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Financial institutions such as banks employ tight security processes for possessing and handling sensitive information. Unfortunately, they remain a prime target for cybercriminals.

Over the last year, cyberattack costs in the banking industry spiked to $18.3 million annually per company. The U.S. alone was subjected to 1,473 cyberattacks in 2021, leading to 164.6 million successful data breaches.

Since the financial industry is also heavily regulated, the government holds them to a higher standard regarding Know Your Customer (KYC) compliance laws and policies. Abiding by these is crucial in fighting fraud, money laundering, and financial terrorism. However, what does it take to establish and comply with KYC regulations in banks?

What is KYC in Banking?

Know Your Customer for banks is the mandatory process of verifying the legitimacy of a customer’s identity and assessing risk factors. By law, organizations must abide by KYC guidelines that include customer identity verification using reliance and independent documents, information, and data sources. Failure to comply can incur heavy penalties.

In today’s global economy, KYC plays an integral role in protecting banking and financial institutions from being used for corruption, money laundering, fraud, and other financial crimes. Aside from the prevalence of such crimes worldwide, increased KYC focus is also due to the growing connections between financial establishments and global companies.

Central banks and governments are aware of the repercussions of cybercrimes and data breaches. This leads them to constantly create new policies or extend existing regulations to eventually cover every aspect of the global financial ecosystem.

Customer Identification Program (CIP)

U.S. law requires all banking and financial institutions to have and maintain a Customer Identification Program (CIP) to counteract terrorism funding and money laundering. 

Banks have their own list of requirements when clients open new accounts. For KYC, they require proof of identification to ensure that their customers are who they claim to be. This includes the following:

  • ID card verification

ID card verification is an authentication procedure that compares an individual’s identity claim with the official data provided. Documents, such as a social security card, birth certificate, and driver’s license, can serve as proof of a customer’s claims.

  • Face verification

Face verification authenticates a customer’s identity based on distinguishing facial features. A person’s “live face” is compared to credible sources like camera footage or website photos through biometric authentication.

  • Document verification

Formal documentation, such as passports or utility bills verifying a customer’s identity and address, are digitally checked for authenticity. Vital information like name, birth date, and other important details are also reviewed.

  • Biometric verification

Biometric verification involves uniquely identifying a person by analyzing one or more distinguishing biological traits. A device extracts biological identifiers like fingerprints, facial geometries, voice prints, retina patterns, and written signatures.

Customer Due Diligence (CDD)

KYC is an ongoing assessment process. Compliance requires regular customer reevaluation, depending on their relationship with your institution; thus, a single assessment does not suffice. This is where KYC’s Customer Due Diligence (CDD) aspect comes in.

CDD is the process of collecting information about your clients, allowing you to determine the degree of risk they pose to your organization. In compliance with CDD, you must know an individual’s financial transaction behavior, allowing you to monitor and detect suspicious activity. Additionally, your organization must assign each client a rating after a risk assessment.

These CDD processes are essential in banking as it helps you determine how you’ll monitor a specific account and which customers are deemed high-risk.

Enhanced Due Diligence (EDD)

EDD is another KYC process that provides greater scrutiny and identifies risks that CDD cannot detect. EDD is a more extensive process than CDD as it looks to establish a higher level of identity assurance by evaluating the customer’s risk category, identity, and address. 

The implementation of enhanced due diligence is required if a client is deemed high-risk due to their high net worth and large transactions. For these clients, heavy monitoring and regulation are necessary to comply with KYC requirements for banks. 

EDD processes add another safeguard for your organization, decreasing the chances of money laundering and terrorist financing. However, for all these procedures to work correctly, your organization must continue regular risk assessment and monitoring.

Safety Through Compliance

Cyberattacks have become more prevalent due to the constant technological advancements and the evolving strategies of cybercriminals.

While no organization is exempted from these attacks, the financial sector is at a higher risk because of the nature of the business. Thus, continued KYC compliance and identity proofing are crucial to ensure the safety and privacy of all parties involved.

Contact us to learn more about Q5id’s approach to KYC for financial institutions.


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