Know Your Customer, known as the acronym KYC, is a series of rules and regulations for businesses that handle money like banks, lending firms, and the like. It espouses just what its name suggests, and is for companies to know who their customers are. When businesses are familiar with their customers’ identity, along with their spending habits, the people running the enterprise can easily spot suspicious activities.
Handling money is a serious responsibility. For businesses that engage in this kind of industry, it is imperative to understand the critical components of KYC. Consider the following points below, as it breaks down this term and explains why it matters a lot. In this modern digital world where hackers abound, businesses that do know their customers are less prone to getting taken advantage of and hacked.
Customer Identification Verification
The most crucial step of complying with KYC measures is to verify the identity of the customers before an account is opened. Most established businesses have a protocol called the CIP or customer identification program, which indicates how they confirm if a new customer is telling the truth about who they say they are.
Every business, depending on the industry and size, has its own set of CIPs. However, as a general rule, CIPs require these data from their clients: name, birth date, address, ID number, and contact number. Banks are a bit more strict because they need additional documentation such as a passport, license, or any other government ID. They also cross-check who people are in public databases and other financial institutions.
Verifying clients’ identities deter fraudulent behavior. Businesses also rely on it to double-check if people are not terrorists or criminals. The federal government requires banks to run a client’s name in the federal government lists of known or even suspected terror groups for the sake of peace.
Planning for Anticipated Finance Behaviours
After getting to know the client’s identity, KYC protocols dictate that businesses must monitor and anticipate their clients’ spending habits to spot fraud. Data science, along with databases, makes this monitoring job a lot easier.
Most banks now create a spending profile for each client which makes the predictions. When something looks out of the ordinary, the transaction gets flagged. This endeavor protects banks from losing funds to fraudulent activities. The moment security is compromised, the bank is alerted so they can beef up their protection. At the same time, the owner of the account is also informed of weird activities to keep them alert.
Companion in Monitoring Risks
Right from the get-go, banks tend to rate a new client based on their risk of attempting any fraudulent activity like money laundering scams. If a particular customer does pose a high risk or threat, banks can opt-out of doing business with this individual.
For those that have exhibited unusual transactions, it is recommended to monitor a suspicious account regularly. Check and verify all transactions. Red flags include the following, such as repetitive wire transfers, frequent transactions with overseas accounts, and the constant moving of money. Higher risk people are always flagged to deter them from committing fraud because watchful eyes are glued onto their every move.
The Know Your Customer platform works very hard in decreasing illicit activities in financial institutions. The more information available on clients, the more identifiable they are and the fewer chances of fraud. With this KYC measures, there is confidence because members of the staff can anticipate risks and catch alarming transactions before any damage occurs.