KYC is a process of verifying customers to prevent fraud. It is mainly used by companies and businesses, especially financial institutions. This particular process is designed to combat illegal thefts like money laundering and terrorist financing. Besides, customers are verified by collecting information like date of birth, address, bills, ID numbers, and more. The customers are also verified by using their personal and professional data. This data is used to verify whether the new customer is involved in any illegal activity or not because it will affect the reputation of the company and will lead to destruction. Its purpose is to ensure compliance, build trust, avert fraud, and protect the company’s reputation.
What are the Four Pillars of KYC?
Companies used pillars of KYC to strengthen the entire process. These pillars are being used by the companies to ensure safety and prevent frauds like money laundering and many other illegal thefts.
Customer Identification Program CIP
This step requires fundamental information about the customer such as names, addresses, bills, ID cards, and more. Before the opening of an account, a customer is fully and carefully evaluated to mitigate potential risk. The customer is asked to provide proof of whether he is the one who he claims to be.
Customer Due Diligence (CDD)
It is the second KYC pillar. it involves the recognition of customers based on their source of income, profession, and record of financial transactions. This will help businesses to know more about their customers to avoid high-risk individuals.
Enhanced Due Diligence (EDD)
This step involves the verification of new customers by knowing about their ties and relationships with the companies having bad reputations. This due diligence process assesses the customers based on their terms with other companies and verifies whether they are involved in any criminal theft.
Ongoing Monitoring
After verifying the customer and opening an account, the company and businesses keep a check on new customers regularly. This will help them to observe the transactions of the customers, and the other activities. By doing this, the companies will get notified of the risks timely.
Challenges and Limitations
These pillars are effective in making informed decisions about the customer because they will help prevent fraud and maintain the reliability of the businesses. Despite the convenience of the process, it still faces some challenges. Over time, the technology and the process will develop and will be incorporated with some enhanced features to give more accurate results.
There is a risk of getting fake documents and information from the customers. The customer might provide data that doesn’t belong to him and deep down the customer is a fraudster, and has the intention to harm the other business. Such customers can provide fake information containing a good reputation.
Moreover, some customers are at high risk, which can cause severe harm to businesses. Such individuals can be politically exposed, involved with the high-risk country, and those who make unusual transactions. Fraudsters make unusual transactions of large amounts that indicate that there is something wrong with the particular customer.
Furthermore, businesses’ compliance with the rules and regulations of KYC is essential. It is necessary to ensure that not only the customers but the businesses should also put their efforts into making. The whole process smooth and guide the customers to the best of their knowledge. Besides, the implementation of the entire process can be expensive for businesses. It requires the cost of advanced technology, companies also sometimes need to hire fraud prevention experts to cater to the problems, and training cost is required to provide a better understanding of the process to all the customers.
Conclusion
All four pillars are necessary for businesses and financial institutions to proceed with safe onboarding. Risk assessment is necessary to understand the intensity of the fraud and allow companies to make better strategies to combat those. Besides, continuous monitoring is crucial for observing the activities and performance of the customers at regular intervals. This will help the organization to address potential risks before time. The pillars contain a comprehensive strategy from understanding the risk and the customer to resolving it before causing harm to the reputation of the company. Thus, KYC is highly encouraged for companies to combat and mitigate risks proficiently.
