How Identity Verification Supports KYC Compliance

Introduction

We have been thrust into a technological revolution since the beginning of the century, and the Covid-19 epidemic served to demonstrate to the world that digitization will continue at an exponential rate. Our remote capabilities increased throughout the Covid period, and because of its effectiveness, most of it is still in use today despite the epidemic. Know Your Customer KYC procedures have improved to the point that they are now nearly fully paperless and virtual for anything from establishing a bank account to making an appointment with a doctor. 

While digitization has increased efficiency in routine personal and professional duties, we have also observed new technology being used for illegal purposes. As hackers use more sophisticated techniques to get beyond enterprise security measures, new technology and online processes are immediately vulnerable to attack. 

The global fraud rate increased from 2021 to 2022 by 18%, while 2022 also had the largest growth in ID document forging, up 24% from 2021’s 18%. Passports took the top spot among all forged ID documents, making up about 40% of all reported cases. It is thought that this is because biometric fraud is challenging because of sophisticated features like liveness detection, which leads criminals to concentrate their efforts on document fraud because it is simpler.

With the broad use of digital KYC, more sectors riding the digitalisation trend are vulnerable to a larger range of cyber risks and fraud, making strong Know Your Customer verification crucial for maximum protection.

An organisation may unintentionally be assisting money laundering, which is frequently linked to terrorist funding, drug trafficking, tax evasion, smuggling, and a variety of other illicit activities, if a criminal is able to get over KYC due diligence measures. An organisation is put in danger since both global and local non-compliance may result in financial loss and reputational harm owing to severe fines. KYC is a compliance requirement that all businesses are required to fulfil in addition to being a verification process.

What is KYC?

‘Know Your Customer’ is shortened to KYC in layman’s terms. 

The actual KYC verification procedure is a little trickier. It verifies clients’ identities and confirms their validity, essentially asking, “Are you who you say you are?” Are you secure to deal with as a client? 

To ensure the prevention of fraud and other financial crimes, it is an essential step in the customer due diligence process. A gap or fault would have disastrous effects on the monetary environment if it were exploited since it also serves a crucial function in maintaining the integrity of the larger global financial system. 

Know Your Customer, or KYC, refers to a set of standards for precisely confirming consumers’ identities. The KYC verification procedure aids in preventing fraud and identity theft. 

AML (anti-money laundering) rules, which seek to prevent financial fraud and money laundering as well as financial institutions from engaging in potentially illegal commercial dealings with terrorists, also apply to KYC.

Although KYC compliance is necessary across all industries, financial institutions and internet firms are the most affected. Identity verification is one of the essential elements of KYC. Organisations can use KYC verification to make sure the person or entity they are doing business with is who they claim to be. 

What is KYC verification?

KYC verification seeks to confirm that a customer is who they say they are. This attempts to safeguard both financial institutions and clients by combating money laundering and terrorist funding as well as identity theft and fraud. The procedure of identifying and validating a potential customer’s identification during onboarding is known as KYC verification and is occasionally referred to as the KYC check. 

The Financial Crimes Enforcement Network (FinCEN) of the United States has detailed a set of rules called KYC. For enterprises like financial institutions and many others, it is a prerequisite. The following are typical KYC process components:

• Customer acceptance policy (CAP)
• Customer identification procedure (CIP)
• tracking transactions
• management of risk

The CAP outlines the rules necessary to accept a customer and establish a commercial connection with them under KYC. This include figuring out their risk tolerance, looking at financial transactions, and describing the requirements for eligibility and the paperwork the client must submit during onboarding.

Verifying Know Your Customer mostly falls under the CIP part of KYC. It is a minimum need to gather the following data in order to validate a customer:

• Name
• Birthdate
• Residence
• Identification number

Public utility bills and government-issued IDs like a driver’s licence or passport may be used for KYC verification. Biometrics and facial verification are two other techniques for confirming someone’s identification. 

Comparing the data the client gives during onboarding with public databases, consumer reporting organisations, and watchlists are other techniques that may be used. 

The organization’s risk profile and risk management guidelines dictate the precise Know Your Customer verification procedures. Organisations must do their best efforts to guarantee that client identities are correctly authenticated, and verification procedures must be fair. 

Who makes use of KYC validation?

Any institution that must comply with KYC regulations must utilise KYC verification. Both financial and non-financial entities as well as internet enterprises may fall under this category. 

In the end, a company uses KYC verification to confirm the legitimacy of its clients. KYC verification is used by banks, Fortune 500 financial institutions, credit unions, credit card businesses, fintech, real estate, and insurance corporations. 

In order to continuously make sure that the customer is in control of their account and that no fraud or identity theft has taken place, Know Your Customer verification is done both during a customer’s first interaction with an entity — when they are opening an account or requesting services, for example — and also throughout the business relationship. This is accomplished by tracking and continuously monitoring money transactions. 

To assist safeguard both the consumer and the company, anything that seems suspect is immediately recognised and reported.

Benefits of KYC verification

You may use KYC verification to make sure that the customer you are conducting business with is indeed who they say they are. By doing this, you may prevent your company from forming potentially harmful economic links with criminal elements. 

Before admitting new clients and companies, Know Your Customer conducts a thorough risk analysis, which can assist to reduce possible losses or problems with particularly dangerous businesses. By providing information into financial transactions and the kinds of services needed, KYC may also assist you in building stronger relationships with your customers.

Verifying your customer’s identity can assist stop the following:

Identity theft

In order to complete KYC verification, a person must present identification documentation. It requires reasonable measures to be taken to confirm that the customer is who they claim to be. Threat actors may find it more difficult to create fake accounts using stolen credentials or falsified papers as a result.

By using KYC best practises and KYC verification, you can stop bogus accounts from being opened, confirm your clients’ identities, and make sure that only the right entities may use your services. 

Financial fraud

Since the epidemic started, it has climbed by over 50%. On average, it loses businesses 5% of their yearly income. Furthermore, financial services companies in the US incur a $4 loss for every $1 in fraud.

Organisations are severely hampered by financial fraud. By preventing criminal actors from creating phoney accounts or impersonating legitimate customers using stolen credentials or IDs, KYC verification can help stop fraud. 

Money laundering is the process of converting funds gained via unlawful or criminal means into legitimate financial worth. This is frequently done via fictitious accounts that criminals can create to “launder” money obtained from the unlawful selling of drugs, smuggling, human trafficking, or other illegal activities.

It is more difficult for fraudsters to create these false accounts when Know Your Customer verification is used. Additionally, KYC keeps track of accounts and transactions, alerting users if any questionable behaviour is spotted. 

Terrorist financing

To finance their activities, terrorists frequently turn to several US accounts and institutions. Following 9/11, efforts have been undertaken to pinpoint and connect the identities and stories of alleged terrorists.

By checking account applicants’ names against a watchlist as part of KYC verification, it is possible to prevent alleged terrorists from accessing these financial services. In order to prevent the money from changing hands, government authorities can use KYC to track money that is earned and moved but may also be used to support terrorist activities.

Real-world examples of KYC verification

The first time a consumer and an organisation contact, Know Your consumer verification is carried out. In order to do this, the company will need the consumer to provide identification documentation. This procedure might appear as follows:

The client will complete a form with their contact details, including name, birthdate, address, and ID number.

The consumer will next need to upload the necessary identification papers, such an ID card issued by the government, for example. Additionally, proof of address documentation is required, which may take the form of a utility bill copy.

Data from the ID document is retrieved, analysed, and verified—often with the use of machine learning and artificial intelligence (AI) technology.

The company can compare the customer’s identify in both public and private records using information from the information they gave.

It is also possible to utilise biometrics and/or face recognition to further confirm a customer’s identification and compare it to their ID. 

Before granting clients access to their services, a wide range of organisations and organisations utilise KYC verification to confirm their identity. For instance, the following organisations demand KYC verification:

• Banks
• Unions of credit
• Online lenders and investment companies
• Mortgage institutions
• insurance companies
• health care providers
• Travel agencies
• Casinos and online gaming
• telecom providers

Best practices for KYC verification policies & procedures

The CIP is frequently the initial step in KYC verification. Due diligence on the part of the client is a component of best practises for the CIP process. 

Most clients are subjected to basic customer due diligence (CDD), which confirms the customer’s identification and evaluates the risk of conducting business with them. Customers with higher levels of risk may require the use of enhanced due diligence (EDD), which involves a closer examination of the client and their records to determine their risk tolerance. 

Beneficial owners, or individuals who own at least a 25% equity stake in the firm requesting access, will also need to have their information identified and verified as part of the due diligence process. This proportion of ownership for IDs requiring verification reduces to 10% for clients with higher AML risk thresholds. 

EDD is more thorough and frequently requires clearance from high management. Financial institutions will also need to keep track of the data gathered throughout the due diligence process.

A CIAM (client identification and access management) system, which may be frictionless for the customer and support KYC compliance for the organisation, is frequently used to enable KYC verification. The use of third-party services and solutions, such as those offered by IDcentral, can aid in effectively confirming consumers’ identities while upholding KYC compliance.

Types of identity verification

Document-based verification, which entails a detailed study of customer-provided papers to confirm identity and address information, is the most fundamental and prevalent type of identity verification. This often refers to at least one type of official identification. To authenticate IDs, more than one document is typically needed. 

Customers frequently need to be onboarded digitally because so much of the world is now online, and digital identity verification is essential. For instance, it is anticipated that 65.3 percent of Americans would use digital banking in 2022. This will demand for extra identity verification procedures, such as those that go beyond simply looking at the documents themselves. Documents can be submitted and checked using sophisticated technical methods, such as employing OCR technology, which combines machine learning and AI technology. This method is sometimes referred to as eKYC.

The following are additional methods of identity verification:

• Video verification is another method that may be used to confirm someone’s identification. It makes use of a live, one-on-one video chat between a client and a compliance expert. This can replace a face-to-face meeting.
• A person may be requested to snap a selfie while carrying some kind of identification, most frequently an ID card, and the face may subsequently be recognised using biometric authentication techniques. 
• By utilising technologies that can determine whether the person on the screen is genuinely there in real time, liveness detection can further reduce identity theft and face spoofing.
• Biometrics: Additional biometric devices and methods can be used to confirm an individual’s identification. This includes matching iris and fingerprint patterns.
• Behavioural biometrics: By utilising a variety of cutting-edge technologies, including machine learning and AI, behavioural biometrics can assist in further confirming a user’s identification by identifying certain usage patterns. This may involve the user’s finger placement on a screen, the way they hold their phone, or the location from which they sign in.

How to verify businesses with KYC verification

Trusts, LLPs, and PLCs are all examples of business entities to whom the CIP component of KYC also applies. It serves more than simply one person. 

You must confirm that a business genuinely exists and isn’t a front for a criminal activity in order to validate it using KYC verification. Documents like the following should be examined:

• A business permit issued by the government
• Constitutional documents
• Trust contracts
• Deed of partnership

To electronically validate a business during onboarding, you can search online business registrations for company records. 

Along with the business itself, KYC verification must also confirm the identities of the business’s vested owners. If the company is approved as a customer, each of these owners will become client of the bank or other financial institution.

Anyone who owns, manages, or makes money through a corporation is obliged to provide identification to the bank when opening a business account. Employees, stockholders, and board members can all be included in this. A bank will want copies of picture identification, passports, and Social Security numbers (SSNs) for each of these individuals during the KYC verification of a firm.

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