One of the most crucial inquiries for both customers and businesses is “what is KYC verification?” KYC verification has become so important. If it is ignored, firms can be penalized. As identity fraud is rising, KYC help in smooth customer onboarding.
KYC verification: What is it?
Simply said, KYC verification is the procedure that a business uses to confirm the identification of clients in order to determine their reliability and authenticity. This is done as part of the company’s customer due diligence methodology. It evaluates the risks involved with conducting business with such customers.
Although KYC verification is largely utilized by banks, insurance companies, and companies in the finance sector. It has grown in importance and even become required for organizations in more traditional industries like eCommerce and gig economy platforms.
Why do KYC verifications exist?
The need to create a system that could track new money entering the economy gave rise to KYC. The source of the cash, the recipient, the persons involved, and other essential information based on the particulars of the circumstance are some crucial tracking facts. To safeguard the interests of the company’s stakeholders, the government can spot and limit illegal activity by keeping an eye on them.
Know Your Customer (KYC) procedures have been in use since the 1990s, to be exact. However, given the increase in terrorist attacks, identity theft, and other cyber-related crimes, they have gotten stricter nowadays.
Even as a business owner, you may quickly recognize your clientele and decide what to do next based on the outcome. Businesses can, for instance, spot criminals or people with a history of money laundering or who are currently on the anti-money laundering watch list. Additionally, they are able to recognize Politically Exposed Persons (PEP) and take appropriate action in accordance with their findings. You wouldn’t want to conduct business with a wanted money launderer if you were a business owner, right?
A crucial component of the Customer Identification Program is now this procedure (CIP).
Why KYC? How important KYC is?
The main goal of KYC is to stop financial institutions from being used as tools for potential terrorist and money laundering schemes. To better control the risks involved with conducting transactions, it also aids banks and other financial institutions in identifying, evaluating, and understanding their clients.
The following are some of the most prevalent justifications for requiring KYC verification in today’s business world:
One important issue KYC addresses are identity theft or fraud. In the past, thieves could simply use a false name and address to conduct business with financial institutions because there were no sophisticated mechanisms in place. However, when technology for complete background checks evolved. Thieves were forced to become more intelligent and utilize well-planned identity masks to evade checks.
But KYC nowadays is a comprehensive combination of both physical and digital identity proofing. It aids financial institutions in spotting identity theft at a distance. It makes sure identities can’t be readily stolen or used fraudulently.
With KYC, businesses can quickly verify clients’ identities to assess risks and stop phony accounts from being opened.
Another significant method utilized by criminal activity to carry out its deeds is money laundering. Essentially, the phrase alludes to the illicit transfer of funds. This covers drug use, racketeering, human trafficking, and other offenses. To avoid raising suspicion, criminal organizations split their bank savings evenly among several phony accounts. The funds are subsequently illegally transferred to local or offshore accounts for money laundering.
Money spent to buy gold, jewelry, and artwork that has been stolen is a prime illustration of this. These things could legally be exchanged for money by being sold.
Financing of Terrorism:
After the 9/11 attack in which terrorists destroyed the twin towers in America, the US and other governments across the world began to focus heavily on terrorism financing. Closing down terrorist financing was one of the main strategies used to combat terrorist acts. Individuals in the nation have been linked to funding a large number of terrorist attacks.
Similar to 9/11, it was later found that specific people and organizations were using money made in the US to finance crime. In essence, the funds were produced by local businesses and then transferred to terrorists’ front accounts. The government was able to locate these accounts and their owners thanks to KYC, which also allowed it to halt any later money-laundering actions.
Another behavior that KYC has significantly reduced is financial fraud. Basically, it refers to financial deception that goes beyond money laundering and financing terrorism. For instance, before KYC was properly implemented. Offenders were accustomed to creating dummy accounts using phony IDs to engage in illegal operations. Such a person could request a loan using the fictitious account and get it. And then steal the money while permanently docile the account.
Although it began primarily with banks and other financial organizations, many companies in other industries now utilize it. This is particularly true for online enterprises. Generally speaking, businesses develop their KYC procedures using one of the following methods.
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