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Financial fraud can have a severe impact on your financial institution. To be more specific, criminal acts such as money laundering can threaten your company’s stability and cause you to lose clients’ trust. It can even destabilize the global economy and pave the way for terrorist acts such as human trafficking and drug cartels.

Fraud can happen unexpectedly, and criminals continuously develop new methods to bypass security systems. To further emphasize its growing prevalence, the United Nations (UN) reports that around 2% to 5% of the global GDP is lost each year because of money laundering. This is equivalent to about $800 billion, so financial institutes will need to take the necessary measures to avoid it.

Due to these cases, optimizing your Know Your Client or Customer (KYC) process has become standard practice. Being aware of what KYC can do and how various identity and access management solutions could keep various risks at bay and help with compliance as required by the federal government.

KYC Defined and Explained

KYC is a standard set of practices that enable financial institutions to verify the identity of their clients accurately. Since banks, credit unions, and other financial organizations provide high-risk services, authorities such as the Financial Industry Regulatory Authority (FINRA) require them to adhere strictly to a set of mandates.

An example of this regulation is the FINRA Rule 3310, which instructs institutions to develop a solid anti-money laundering (AML) program. This has enabled them to mitigate terrorist financing, market manipulation, and more. 

With a strong KYC process, your organization can easily track, monitor, and react to any form of suspicious activity. For maximum efficiency, bankers and advisors will need to construct a data collection process that will give a full picture of their client’s background. They need to know the nature and purpose of their transaction, the relationships and affiliations they have, and more. 

Why KYC Compliance is Necessary

KYC compliance will ensure that your financial institution operates with little to no obstructions. Not only will you be able to stay in line with the law, but it is also an excellent way to keep your organization safe from the following issues:

Money Laundering

KYC provides better means of tracking accounts and activities to prevent suspicious transactions from occurring. This can help you spot and handle possible issues before they escalate and lead to losses.

Identity Theft

Financial institutions need to verify the identity of each person before a transaction can pull through. A strong identification process ensures that only verified users access their accounts and your services.

Fraud Detection

KYC can help you detect any abnormal changes in an account and identify if it is fraudulent. Once you confirm a discrepancy in a record or transaction, you can immediately freeze an account and prevent any more damage from occurring.

Avoid Heavy Censure by Legal Authorities

Complying with KYC regulations saves you from facing criticism and penalties from legal parties. It also puts your institution in a good light, which will naturally improve your reputation in the market.

Customer Risk Assessment

KYC will help you assess essential factors when verifying a customer’s identity and activity. This will not only help you improve your security infrastructure but also prove beneficial to your company’s core services. 

Risk Factors that KYC can Address

Being aware of the risk factors KYC can address will be key to proper compliance and implementation. According to the Harvard Law School Forum of Corporate Governance, here are a few questions that you should consider when reviewing a client or a legal entity’s risk.

  • How complex is the customer’s ownership structure?
  • Is the customer operating in a heavily regulated industry?
  • Is the customers home jurisdiction or neighboring jurisdictions subject to sanctions or home to terrorist organizations?
  • Does the customer’s home jurisdiction lack effective AML regulations or have high levels of corruption?
  • To what extent is the customer’s business cash-based?
  • Has the customer taken any measures to mask the identity of its shareholders (e.g., via nominee shareholders or bearer shares)?
  • Is the institution’s relationship with the customer face-to-face?

Success through KYC Compliance

Money laundering can cause massive damage to financial institutions and all associated parties. Since they are primarily responsible for preventing fraud, it’s important to implement and improve security. With that said, having a strong KYC process will enable you to comply with federal regulations and ensure the safety of all stakeholders. 

In case security isn’t one of your organization’s specialties, seeking third-party solutions will guarantee safety and compliance. For starters, getting in touch with the experts at Q5id will ensure that your KYC process adheres to federal requirements and follows best practices. Visit our page to learn more!


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