The Importance of KYC process in banks

What is KYC, and what is the importance of KYC?  KYC stands for “Know Your Customer.” It is a process where banks obtain information about their customers’ identity thereby ensuring that bank services and government regulations not misused. The KYC procedure is used when bank customers open accounts. Banks are also required to periodically update their customers’ KYC details. The purpose of KYC is to reduce the risk of identify theft, money laundering, financial fraud, and the financing of criminal organizations. KYC helps manage risks and helps to understand customer behaviors. This importance of the KYC process requires banks to collect and verify basic details of customers which includes their name and authorized signatures, legal status of an entity or person, the identity of owners on the account and other information depending on FI risk approach.

The importance of KYC in banks and financial institutions

The importance of KYC in banks and other financial institutions have strong KYC procedures in place so they can ensure that their clients are not involved in money laundering or the financing of criminal organizations. The KYC process helps avoid severe reputational and financial penalties imposed by regulators. Banking is an industry with inherent risk of financial frauds and money laundering so it is extremely important to perform background screening procedures on customers to mitigate fraudulent activities.

To create and run an effective KYC process in banks, these are the following elements that are required:  Customer Identification Program (CIP), Customer Due Diligence, and ongoing monitoring. The Customer Identification Program requires that financial institutions like banks take the appropriate steps to have the reasonable belief that all customers who enter a formal banking relationship with them are who they say they are. The CIP is also commonly referred to as the “know your customer program.” Customer Due Diligence information includes facts about a customer that enable an organization to assess the extent to which the customer exposes the institution to a range of risks. These risks include terrorist financing and money laundering. The importance of KYC is a complex undertaking that involves the collection of documents which show proof of identity (government issued IDs), establishing and verifying customer identity, and screening the identity information against political exposure, sanction lists, criminal lists, and unreliable customers lists. A bank must understand a customer’s profile and how they will be using their accounts, assess the risks of the customer’s profile, and monitor the transactions performed by the customer and ensure they align with expected behavior. The importance of KYC in banks are numerous. The overall importance of KYC norms in banks helps establish trust in a customer profile, allows the bank to understand the nature of customer activities, and provides protection from fraud and losses. In addition to this, it also helps mitigate risk associated with money laundering and standardizes the onboarding process making it easier to monitor customer behavior based on their risk profile.  The importance of KYC in banks is extremely important.

According to a Forbes article written by CEO of Jumio, Robert Prigge, regulators across the US, Europe, APAC, and the Middle East have levied nearly $26 billion in financial penalties against financial institutions for AML, KYC, and other violations over the past decade, which $24 billion was imposed in the US. In today’s heightened business and regulatory climate, organizations should not only be concerned with making profits, but also be able to correctly identify who they are doing business with. This means, verifying customers’ identities and meeting KYC and AML guidelines, which makes the importance of KYC so significant.

RPA for KYC

Comarch KYC is a Robotic Process Automation (RPA) software designed specifically for banks and other financial institutions. While KYC in AML is typically a repetitive process that is both labor intensive and prone to human error, Comarch’s KYC process in banks uses optimization by enhancing data collection and input. The system uses automatic processes to derive data from different sources, both external and internal, and instantly turns them into user-friendly reports ready for further analysis in compliance with regulatory requirements for KYC in AML. RPA in banking reduces the number of manual tasks and allows us to focus on what matters most: accurate and efficient customer risk evaluation.

Financial institutions have the difficult obligation to provide rigorous safeguards against illicit cash flows while also turning a profit. As the methods of criminals get increasingly sophisticated, banks must keep pace if they wish to continue meeting their obligations. KYC is a vital first line of defense and banks should be constantly working to bolster these defenses. Fortunately, they can look to modern software to help them improve their KYC efficiency while reducing costs. With modern systems in place, KYC will no longer be a tedious and expensive regulatory requirement but instead an efficient and effortless process as the importance of KYC banks is becoming more important than ever.

Sanah Hamad, Business Development Manager, Comarch