What are the three most efficient components of KYC?

With the growth of KYC fraud in the country, digital crimes have turned out to be very strong. Therefore, it has become an immediate necessity to deal with this problem as soon as possible, especially for the sake of financial institutions and banks.

The process of 'Know Your Customer' refers to verifying the identity so that any kind of illegal activity like cybercrime and money laundering can be avoided. This is also the reason why financial institutions are tightly linked with the KYC and AML requirements. To elaborate on this, there are 3 different components in KYC that support this verification process.

Components of KYC to reduce KYC fraud

For a better implementation of the verification process, there is the introduction of 3 different components of digital KYC. These are the pillar of the entire process and regulate the functioning of the institutions.

1)      Identity Verification (IDV)

Identity verification or the IDV verifies a customer. This acts as a shield protecting every kind of cyber activity, starting with money laundering, terrorist financing and other illegal crimes. Besides authenticating the customer's identity, the IDV also has other roles. It is used to establish the foundation for an accurate risk assessment and profile to avoid KYC fraud. Some of the basic requirements of IDV include:

·         Name

·         Date of birth

·         Address

·         Identification document

2)      Customer Due Diligence

This involves assessing any kind of risk that is associated with the client relationship and acts as one of the best customer onboarding solutions. It includes KYC checks, analysing the overall product of the client, and keeping a track of the transactional history and the behaviour of the client. In case there is any suspicious activity on the part of the client, it marks the heightened risk factor that can come to the business as a whole. Mostly, these can affect Politically exposed people. Those companies that offer financial services are bound to carry out 'Customer Due Diligence' in order to comply with the anti-fraud protocols.

The CDD is further divided into three parts:

·      Simplified Due Diligence (SDD) – For customers that are at a low AML risk.

·    Basic Customer Due Diligence (CDD) – For gathering baseline information about customers and assessing their risks.

·      Enhanced Due Diligence (EDD) – For carrying out detailed checks on customers and their backgrounds, especially the PEPs. 

3)      Ongoing monitoring

This is an important step for a customer onboarding solution. It mostly keeps track of the individuals and their risk status. For example, if the customer onboarding of a user is low, the chances for availing of loans reduce automatically.

It depends upon the financial institutions to see if an individual is qualified for availing of loans. The low, medium and high-risk factor of the customer classifies them and places them under individual onboarding entity. The system of digital KYC  appoints a group of people who make regular checks for identifying the risk. These risks can include:

·         A sudden hype or fall in the transactional activity of the individual.

·         Unusual activity across the border

·         Transactions that include the sanctioned entities or individuals that are always on the watch list and are at high risk.

·         Negative media references

Before any institution can make go forward with a rule, it has to be verified by the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Insurance Regulatory and Development Authority (IRDA). Only then can the institution go forward with the rules.