk.

With the legal implications and fines that may arise from non-compliance and the need to ensure accuracy and timely reporting, most banks have opted to use a digital ID verification process that identifies customers and ensures their account security.

Other Businesses Using KYC Guidelines

Although KYC was mainly associated with financial institutions to prevent money laundering and other illegal activities, other businesses have now adopted the guidelines. Both big and small companies have implemented the KYC guidelines as a due diligence method to ensure clients are who they say they are. This measure ensures both the organization and the client are operating within anti-money laundering laws.

Some businesses, other than financial institutions, who have adopted KYC guidelines include:

  • Financial Technology Companies
  • Dealers of virtual assets
  • Non-profit organizations

Some key reasons for other organizations utilizing KYC include reducing risk and maintaining business integrity. Although not required by law, these businesses take the extra step to protect their companies and clients. Since businesses outside of the necessary financial institutions are becoming KYC compliant, what guidelines are they following?

KYC Guidelines and Compliance Requirements

Within the United States, The Financial Crimes Enforcement Network has set guidelines for compliance with KYC.

Identity Verification to Include Owners and Beneficiaries

Institutions are required to verify the identity of customers and beneficiaries who own at least a 25% stake in a business. While 25% ownership may apply to most institutions, the guidelines also stipulate that less than 25% ownership be verified if there is a higher anti-money laundering /terrorism finance risk.

Customer Risk Profile Development

The customer risk profile is developed before and after the customer has been on board with the organization or institution. Institutions are required to classify and understand the type of relationship they have with the client and also the purpose for the client’s connection. This client profile is inevitably developed to track or detect any suspicious activities.

Third-party Compliance Through Yearly AML and CIP Certificates

Suppose an institution or organization outsources its customer identity verification process? In that case, it is required that an Anti-Money Laundering and Customer Identification Program certificate be secured from the third-party provider annually. This requirement ensures that the third party has the proper structure and risk controls to meet the KYC requirements for compliance effectively.

Maintain Customer Information

Institutions or organizations are required to keep accurate and current information for customers. Many times businesses may need to update individuals in a leadership role. These leadership roles may go undetected; however, it is the institution’s responsibility to ensure that all leadership changes are reflected and verified on the customer account.  A Forbes report on a survey conducted revealed that 30% of companies that experienced at least six changes failed to report these changes to their financial institutions over two years. 

Monitor Customer Accounts and Report Suspicious Activities

Activities on customer accounts are required to be continuously monitored to ensure there are no suspicious activities. If suspicious activities are detected, institutions are required to report such findings promptly.

 Because there have been sophisticated ways in which criminals can hide suspicious activities, in 2018, some agencies in the U.S began to encourage institutions to employ the use of digital technologies or artificial intelligence to meet this requirement.

Does most of this information seem familiar? Some of these requirements may appear familiar to individuals and business customers alike as most are aligned with current SEC requirements.

Securities Exchange Commission Data Requirements and KYC

Financial institutions also have to adhere to SEC requirements as of 2018. These requirements are deeply ingrained within the KYC requirements. Here are a few SEC data requirements commonly used for financial institutions that also ensure that KYC guidelines are met.

When a customer decides to open an investment account, they are required to provide personal information to include their:

  • Client’s name
  • Date of birth
  • address
  • employment information
  • Annual income
  • Net worth
  • Investment objectives
  • Identification

With all these requirements and guidelines, organizations tend to develop written internal policies to encompass the stipulations to ensure KYC compliance.

Organizational Policies Derived From KYC Guidelines

Most organizations that seek to comply with the KYC guidelines will have written policies to include:

  • Standard customer policies
  • Customer Identification Program or CIP
    • Collection of data
    • Verification of identity
    • Political ties and sanctions checks
  • Risk Analysis and Management
    • Transactions monitoring

Within these policies, the organizations may include a KYC process to ensure all documents are collected and all steps are taken from customer identity verification to account monitoring and reporting. Below is a review of the KYC process and actions that can be taken to maintain compliance.

The Know Your Customer / KYC Process

The KYC process may include verifying a government-issued ID, proof of address verification, and biometric or facial recognition.

The KYC process for customer identity verification can be digital or paper-based. Most institutions have opted for a digital process where a document reader and software for document verification are used to determine the authenticity of documents provided by the customer.

Not only can some digital software verify the authenticity of a document, but it also allows for biometric tests that may include fingerprint and facial recognition checks.

Steps Towards Meeting KYC Guidelines

The following steps will show the information required or the actions needed to ensure that your business meets KYC guidelines.

  1. Collection of customer documents:  Documents collected at the onboarding phase should include:
  2. Government-issued photo ID to confirm the person’s identity.
  3. Documents to confirm the person’s address
  4. Financial records to access financial risk
  5. Verification of identity: During the verification of identity phase, institutions should reach out to the issuing agency of the ID to confirm the customer’s identity.
  6. Verification of address: The address verification is in place to ensure that organizations confirm the customer’s residency to see if they are domestic or if they hold other addresses.
  7. Financial assessment: Verifying financial documents, including tax returns and other financial records, ensures that the information has not been misrepresented. This step also confirms the client’s financial position so the institution can better serve their needs.
  8. Monitoring of transactions: Unusual transactions of varying amounts and high-value transactions are checked at this point and monitored to ensure there are no acts of illegalities.
  9. Issuance of verification certificate: Although optional, it is good practice; after reviewing all the steps to ensure KYC compliance that a verification certificate is issued to confirm that the account has been verified.

Different documents may be required at various stages of the verification process. Here are some documents that may be considered for KYC purposes.

Know Your Customer / KYC Documents

Some documents that may be used for customer identification include:

  • Driver license
  • Passport
  • Birth certificate
  • Social Security card

Although different states and regions may have varying document requirements, most institutions require a government-issued form of identification such as a driver’s license or a passport. Others may require a birth certificate or more sensitive information, such as a social security card.

These documents are collected to confirm that the person is who they say they are and are also used to verify their address.

Some documents that may be used for address or residency verification include:

  • Utility bills covering a specific period
  • Statements from financial institutions
  • Documents detailing employment
  • Mortgage or lease agreements

What if it is a business opening an account and not an individual? The U.S Financial Crimes Enforcement Network, as of May 2018, has required that individual stakeholders in a company such as shareholders, employees, and board members be verified using documents such as a government-issued photo ID, social security numbers, and passports.

The Importance and Benefits of KYC

Following the Know Your Customer guidelines not only ensures that you are operating within the legal requirements of the Patriot Act; the guidelines also protect your business from risk and ensures that your activities are lawful and that you meet the needs of your customers.

Avoid Legal Fines

The legal implications related to going against anti-money laundering guidelines can be significantly dire for intuitions and individuals. As reported in Bloomberg Law news, one of the most prominent cases regarding the violation of anti-money laundering laws is the 2020 case of Larry Dean Harmon, who was fined $60M.

Apart from individuals, a report from Thales Group revealed that worldwide a total of 26M USD of fines had been issued within ten years for the non-compliance of guidelines related to anti-money laundering as well as KYC requirements.

Reduce Risk and Maintain Business Integrity

Although the legal fines are a deterrent, organizations also have the responsibility to ensure that money laundering and criminal activities are thwarted and that the financial industry remains strong and trusted. Damage to a business’s integrity and legal fines are just a few reasons to maintain KYC compliance; there are other risks involved and different ways in which companies can better serve their customers.

Following KYC guidelines reduces the risk for institutions to ensure that they are not conducting activities and are not affiliated with criminal individuals or entities. This measure limits/ reduces the occurrence of fraud and acts as a means of upholding the organization’s integrity.

Not only is this risk assessment suitable for institutions, but it is also good for customers. By assessing the customer’s risk, lenders and investors go beyond merely confirming the customer’s identity and can further evaluate their financial position to provide better services and advice.

Meet Customer Needs

Dealing with a customer’s finances is extremely sensitive. Being KYC compliant helps organizations to understand their customer’s needs by assessing their customer profile and risk to ascertain essential facts that can assist with investment options, recommendations,  and special handling of each customer’s account.

Although not a KYC requirement, the suitability rule is a guideline for investors and is made executable when KYC guidelines are followed. The suitability rule allows brokers to determine what is more suitable for the client based on the client’s financial situation. Being KYC complaint ensures that the information needed for the Suitability Rule under the Rules of Fair Practices is gathered and assessed to meet the needs of the customer.

Being KYC complaint is beneficial for both organizations and businesses and provides a set of guidelines that will evolve as time changes.

What’s Next for KYC?

KYC ensures that business is being conducted with integrity. As more financial instruments and features emerge, the KYC guidelines will continue developing and expanding to other organizations and institutions. As of 2021, the Financial Crimes Enforcement Network has proposed that market participants in digital assets and cryptocurrency begin conducting customer identity verifications. With all its legal weight and future reach, how can your business stay ahead and ensure that KYC guidelines are met?

How Can Your Business Meet KYC Guidelines?

Following the KYC guidelines can be both labor-intensive and time-consuming. Due to the time requirement, the need to ensure accuracy and compliance, and labor costs, most organizations turn to outside organizations like Quiktrak to provide verification services associated with maintaining compliance to an agency or external organization.

To learn more about how Quiktrak can help you maintain compliance, visit our KYC services page here: Quiktrak Know Your Customer (KYC) Verifications

Sources