The 4 Pillars of KYC: Building a Solid Foundation for Effective Identity Verification

What are the 4 Pillars of KYC?

KYC comprises four critical areas that banks and financial institutions examine when developing KYC programs. Let’s take a closer look at each component:

1 Customer Acceptance Policies (CAP):

Before implementing a KYC process, thorough rules and procedures that explain the approval process needed customer paperwork, and considerations to consider when assessing customer eligibility must be established. It is critical to identify high-risk clients and proceed with caution when approving them.

These are the essential facts about Customer Acceptance Policy.

• Accept only consumers whose identities have been determined through due diligence based on the customer’s risk profile.
• When the investor is a first-time investor, the account should be opened only after the account opening papers and KYC procedures have been completed.

(a) Documents must be collected by regular procedures.

(b) Technical support is used to verify the customer’s identification.

(c) PBSPL will implement KYC procedures following industry standards.

• Any transaction from a customer can be accepted only once the customer acceptance procedure has been completed. In the event of low-risk consumers, however, the customer acceptance procedure and the transaction acceptance procedure might be initiated concurrently.
• If the customer is refused under the customer acceptance policy and the consumer does not react to requests for additional information, the new account creation may be rejected. To that end, appropriate conditions may be included on the account opening or money transaction application form.

2 Customer Identification Program (CIP) and Customer Due Diligence (CDD)

A customer identification program is a series of procedures that organizations must implement and adhere to to authenticate the identity of their customers or users. Once the KYC regulations and procedures are in place, the next stage is to authenticate the potential customer’s identity. Customers are typically required to show proof of four major identifiers and then verify that information using a combination of documents and database checks. Other types of identity verification can be added to this basic process if desired.

• Name
• Date of birth
• Address
• National identity number

The institution must decide which forms of identification are acceptable and how many are needed. A client identification program is just one component of a larger KYC approach. Customer due diligence (CDD) is another critical component of your KYC program that is not covered by the CIP

Also Read: Due Diligence Checklist | KYC/AML Guide

Customer due diligence is a method that is used to assess client risk. A simplified due diligence approach might be used in situations with fewer hazards. CDD is an ongoing procedure that evaluates client risk and is an important component of the 4 pillars of KYC. Situations with a higher level of risk, on the other hand, may necessitate an extended due diligence (EDD) procedure.

FinCEN enforces CDD in the United States, which requires financial institutions to achieve four main requirements:

• All consumers or clients must be identified.
• Identify and list all of the beneficial business owners with whom you want to do business. Develop a customer risk profile by understanding the nature and purpose of customer connections.
• Continuously monitors client service and transactions to detect and report questionable activity

3 Risk management:

Risk management entails conducting regular internal audits to ensure that specified standards and procedures are followed. Financial institutions must follow the rules set forth by regulatory authorities such as the US Financial Crimes Enforcement Network (FinCEN) in the United States, the Financial Conduct Authority (FCA) in the United Kingdom, and the Financial Transaction and Reports Analysis Centre of Canada (FINTRAC). The classification of clients as low, medium, or high-risk aids in the analysis of the probability of financial fraud and allows for adequate monitoring.

The Financial Action Task Force (FATF) was involved in the first attempt to introduce the RBA in 2007, publishing a statement stating:

“By using a risk-based approach, competent authorities and financial institutions can ensure that measures to prevent or reduce money laundering and financial threats are proportionate to the identified risks.”
Also Read: Risk Management in KYC: A Comprehensive Guide

The level of risk associated with identity verification varies depending on factors such as the nature of the organization, the specific use case, and the client involved. It is critical to use a risk-based approach that matches the verification method to the level of risk to achieve effective verification. This method enables adaptability and flexibility in the face of changing technology, regulations, consumer behavior, and criminal activity.

Using various techniques provides distinct benefits such as

1. Digital identity verification, for example, offers quick and easy online or mobile application processes while meeting regulatory compliance and fraud protection criteria.
2. ID document verification confirms the authenticity of the document, it does not ensure identity verification.
3. Combining these methods and implementing other layers of identification, such as biometrics allows for full verification and risk minimization.

Organizations can effectively match the verification approach to the associated risk level by customizing verification procedures based on client and transaction attributes.

4 Ongoing monitoring:

Regardless of the client’s risk level, continual transaction monitoring is essential. Checking customer information, such as income, employment, and address, regularly helps maintain correctness and catches any changes. Financial institutions should scrutinize unusual transactions and detect any questionable behavior. These practices of monitoring assure the integrity and accuracy of consumer identification.

Automated client ongoing monitoring has a number of advantages, including enhanced flexibility in determining the frequency of verification and real-time screening against relevant sources. This assures continued compliance with anti-money laundering rules while also reducing risk exposure. Furthermore, by integrating current customer data and external information, it gives an improved customer and staff experience, resulting in fewer compliance touchpoints and more focused customer interaction.

As previously stated, the RBA decides whether a client is low, medium, or high risk based on internal intervention thresholds and levels. Ongoing monitoring entails doing periodic assessments to detect dangers such as:

• Unexpected changes in transactional activity
• Unusual cross-border activity
• Transactions involving sanctioned businesses or persons, as well as individuals on watchlists
• Adverse media references
• If suspicious activity is found, it may necessitate additional EDD and/or the submission of a Suspicious Activity Report (SAR) to appropriate regulatory authorities.

Furthermore, ongoing KYC improves the customer experience by gathering more information about the client’s demands and generating authentic discussions. Overall, businesses are rethinking risk rating assessments and implementing dynamic risk assessment processes to improve consumer segmentation, goods, and services.

Conclusion:

Finally, the 4 pillars of KYC establish a solid structure for effective identity verification in the banking and financial industries. CAP set the groundwork for customer approval, while the CIP and CDD confirm prospective customers’ identities. Risk management assures regulatory compliance and assesses consumer risk while continuing monitoring ensures the accuracy and integrity of customer information over time. Financial institutions can improve their security measures, reduce the danger of fraudulent operations, and preserve regulatory compliance by applying these four pillars of KYC. KYC is critical in fostering trust, preventing financial crimes, and promoting a secure and transparent financial ecosystem.