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Know Your Customer Laws – What You Need to Know

When establishing or expanding a business or company, the regulations and laws surrounding it can be daunting and overwhelming. One area you really need to understand is that of know your customer laws (KYC).

As your business develops and your customer base multiplies, so do the regulatory requirements that monitor them. As such, it’s important to have the insight you need to manage risks and keep the teams within your company focused on the growth of your business.

The History of KYC

The know your customer or know your client, laws within the field of financial services date back to 2001 in the USA, as part of the riot act established in the aftermath of the 9/11 disaster.

Before that time, the KYC regulations had the goal of preventing the laundering of money, but the terrorist attack in 2001 changed that forever. The increase in online scams and frauds increases the operation, legal and reputational risks that a company is exposed to. As a result, the KYC regulations were developed with the aim of avoiding fraud and the practices of money laundering.

Furthermore, in recent years, the governing bodies in the US and abroad have intensified their efforts in modernizing and enforcing money laundering and terrorism financing regulations. To reflect these efforts, the Financial Crimes Enforcement Network of the US proposed further KYC requirements in 2014 to meet the risks of the modern age.

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The KYC regulations were proposed as a wider-reaching regulation that establishes the four key elements of a customer due diligence program. These four elements are as follows:

  • Identify and verify the identity of the customer.
  • Identify and verify the identity of the owners of customers that are registered as legal entities.
  • Understand the nature and purpose of the relationship with the customer.
  • Conduct regular monitoring of customer information so as to update their details and identify any suspicious transactions.

What Does it Mean to Know Your Customer?

KYC processes are there to ensure that customers are legitimate. They do this by verifying their identity and creating a relevant risk assessment. It is a crucial component of customer due diligence procedures and helps to prevent financial crimes and other fraud.

It tells you more about the customer that you are dealing with and protects you against damages to the company that would arise if a break into the system were to occur. The regulations involved in making a company KYC Compliant are becoming stricter and stricter every day as attacks evolve and grow in both intelligence and destruction. Therefore, it’s essential to stay ahead of the game and always be on the lookout for weaknesses and never allow the guard of the company to drop.

KYC in Cryptocurrency

Cryptocurrency is a revolution taking the world by storm and it also opens up a whole new opportunity for criminals to attack. It can be a means to further their illegal activities and as a vessel in which to launder money.

As this threat increases, regulatory boards are looking for ways to improve and impose restrictions and standards on the cryptocurrency markets. Additionally, although this is not yet a legal requirement, many platforms have begun implementing various safety precautions to protect their business. Early in 2021 it was proposed that those who participate in cryptocurrency and digital asset marking submit, maintain and verify the identities of their customers.

This proposal would cause certain cryptocurrencies to be classified as monetary instruments thereby subjecting them to the requirements already mandatory as part of KYC compliance.

Benefits of KYC Processes

There are various important benefits that come from implementing KYC processes.

  • It protects sensitive information about the customer from getting into the wrong hands. It simultaneously protects the company from the reputational and legal damages that would arise from a breach of the data.
  • It has the main goal of preventing financial crimes like money laundering, tax evasion, corruption, and terrorist financing.
  • It keeps the interest of the investors safe.

Often, you can find a software solution that will automate the KYC processes for you. The numerous benefits of this include:

  • It saves time, money, and mistakes.
  • It helps a company to remain compliant with the ever-changing and updating regulations of KYC laws.
  • It can assist in verifying customers regardless of their geographical location.
  • It allows for a smoother and faster customer onboarding process.

Problems with KYC Policies

On the other hand, there are downsides and criticism of the KYC laws to be considered:

  • It can be a heavy financial burden on businesses, especially smaller businesses.
  • Customers might things the verification process is too intrusive and time consuming, and as a result may choose not to enter into a business relationship with the company.
  • Those who live a nomadic life and travel a lot, for example, digital nomads or retired people, won’t have the paperwork and documentation needed to prove their

address and identity.

KYC and Technology

Technology is assisting and advancing every field of business and the area of KYC laws is no exception. As mentioned, a KLC software solution automates the various processes to make customer due diligence that much easier.

In addition, electronic KYC (e-KYC) is becoming more and more popular as a method of authenticating customers and users. This technology can be used to verify legal documents like passports. Video verification is also on the increase as it uses a live video with a compliance specialist to verify the customers identity. This option reduces the high costs involved in physically visiting the customer. Every day, most people use facial recognition, and this is being made use of by financial institutions for fraud prevention.

Similarly, liveness detection uses the camera to determine whether the face in front of the camera belongs to the correct person to prevent identity theft. It uses the analysis of micro-expression and 3-D depth perception to fight against face spoof attacks.

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