What Is KYC Compliance? A Complete Guide for Easier Implementation

Trustly

Financial crimes are getting more sophisticated — and common. According to a 2023 survey of 400 senior executives, 69% believe that these fraudulent activities will increase in the next 12 months. Additionally, one-third are actually anticipating getting victimized by cybersecurity and data breaches at some point.

As these figures become the new reality for businesses, banks, credit unions, and companies are under pressure to keep up with ever-stricter cybersecurity measures and anti-fraud laws, including Know Your Customer (KYC) compliance. As part of the overarching anti-money laundering (AML) compliance, the main goal of KYC regulations is to ensure that companies are not servicing criminals, identity thieves, and scammers.

In this article, we’ll look into:

What KYC compliance is
The factors that drive KYC compliance
The benefits and challenges of KYC compliance
How KYC compliance is implemented
Strategies for effective KYC compliance

What Is KYC Compliance?

KYC compliance requires companies to establish a customer identity verification program to combat rising financial crimes, such as money laundering and terrorism financing. Businesses are mandated to conduct comprehensive KYC verification during the customer onboarding process and across their existing client base to ensure that:

(1) the clients are the real owners of their accounts, and

(2) they’re not using these accounts for fraudulent activities, including phishing scams and identity theft.

This process involves three key components:

Identity verification: Businesses collect and verify customer information by obtaining government-issued identity documents (e.g., a Social Security card or driver’s license) containing the legal name, proof of address, and date of birth. Document verification methods can range from manual checks to advanced biometric authentication (e.g., a liveness check through facial recognition technology).
Risk assessment: The next step is assessing customer risk profiles, including financial behavior and business activities. Due diligence measures are implemented to understand the risk level, such as politically exposed persons (PEPs) or those operating in high-risk industries and jurisdictions.
Continuous monitoring: Compliance goes beyond the initial onboarding and into day-to-day financial transactions to detect suspicious activities. This ongoing process ensures that businesses can quickly respond to red flags, which is part of KYC regulations.

What Factors Drive KYC Compliance?

Compliance with KYC standards in the U.S. is mandated by several AML regulations and regulatory bodies.

AML Regulations

Bank Secrecy Act (BSA): Enacted in 1970, the BSA is the cornerstone of the U.S. AML program. Financial institutions must report cash transactions exceeding $10,000 and any potential criminal activities.
USA Patriot Act: Passed in response to the September 11 terrorist attacks, this law expanded the BSA’s AML requirements. It includes provisions to strengthen the customer due diligence (CDD) process, particularly for PEPs and higher-risk entities.
Anti-Money Laundering Act (AMLA) of 2020: AMLA required beneficial owner reporting (those with at least 25% ownership/control of companies) and extended coverage to more sectors (such as virtual currency or cryptocurrency providers). This law also encouraged innovation (such as artificial intelligence and machine learning) to better monitor compliance.

Regulatory Bodies

Financial Crimes Enforcement Network (FinCEN): As a bureau of the Department of the Treasury, FinCEN oversees all KYC regulations and issues guidelines that companies must follow. It also collects, analyzes, and distributes financial intelligence to prevent and identify illegal activities.
Office of Foreign Assets Control (OFAC): This agency is one of the government bodies that enforce the BSA. It monitors cross-border transactions and implements U.S. sanctions globally against companies, individuals, and countries that contribute to money laundering, terrorist financing, and drug trafficking. All U.S. citizens, financial institutions, and businesses must comply with OFAC sanction lists.
Financial Action Task Force (FATF): Based in France, FATF sets global standards and recommendations to ensure countries effectively prevent financial crimes. Financial institutions are encouraged to check customers against the organization’s watchlists.

Benefits and Challenges of KYC Compliance

Understanding the advantages and challenges of KYC checks can help companies better prepare for and implement relevant strategies/technologies. While there is no one-stop solution to compliance challenges, the benefits outweigh the initial costs of establishing KYC protocols.

Benefits

Businesses can significantly reduce fraud risks, potential losses, reputational damages, fines, and legal issues.
Regulatory compliance helps build trust and credibility with agencies and customers for long-term sustainability.
Companies can contribute to global anti-fraud efforts and an enhanced national security.
Comprehensive risk assessments can provide valuable insights into customer behavior and risk profiles, which can be used to develop or tailor products/services.
Adopting technology to streamline KYC compliance can boost operational efficiency and reduce admin work.

Challenges

Implementing KYC programs can be costly and resource-intensive, particularly investments in technology and continuous staff training.
The KYC process can sometimes create friction in the customer experience, especially if there are long verification times and complex/manual procedures.
Keeping up with constantly developing regulatory requirements can require many adjustments in business processes and systems.
Managing and protecting large databases requires comprehensive and costly cybersecurity and infrastructure solutions.
Integrating KYC processes into existing systems can be too complex for large organizations.

How Is KYC Compliance Implemented?

Accurate customer verification and proactive risk management are the key KYC requirements. A good compliance program must build a strong framework that can satisfy these regulations while maintaining a smooth customer experience:

Customer Identification Program (CIP): CIP involves verifying the identity of customers during onboarding, such as opening a bank account online through digital identity verification. Businesses must collect names, dates of birth, and other details, which can be cross-checked with bank-verified databases.
Customer Due Diligence (CDD): CDD focuses on risk assessment, which involves gathering additional information about the customer’s business activities and transactions. Enhanced Due Diligence (EDD) may be required for PEPs and other high-risk accounts. EDD involves more in-depth investigations, such as looking into the source of wealth and business connections.
Ongoing monitoring: This process continuously tracks customer activity to identify any potential fraud hidden behind seemingly legitimate transactions. Businesses must have a system that can detect and report suspicious activities immediately, such as unusual funds or cross-border transfers.

5 Strategies for Effective KYC Compliance

Compliance requires a combination of technology, continuous education, and active collaboration. Here are some strategies to ensure your business is helping keep the financial industry safe:

Implement verification solutions: Open Banking streamlines the verification process through application programming interfaces or apps that enable real-time data sharing among financial institutions, FinTechs, and businesses. For example, Trustly ID instantly verifies identity information through bank-grade, pre-KYC data. Other verification solutions include electronic KYC (eKYC) platforms that enable customers to upload ID documents or take selfies.
Stay updated with regulatory changes: Subscribing to alerts and newsletters from regulatory bodies and agencies keeps you informed about developing laws or potential amendments to existing ones. You can also consult with legal experts or establish a compliance team responsible for monitoring updates. Finally, provide ongoing training for staff to make sure they know the latest compliance requirements.
Use technology to automate risk management: Risk engines and solutions can streamline customer activity tracking and detection of suspicious behavior. For example, Trustly’s AI-driven risk engine continuously monitors transactions across the client base to detect account takeovers and unusual patterns. Risk solutions can also set up alerts and reporting mechanisms to immediately notify security teams in real-time.
Conduct regular risk assessments: Regularly evaluating risk profiles and updating your KYC procedures based on these evaluations can help your business stay ahead of fraudsters. This includes developing a comprehensive risk assessment framework and using data analytics to monitor changes in behavior and adjust risk levels accordingly.
Consistently communicate the importance of KYC to customers: Informing customers about how KYC keeps their accounts safe can help reduce friction and improve their experience. Integrate this information in onboarding materials, FAQs, and customer support communication. Finally, update your customers about any additional identification requirements and clearly explain why they’re necessary.

KYC Compliance Can Be Easy With Trustly

KYC compliance ensures that your company stays in business and has access to secure financial services. However, regulatory compliance doesn’t have to be complicated or costly. Trustly’s Open Banking solutions can streamline identity verification and risk management assessment to fast-track customer onboarding. Trustly Connect retrieves bank-grade data for instant account and ownership authentication so your business can conduct KYC without inconveniencing customers.

Schedule a consultation with an expert to learn how these solutions can make KYC compliance stress-free.

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