Tag Archives: Kyc verification

What Are the 3 Essential Steps in the KYC Verification Process for Effective Customer Compliance? 

mimo_logo_x1024_@
+91 1141182211
Field service management software | MIMOiQ

What Are the 3 Essential Steps in the KYC Verification Process for Effective Customer Compliance? 

In today’s increasingly regulated financial landscape, Know Your Customer (KYC) verification has become a cornerstone of compliance. Financial institutions, service providers, and businesses across various sectors are required to implement robust KYC procedures to prevent fraud, money laundering, and terrorist financing. Understanding the KYC verification process is crucial for ensuring that your organization meets regulatory requirements while safeguarding its operations. This blog will walk you through the essential three steps of KYC verification, helping you achieve effective customer compliance. 

Table of Contents

What is KYC Verification?

KYC verification, or Know Your Customer verification, refers to the process through which organizations verify the identity of their clients or customers. This process is a critical component of anti-money laundering (AML) and counter-terrorist financing (CTF) regulations. The primary objective of KYC verification is to prevent financial institutions and businesses from being used for illicit activities, ensuring that they only engage with legitimate clients. 

The KYC verification process involves collecting and validating customer information to confirm their identity, assessing their risk profile, and monitoring ongoing transactions. This helps comply with legal requirements and enhances the trust and integrity of financial systems. 

What Are the 3 Crucial Steps in the KYC Verification Process to Know Your Customer?

Step 1: Customer Identification

The first step in the KYC verification process is customer identification. This step involves collecting and verifying the identity information of a customer to ensure that they are who they claim to be. Here’s how it’s typically done: 

Collecting Basic Information: During the customer identification phase, businesses gather essential information from the customer. This typically includes full name, date of birth, address, and contact details. For individuals, this might involve collecting a government-issued ID such as a passport, driver’s license, or national identity card. For corporate clients, it could involve gathering details about the company, including registration documents and information about its directors and shareholders. 

Verification of Documents: Once the required documents are collected, they need to be verified for authenticity. This involves checking the validity of the ID documents against official records or using verification tools and services. Many organizations use document verification technologies, such as optical character recognition (OCR) and biometric scanning, to ensure the documents are genuine and have not been tampered with. 

Identity Proofing: Some businesses may also require additional steps for identity proofing. This can include video calls where customers present their ID documents in real-time or answering security questions to confirm their identity. The goal is to ensure that the person providing the information is indeed the person on the provided documents. 

Step 2: Customer Risk Assessment

Once customer identification is complete, the next step is to conduct a customer risk assessment. This step involves evaluating the risk associated with the customer based on their profile and activities. Here’s a detailed look at this phase: 

Risk Profiling: Risk profiling involves categorizing customers into different risk levels based on factors such as their geographic location, occupation, source of funds, and transaction patterns. For example, customers from high-risk jurisdictions or those engaged in high-value transactions might be categorized as high-risk clients. This helps businesses allocate appropriate resources to monitor and manage the risk associated with each customer. 

Due Diligence Checks: Conducting due diligence checks is essential to understand the customer’s background and to ensure that they are not involved in illegal activities. This can include checking the customer’s name against lists of known or suspected criminals, politically exposed persons (PEPs), and sanctions lists. Due diligence might also involve assessing the source of funds to ensure they are legitimate and not linked to money laundering or terrorist financing. 

Enhanced Due Diligence (EDD): For high-risk customers, enhanced due diligence (EDD) is required. This involves a more thorough investigation, including obtaining additional documentation, verifying the source of wealth, and closely monitoring their transactions. EDD measures are designed to mitigate the higher risk associated with these customers and ensure that their activities do not pose a threat to the financial institution. 

Step 3: Ongoing Monitoring

The final step in the KYC verification process is ongoing monitoring. KYC is not a one-time procedure but an ongoing process that requires regular updates and monitoring to ensure continued compliance and to detect any suspicious activity. Here’s how ongoing monitoring is typically carried out: 

Transaction Monitoring: Continuous monitoring of customer transactions is essential to identify any unusual or suspicious activities. Businesses use transaction monitoring systems to flag transactions that deviate from the customer’s normal behavior or that meet certain risk criteria. This helps in detecting potential money laundering or fraudulent activities early and taking appropriate action. 

Periodic Reviews: Regular reviews of customer profiles and KYC information are necessary to ensure that the information remains accurate and up to date. This involves reviewing the customer’s details periodically, updating records, and reassessing their risk profile based on their recent activities and any changes in their circumstances. 

Updating KYC Information: Customers must update their KYC information whenever there are changes in their personal details or business activities. This includes updating contact information, changes in ownership, or significant changes in transaction patterns. Businesses must have procedures in place to handle these updates promptly and ensure that the information is always current. 

Compliance with Regulatory Changes: The regulatory landscape for KYC is constantly evolving, and businesses must stay informed about any changes in regulations or requirements. This involves updating KYC policies and procedures to align with new regulatory guidelines and ensuring that the compliance measures are effectively implemented. 

Final Thoughts:

KYC verification is a critical process that helps businesses maintain regulatory compliance and protect against financial crime. By following the three essential steps of KYC verification—customer identification, customer risk assessment, and ongoing monitoring—organizations can ensure they are engaging with legitimate clients and mitigating potential risks. 

The KYC verification process not only helps in preventing fraud and illegal activities but also fosters trust and integrity in the financial system. As regulatory requirements continue to evolve, businesses must stay vigilant and adapt their KYC practices to meet new challenges and ensure continued compliance. Embracing a robust KYC verification process is not just about meeting legal obligations; it’s about building a secure and trustworthy foundation for business operations and customer relationships. 

How can MIMO be the right KYC solution provider for you?

By selecting a reputable KYC solution provider that aligns with your business needs, you can ensure a successful implementation and deliver a secure and seamless onboarding experience for your customers. 

MIMO provides a sophisticated KYC solution that digitizes customer onboarding journeys with contact point verification (CPV), data verification services, and geo-tracking capabilities, increasing the speed, scale, and security of your customer onboarding process. Utilizing MIMO’s KYC solution for customer onboarding facilitates the following benefits: 

  • Save up to 80% on operational expenditures. 
  • Minimize KYC turnaround times by up to 95%. 
  • A better and more secure customer experience. 
  • Efficient management of compliance requirements. 

Banks, NBFCs, MFIs, insurance, logistics, mobile wallets, and P2P marketplaces can employ KYC to improve the customer experience and detect identity and financial fraud before onboarding new customers. 

MIMO can ensure regulatory compliance and smooth integration of the system with current workflows, which can help create a better and more efficient customer verification process. This, in turn, improves the user experience, simplifies operations, and increases the company’s profitability and compliance framework. 

Like this article?

Share on facebook
Share on twitter
Share on linkedin

More To Explore

What are the KYC Procedures for Merchant Onboarding?

mimo_logo_x1024_@
+91 1141182211
KYC procedures for merchant onboarding

What are the KYC Procedures for Merchant Onboarding?

The merchant onboarding process is at the core of the payments industry, its effectiveness either enabling or inhibiting growth for businesses in this soon-to-be $2-trillion market. The global payments sector is rapidly evolving, with legislative changes, macroeconomic developments, and fintech’s push into the payments industry that is posing problems and opportunities. 

As payments companies negotiate the industry’s challenges, they are all affected by the digital change that is sweeping financial services. Customers and merchants have grown accustomed to faster, more convenient service, prompting payment providers to invest in digital infrastructure upgrades to gain speed and flexibility. Meanwhile, new businesses are emerging onto the market with unprecedented speed. 

When onboarding merchants, certain risks must be addressed, such as fraud, excess chargebacks, money laundering, tax evasion, and so on. Regulatory guidelines and applicable regulations compel us to take a number of preventive measures, including Know-Your-Customer (‘KYC’) and merchant due diligence procedures, in order to achieve this. As a result, we conduct a series of checks for merchants that begin before onboarding and last until the conclusion of their engagement with us. Financial service institutions or any other businesses who want to onboard merchants onto their platform can use the techniques described here to comply with guidelines and mitigate risk. 

Table of Contents

What is KYC?

When a client attempts to open an account or on board with a regulated financial institution, such as a bank, a private bank, or an investment company, KYC is conducted (e.g.: the KYC process you undertake when opening a bank account). An individual or a legal entity can be a client. The goal is to verify the client’s identity, address, and legitimacy through crucial document verification. When combined with due diligence and other mandatory tests, these allow us to identify possible fraudsters, and shell corporations and detect money laundering, among other things. Non-regulated enterprises, such as an online marketplace, are frequently required to conduct a full or partial KYC as a precaution. These enable us to secure ourselves and our end customers and the financial system as a whole. 

The Complete KYC Procedure

The KYC document check, also known as the Customer Due Diligence Check, is in the initial stage. Individual KYC and Business KYC are two types of KYC that can be used: 

Step 1: The KYC document check or CDD process

  • Individual KYC: We do a ‘KYC’ process, or CDD for an individual, when you are a merchant who is an individual (e.g., a sole proprietor). In general, we check your identity using an OVD check (identity documents such as Aadhaar, passports, driving licenses, and so on), individual PAN verification, and, if applicable, current address proof check (utility bills, etc.). We can also request additional documents to confirm your financial or company position, such as your business registration documents. 
  • Business KYC: When we are on-boarding a business partner, we perform a Business KYC procedure, also known as a CDD for a business. The OVD check is replaced by an ‘entity-proof’ check in this case. This, too, varies depending on the type of legal company you are. If you’re a company, for example, we’ll need to verify your certificate of incorporation, memorandum and articles of organization, and other documents. If you’re a trust or partnership, we’ll need your trust/partnership deed, registration certificates, and other documents. 

Step 2: Check for sanctions and PEPs on the sanction and PEP lists.

The names of our clients and their beneficial owners must then be checked against specified lists, such as national and international terrorism lists, or lists of “Politically Exposed Persons.” We must also notify the Financial Intelligence Unit of India (‘FIU-IND’) if a name appears on a sanctions list. We also check blacklists, greylists, and defaulter lists for firms, directors, and other individuals issued by banks, the Ministry of Corporate Affairs, the Securities and Exchange Board of India, the Enforcement Directorate, the Office of Foreign Assets Control (US), and others (for a detailed list please see Appendix II below). These checks help us combat terrorism and money laundering, as well as determine risk thresholds for individual clients. 

Step 3: Merchant screening and onboarding policies

Following that, we do a background and antecedent check in the form of an initial screening, for which we establish an internal merchant Onboarding Policy. The purpose of this step is to confirm the nature, purpose, and legitimacy of a potential client’s business. To determine business legitimacy, we conduct a variety of checks, including licensing/registration checks, credit checks, profit and loss statement checks, balance sheet reviews, and so on, based on information we obtain directly from the prospective client, as well as publicly available information such as the merchant’s websites, product listings, end-customer reviews, social media activity, and so on. We must additionally check for PCI-DSS compliance because it is mandated by law.  

Step 4: Merchant profiling and levels of diligence

Following these preliminary assessments, we must categorize merchants as low, medium, or high risk. Based on this, we determine the levels of due diligence and post-onboarding monitoring we do; for example, we need to conduct enhanced due diligence for PEPs but simpler due diligence for self-help organizations. We’re also barred from doing business with some industries (tobacco, hacking, gambling, weapons, and so on), while others are considered high-risk (pharmaceuticals, matrimony, gaming, security brokers, jewelry, and so on), necessitating more scrutiny and caution. 

Step 5: Continuous due diligence

Following onboarding, our due diligence procedures will continue to monitor any suspicious changes in merchant behavior. A change in the merchant’s website details, for example, or an unexpected display of high-risk products, could suggest fraud. These circumstances may necessitate a review of merchant risk profiles and due diligence levels. 

Step 6: Keep track of your transactions

We monitor merchant transactions as part of our onboarding process to look for any potential red flags, such as differences in expected transaction characteristics. Expected total transaction volume, average order value, chargeback frequency, and so forth are examples. For instance, if a merchant exceeds the maximum transaction limitations, exhibits a strange refund pattern, or receives frequent end-customer complaints, these are all red flags. Regulated entities must report any suspicious transactions (such as those that raise money laundering concerns) as well as transactions above specific thresholds (e.g., cash transactions over Rs.10 lakh, cross-border wire transfers surpassing Rs.5 lakh) to the FIU-IND. 

Step 7: Requirements for record-keeping and internal governance

Then, for at least 5 years, we preserve records of all merchant transactions and identity documents. These must be made available to the authorities upon request, such as in the case of an investigation. Internal governance demands such as dedicated internal committees, internal audits, periodic risk assessments, and proper employee training are also in place to ensure effective implementation of requirements. A Designated Director and a Principal Officer must also be selected, as they have specific reporting responsibilities under the PMLA. 

Step 8: Updates on a Regular Basis

Finally, both merchant risk profiles and KYC must be updated on a regular basis. It is required by law to update merchant KYC every 10 years for low risk, 8 years for medium risk, and 2 years for high risk. This is also aided by the continuous due diligence checks. 

Final thoughts:

Merchant onboarding is beset by the same age-old regulatory, trend, and competition issues that hamper the payments industry as a whole. Where once the industry dynamic was split between large retailer’s competitive margins and smaller merchant’s regulatory issues, the spectrum has now expanded to embrace the rising marketplace economy. Because everyone is a merchant in today’s environment, merchant onboarding volume, and transactional volume are both lucrative and hard. The marketplace economy has created a risk and regulatory gap, which is being navigated by a subset of creative payments organizations. 

Like this article?

Share on facebook
Share on twitter
Share on linkedin

More To Explore