The 9/11 attack on American soil shook the nation to its core, and the perpetrators used The Hudson United Bank of New Jersey to fund this attack. According to the 9/11 commission, proper money-laundering safeguards within the financial industry at the time weren’t designed to detect or disrupt the type of deposits, withdrawals, and wire transfers that helped the attackers to commit the crime. After the attack of 9/11 KYC laws were introduced as a part of the Patriotic Act as a means of preventing financial activity and crime.
Know Your Customer (KYC) laws were introduced as part of the Patriot Act as a means of preventing terrorism financing and financial crime such as money laundering. As criminals use fake or stolen identities to commit financial fraud, banking institutions have to find a way to distinguish between fake and legit customers. That’s what KYC policies help achieve, the policies require financial institutions to conduct a series of tests to get to know their customers. This should help financial institutions to understand if the customers are who they say they are.
This makes KYC and Customer Identification Procedure (CIP) vital for banking and with more and more banks supporting online customer onboarding, KYC is becoming even more crucial. Banks, financial institutions, and other businesses need to find technologies that can streamline the customer onboarding and KYC procedure and eliminate the risk of fraudsters getting access to financial systems.
For decades, the United States Department of Treasury has had legislation guiding financial institutions on detection and prevention of money laundering. The BSA (Bank Secrecy Act) of 1970 requires financial institutions to maintain specific records like cash transactions exceeding $10,000 and also report suspicious transactions that they think could be linked to money laundering, tax evasion, or any other criminal activities.
Recently in 2016, the regulatory body ‘FinCEN’ issued new rules that outlined how to strengthen the customer due diligence and Anti-Money Laundering strategies. This also requires financial institutions to perform due diligence so they can better understand who their customers are and what kind of transactions they conduct. Any transactions from their ordinary transaction habits can be marked as a red flag.
To successfully comply with KYC regulations, banks all over the globe spent over $100 billion in 2016 and the cost has since risen by 10% in 2021. Regardless of the growing cost of compliance and huge investments, over $26 billion were imposed as fines in the last decade to financial institutions for non-compliance with KYC and AML laws.
To make the CDD (Customer Due Diligence) process more robust and meet the KYC requirements, FinCEN outlined 4 basic elements for an effective KYC procedure. The 4 elements are:
What do Customers Have to Provide During Onboarding?
To keep with the regulations, financial institutions have to collect and authenticate identity information while onboarding new customers. Different financial institutions have different requirements when it comes to identity information.
Individual customers who visit the bank for account opening will bring some ID documents (driver’s license, passport, etc), proof of address document, and any other document that is required. The banker then authenticates the documents to verify that the customers are who they claim to be. For onboarding businesses, banks ask for additional information to verify the identity of beneficial owners. Most financial institutions also require a profit and loss statement from businesses.
Opening a new account online significantly toughens the process as banks have to verify digital documents like driver’s license, proof of address documents, and others. Building a trustworthy link between a digital ID and an actual person requires a strong customer ID verification process to eliminate fraudsters from the customer onboarding process. This verification process may include biometrics verification, facial recognition, online document verification, and machine learning technologies for verification.
Companies all over the world are using biometrics verification, manual verification, and online document verification software to comply with KYC regulations, prevent online fraud, and provide a better customer experience for customers.
The technologies can be used to enhance trust among customers and also create a seamless onboarding experience.