KYC Compliance for 2021: The Complete Guide

Banking has gone digital, each and every banking service can be accessed anywhere and anytime by customers with internet connectivity and a smartphone. As convenient digital banking has made things for customers, it comes with its fair share of setbacks. One of the biggest problems that digital banking has brought along is financial fraud. Financial fraud can be of multiple types including debit and credit card fraud, ACH fraud, and money laundering. KYC compliance is an extremely important factor of any compliance process which can reduce the likelihood of financial fraud. 

One form of financial fraud usually takes place when someone harms an individual’s financial health via identity theft. A more common form of fraud is when fraudsters gain access and exploit financial institution’s weak systems. This is why financial institutions use KYC compliance to avoid getting tricked by fraudsters. This is also known as CDD (Customer Due Diligence) checks. In this guide, we have compiled a KYC compliance checklist to follow in 2021.

What Is KYC?

KYC or Know Your Customer is the process of verifying customer identities using a set of documents. This verification process is vital to ensure that financial institutions aren’t tricked by those who steal identities, do money laundering, and funding of criminal organizations. KYC makes sure that the organizations are compliant and that customers with a lot of red flags aren’t allowed access to financial institutions’ systems. All financial institutions or banks don’t need to use identity verification as a part of KYC compliance.

What is KYC Compliance?

A KYC verification is done by a bank’s system or by using a third-party verification system. KYC is necessary for a customer whenever they try to open a new account. To make sure the account opening process goes smoothly, customers must verify themselves by using an identity verification process. 

This process requires the customers to go through an identity verification process, the process checks the customer’s background and financial background. This whole process of identity verification identifies if a customer can pose risk to banks and institutions. 

How Does Proper KYC Compliance Help In Protecting Financial Institutions?

The biggest type of financial fraud is identity theft. A lot of people get away with committing financial fraud using false identities and false backgrounds. This is where strong KYC compliance comes in place and mitigates the risk of financial fraud. In most of the KYC compliances, customers are asked to submit authentic government-issued ID documents such as passports, UID, driver’s license, most recent utility bills, or insurance plan information. 

These documents are needed to check if a person is actually who he/she claims she is and they also help banks and other financial institutions calculate a customer’s financial situation and if they can be a risk to an organization. KYC compliance programs make sure that banks and financial institutions are aware of their customer’s risk profiles and a process that segments suspicious or risk transactions. 

KYC Compliance Checklist 2021

These verification documents help customers build a strong proper customer identity and the verification process can help in ruling out the fake ID and other documents. Every bank and financial institution follows strong customer verification processes, some of the procedures require identity verification while some require physical submission. However, the essential documentation required according to the 2021 KYC compliance are:

  • Proof of Identity
    • A UID/passport, driver’s license, or voter’s ID card. 
    • A current ID card issued by the state.
    • Any valid Debit or Credit card issued by a bank.
  • Proof of Address
    • A recent copy of utility bills such as electric bills with a verifiable address.
    • Visa/Driver’s license with a digital picture.
    • A copy of a registered sale agreement or lease for residence. 

Types of KYC Verification

To make customer processes easier and more user-friendly, there are mainly two types of KYC verification that a lot of banks and financial institutions follow: online or eKYC submission.

The first and main type of KYC verification relies on online identity verification where the customer provides necessary documents online for verification. This is the fastest and most seamless type of document submission. To verify documents, technologies use OCR (Optical Character Recognition) that banks and financial institutions use to verify document data. 

  • In-Person Submission

The KYC verification process happens whenever a customer submits their identification documents to banks and other institutions in person. A copy of all document types is needed to match a person’s identity to the documents. Some banks and financial institutions also require document submission through video KYC.

  • eKYC Submission

eKYC or online KYC process utilizes online documents for the fulfillment of the compliance. While it saves some time, it leads to an enhanced rate of fraud. The switch to digitization and the need for fast and seamless operations gave rise to the eKYC process. eKYC is a remote, paperless process that minimizes costs and reduces the time taken for completion.

3 Fundamentals of KYC Compliance Process

For successful KYC compliance, the process of KYC compliance is based on three major steps. Depending on the risk level of a customer, there can be changes made in the screening process. While almost all the basic KYC compliance will work well enough for all kinds of customers. This is also true with ongoing monitoring which is used for customers who are at a higher risk of hurting the banks or for people who are on Politically Exposed Persons (PEP). 

1. CIP (Customer Identification Program)

The first step in completing a KYC compliance is to identify a customer and their financial background. Ever since the latest KYC compliance changes, a CIP is made mandatory for all banks and financial institutions to follow. This program helps financial institutions to identify their customers and also helps in monitoring their financial activities of the next steps in KYC compliance. 

While it is mandatory by FATF to conduct a CIP, it is up to banks and financial institutions to determine the level of verification. Here are the most common things that are mandatory for a bank to ask from their customers:

  • Customer name
  • Date of Birth
  • A UID
  • Copy of utility bills

To make sure the CIP process is successful, the banks have to examine these documents thoroughly. Similar information is required by the banks to conduct an AML procedure.

2. Customer Due Diligence Checks

The toughest part of the KYC process for banks is to determine the reliability of their customers. Banks need to decide if they can or cannot trust a customer. Customer Due Diligence (CDD) checks to help the banks and financial institutions determine if they are dealing with fraudsters. CDD contains three different levels:

  • SDD: Standard Due Diligence is the primary information required by customers that usually indicates any kind of risk. If a customer has a low-risk index and won’t cause financial loss to institutions in the future, then a full CDD process is needed. 
  • CDD: Customer Due Diligence is necessary information that all customers have to submit to go through a financial activity examination, this helps in determining any further risks related to customers.
  • EDD: Enhanced Due Diligence is extra information that a bank has to verify. This information isn’t compulsory but it depends if an organization wants to conduct EDD or not. Conducting EDD may help provide a deeper insight into a customer’s financial activities.

3. Continuous Customer Monitoring

Once all the steps of KYC compliance are done, banks need to stay vigilant until the day the customer is associated with them. Any institution has to keep checking for suspicious transactions and red flags to reduce the risk of fraud as much as possible. This continuous screening allows the banks to keep an eye on certain customer’s transactions. 

Every bank and institution has to follow a different program of continuous monitoring, how the red flags to look out for remain the same:

  • Elevation in transactions.
  • Frequent offshore or out of region transactions. 
  • Any transactions made to an account by an unidentified party.

Changes in Financial Industry after KYC Compliance

KYC is a significant tool to fight against financial crime, identity theft, and other sorts of fraud. The financial industry has to follow the international regulation enforced by FATF (Financial Action Task Force) and strong directives like AML 4 and 5 for the reduction of fraud. 

KYC procedures that are defined by banks need to ensure that their customers are real, and do not pose any financial risk. Banks and every organization that comes under the financial industry must comply with KYC regulations to limit fraud. Non-compliance can lead to high penalties and even higher losses due to fraud. 

According to data published by the National Crime Victimization Survey, 10% of US citizens suffered from identity theft fraud in 2016. That number has been on the rise ever since. In 2020, the fraud percentage grew at an alarming pace of 45%. Over 150,000 people were victims of identity theft in the US alone. 

The reason for the growing rate of fraud is the lack of proper enforcement of KYC regulations and other improper technologies for ID and document verification. DIRO’s online document verification technology offers real-time verification of customer documents. DIRO reduces the use of forged and stolen documents as it captures document data directly from the original source. 

KYC Compliance for Mitigating Fraud

Just verifying a customer at the beginning of a customer relationship isn’t enough to mitigate fraud. Continuous monitoring of customers you’re in relation to help in reducing the rate of fraud. 

Detecting red flags like anomalies, unusual transaction flows, sudden international payments, and transactions with accounts previously associated with money laundering or other kinds of fraud. Ongoing KYC and AML screening should be applied to reduce the flow of financial crime.

DIRO’s Role in KYC Compliance and Fraud Reduction

DIRO’s solution eliminates friction during customer onboarding and creates 100% verifiable documents that suit the regulatory requirements. This online document technology can also assist in:

  • Streamline the KYC onboarding process instantly to reduce the time taken during the approval of customers.
  • Prevents the use of doctored and stolen documents with multi-factor authentication and strong impersonation checks during onboarding. 
  • Verifies online documents globally to improve international customer onboarding. 

DIRO can provide 100% proof of authentication on documents like bank statements, bank account information, proof of address, utility bill data, incorporation documents, insurance documents, tax returns and so much more. DIRO verifies customer documents in real-time with access to thousands of original web sources.

Final Take: KYC Compliance Checklist

As almost all the banks and financial institutions shift to digital banking services, it has become easier for hackers to get into the digital banking service. Because of that, financial specialists feel the need to use new procedures to reduce the risk of fraud. A KYC process helps in protecting a bank’s services from getting misused and also protects customer’s financial information from fraudsters. While each organization is different, KYC compliance is needed for a frictionless onboarding process.