KYC verification explained

KYC allows companies to serve the integrity of the financial system confidently and to comply with the legal and regulatory obligations posed on any financial institution. It's crucial to have tools that guarantee your potential customers are exactly who they say they are. But how does KYC checks work? What are businesses required to do to comply? And what are the risks of not doing so?

In this article, we’ll explain a bit about the KYC process regards to identity verification, including key components and why KYC is so important in this space.

What does KYC verification mean?

KYC stands for Know Your Customer. It’s used to verify the identity of customers across a range of use cases like signing documents, completing hiring processes, setting up marketplace seller accounts or user gaming accounts, and applying for financial products and services. KYC prescribes the steps you need to verify your customer depending on the potential risk associated with providing services to or transacting with them to help fight fraud and prevent money laundering, terrorism funding, and illicit activity. KYC also helps maintain the integrity of global markets and institutions and enables businesses and consumers to engage in transactions safely and securely.

KYC is a subset of Anti-Money Laundering (AML) regulations and is a mandatory process for many businesses when onboarding new clients and on an ongoing basis.

If your business is required but fails to comply with KYC regulations, it could face very serious consequences, including heavy fines and criminal liability, among others.

How does KYC work for Identity Verification?

To comply with KYC, businesses must collect and review information and documents that verify the identity of their customers. These requirements can vary depending on the region or sector in which your business operates but often include the following:

ID - a government-issued identification document such as a passport or driver's license
Documents - proof of address such as a utility bill
Face verification - often now a ‘liveness detection’ through the user’s smartphone camera to avoid static image scams
Biometrics - usually facial or fingerprint scanning and recognition

If an individual fails KYC checks, you must refuse to provide your services to them.

KYC use in different sectors

Here’s how KYC is used in different sectors:

Fintechs

New developments and innovations in the Fintech space open the door to opportunity for their customers. However, it can also make them an attractive target, putting Fintechs on the frontline of defending against financial crime. Fortunately, they can rely on a combination of many advanced verification tools, including biometrics and advanced optical character recognition.

Financial services

As they deal directly with accounts, money, and a high volume of transactions, financial institutions – including banks and insurance companies, as well as fintechs – have a significant level of responsibility when it comes to fighting financial crime. As such, financial regulations are usually the first to reflect new KYC requirements. It’s essential for all financial services companies to monitor activity, verify the source of large or suspicious transactions, and maintain accurate records.

Real estate

Because of the large sums involved in real estate, there’s a real risk of money laundering. Real estate firms are mandated by KYC and AML to check that any money used to invest in property is traceable and not from a criminal source.

Gaming industry

Online gaming requires gaming companies to verify the identity, age, location, and source of funds of players to ensure their services are not being used for illegal activity. This helps to protect both the company and its gamers by building trust and ensuring that the latter’s personal information is secure.

Legal sector

As they deal with a wealth of confidential client data, as well as large sums of money, legal services are at risk of being targeted by criminal activity. To maintain trust in the legal system and to mitigate against any possible risks, legal firms should conduct comprehensive KYC identity verification on all their clients.

What does KYC look like in real life?

The steps you need to take to fulfill KYC requirements vary by sector and by geography but have the same goal: to accurately verify and assess the risk level presented by an individual or business. Some examples are provided below:

Customer Identification Program (CIP)

A Customer Identification Program (CIP) is a United States requirement where financial institutions need to verify the identity of individuals wishing to conduct financial transactions with them and is a provision of the USA Patriot Act. Affected institutions need to verify the identity of anyone who conducts certain types of events with their business - this can range from (but isn’t limited to) applying for regulated products and services like a loan application to creating a certain kind of user account like becoming a marketplace seller.

To fulfill this requirement, the user must provide their name, date of birth, address, and identification number. You, as the business, can then compare this information against documentation or official records from public databases to verify that the details provided are genuine within a reasonable time.

Customer Due Diligence

Customer Due Diligence (CDD) is a term that is typically used to describe the assessments and steps that need to be performed on certain customers in the EEA and the UK based on AML legislation. Higher-risk customers can then be subjected to a greater level of scrutiny than those that pose a lower level of risk.

For example, if the customer presents an average level of risk, a business would need to conduct Standard Due Diligence before onboarding. This would mean verifying their identity using standard procedures and a reliable, independent source. If, on the other hand, a customer operates in a high-risk jurisdiction or business, for example, you would need to perform Enhanced Due Diligence. This means asking for additional identification, more detailed information about the source of their funds, the nature of their business relationships, and the reasons behind their transactions.

There are two levels of CDD:

Standard Due Diligence - if the customer presents an average risk of being involved in suspicious activity, you need to verify their identity using standard procedures and a reliable, independent source.
Enhanced Due Diligence - if you assess the customer to be at a high risk of being involved in criminal activity, you need to subject them to Enhanced Due Diligence. This means asking for additional identification, more detailed information about the source of their funds, the nature of their business relationships, and the reasons behind their transactions. These customers are likely to be politically-exposed persons (PEPs), on a government sanction or financial watchlist. You might also consider their location, occupation, the payment methods they use, as well as the type, value, and frequency of their transactions.

A good CDD program should:

Gain a picture of the individual, their location, and their business activities
Verify their information to an appropriate degree depending on their level of risk
Classify their risk category and store their information in a digital format
Maintain these records for an appropriate period of time

Ongoing monitoring

KYC checks aren’t over as soon as your customer is onboarded. You need to monitor your customers on an ongoing basis by continuing to review their transactions and accounts for suspicious activity. Frequency and extension of ongoing monitoring depend on the customer risk rating.

As best practice, you should keep all records up to date, check whether the type of transactions and the amounts coming in align with the activities the account is used for and ensure the risk level and measures used are suitable for the customer.

KYC documents

KYC documents are formal documents that verify the name and address of a customer. Some customers may also be required to provide proof of income if applying for certain products or services. In general, a customer will need to provide separate proof of identity (POI) and proof of address (POA) documents.

Proof of identity documents could be a:

Passport
Driver's license
Birth certificate
State identity card
Benefit book
National identity card with a photograph

Proof of address documents could be a:

Utility bill
Local authority council tax bill
UK driver's license
Bank statement
Mortgage statement
Current tenancy agreement
Tax demand letter

POA documents should state the customer's name and have been issued within three months.

Proof of income documents could be a:

Bank statement
Payslip
Income tax return

Learn more: Synthetic identity fraud

Why KYC is important

KYC checks are essential as a way to make sure customers are who they say they are. They protect everyone involved in a business relationship by shielding them from financial crime, corruption, and the funding of terrorism. They also ensure your business meets AML requirements that help to fight fraud. KYC maintains the integrity of global markets and institutions and enables businesses and consumers to engage in transactions safely and securely.

Advantages of using digital solutions like KYC

Thanks to digital solutions, it’s never been easier for businesses to meet their Know Your Customer requirements, and there are some benefits:

Speed

Proper KYC processes enable speedy onboarding of new customers, which is excellent for building trust and for maintaining lasting business-client relationships. These processes can sometimes be conducted quickly through mobile devices, which optimizes the customer experience.

Available everywhere

KYC requirements vary around the world. They help to keep you and other businesses, as well as your customers, safe when engaging in financial activities – wherever you’re located.

Trustworthy

Trustworthiness is vital to successful business relationships. By rooting out bad actors, KYC procedures help all parties conduct business with confidence and with an understanding that everyone involved is genuine. For example, Airbnb has recently introduced a requirement for all users to verify their identity, helping to build trust and improve the experience of using the site for all genuine hosts and guests.

Learn more: How to prevent identity theft with KYC

How Checkout.com can improve your KYC experience

Checkout.com can help your business conduct KYC verification through accurate and successful identification during transactions with a fast, secure, and compliant identity verification experience.

Checkout.com’s Identity Verification is designed for clients looking for an excellent user experience that maximizes conversion without compromising on reliability. Contact our team today to learn more about Identity Verification.