KYC (Know your Customer): Definition and procedure

KYC (Know your Customer): Definition

KYC (= Know your Customer) and KYB (= Know your Business) form the basis of customer enrolment for any payment service, whether it’s for individuals or businesses. This is the process of verifying the identity of an individual or a company’s constituent parts (legal representatives, articles of association, etc.), and assessing the risks inherent in providing payment services. The purpose of this audit is to ensure compliance with AML (Anti-Money Laundering) laws, which punish crimes, fraud and financial offenses such as corruption and the financing of terrorism.

KYC (Know your Customer) : Procedure

First and foremost, you need to verify your customer’s identity. In general, they provide identification such as an identity card, passport or driver’s license, depending on the country, as well as an invoice showing their home address. You’ll get his surname, first name, date of birth, photo and address. Once you have these elements, you need to be able to prove that the person providing the information is actually the one subscribing to the service. When this stage is carried out in a physical situation (at a counter, for example), it is the person in charge of collecting the elements who has to approve that the person in front of him or her is indeed the person indicated on the documents. When subscribing online, digital biometric verification, for example with a selfie of the individual’s face, is essential. This procedure, known as “eKYC”, has a number of advantages specific to the digitalisation of this type of procedure (reporting, evolution, speed, costs, etc.). Your procedure for verifying the data and documents supplied must be strict and extremely secure, as this is the 1st stage of verification. Indeed, if the information provided is false, or if the individual supplying the information is not who he or she claims to be, this will constitute a 1st flaw in your procedure. Note that the storage and processing of all this information is subject to the GDPR, which aims to protect personal data. You will therefore need to comply with the procedures imposed by this European regulation, while respecting your KYC procedure.

Once the information has been validated, your role will be to verify it. The aim is to identify whether the individual is at risk or not. You’ll need to ensure that your company doesn’t provide payment services to criminals, terrorists or politically exposed persons (PEPs). Depending on the level of potential risk of fraud, embezzlement or money laundering, an investigation may be launched to request further information with regard to legislation in your country.

It’s one thing to check your customer’s reliability once. It’s another thing to check it continuously, at a regularity set by you. We call it “On Going AML”. Depending on your customer’s business and your risk assessment strategy, you may need to set up alerts based on “suspicious” elements such as people on sanctions lists, unusual cross-border activities or activities in high-risk areas, unfavorable mentions in the media, or sudden, abnormal activities.

Today, with the emergence of Fintechs, KYC requests have also exploded, and many companies are offering these outsourced services. Before contracting with one of them, make sure that its procedure is compliant, secure and detailed, and that it gives you access to a result in line with your risk strategy. Don’t forget to ask the KYC cost by integrating On Going AML, and validate GDPR compliance.