KYC expanded as Know Your Customer is an identity verification mechanism. It is required for all activities that a citizen or business conducts, monetary, legal, transactional, etc. KYC shadows the businesses. Using KYC, companies can claim rights, services, and entitlements. Every aspect of the company is linked to the KYC documents.

KYC essentially establishes the business’s identity to all regional and national authorities. Service providers do not run any other process to verify a business. Because KYC documents are already verified, the process of verification is faster. Being a digital process, with a mix of manual processes for those who are not digitally savvy, KYC for businesses has been made easy. The process of providing KYC documents is becoming easier with every passing day.

KYC verification – what is it?

KYC compliance is a mandatory activity. Non-compliance can set off a lengthy and expensive process for a business to set things right. KYC is necessary to establish the veracity of a business. It is critical for governments, given the number of fraud businesses that cheat gullible people.

KYC has its beginnings in the financial sector. Government enforcement agencies used KYC to block illegal transactions of fraudsters, criminals, and money launderers. So, now the situation is that all businesses must be KYC verified. Neo banks, gambling operators, or forex exchanges, KYC compliance is mandatory irrespective of the nature of business.

KYC compliance has become mandatory because of recurring fraud schemes, terror financing, and other suspicious activities. Authorities require businesses to undergo various compliance checks, including face verification, ID card verification, proof of address verification, biometric verification, and documentation verification.

Based on the KYC documents provided, customer risk is assessed. Customers are informed of the KYC profile of a business. Based on their judgment, its customers can make an informed decision. KYC compliance helps regulatory authorities track all activities of the business. It enables the country’s tax departments and enforcement directorates to apply anti-money laundering schemes.

What makes KYC important for online businesses?

KYC compliance is important for online businesses because it establishes the company’s legitimacy. It is an important tool for identifying the business. The identification serves to protect the end customer from any risk. Not only can the customer transact with KYC-verified businesses, but vice-versa – the company can only deal with KYC-verified customers.

KYC came about during the 1990s. It was an attempt to stop money laundering activities. After the attacks of 9/11, more rigid laws were passed around KYC, especially after terror financing became an issue. KYC compliance was formally made stricter under the Patriot Act. Although KYC was an active development, the terror activities strengthened and expedited the process. Now it’s almost universal, and businesses have to comply with KYC to conduct their business.

Businesses must comply with KYC mandates – Customer Due Diligence and Customer Identification Program. These two mandates are necessary to check the following:

  •  Identity theft – Without KYC, it is not easy to verify the identity of an online business is legitimate. An online business can easily create fake accounts. There are numerous instances of identity theft using forged documents or identification documents stolen from someone else.
  • Money laundering – Organized criminal lobbies use fake bank accounts to keep the money. The money is used to fund human trafficking, narcotics, racketeering, and smuggling activities. The money is spread across multiple fake accounts to avoid raising any suspicion. But with KYC, this is not possible because each account holder needs to be verified. Duplicate accounts cannot be held.

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Difference between anti-money laundering and KYC

Anti-money laundering (AML) is a legislative framework. It is a set of regulations that businesses have to comply with to verify their identities and intentions. KYC is a more specific area. It refers specifically to identifying a business or person and its intentions. Companies can have their internal KYC programs. AML laws and legislations vary by jurisdiction and country, and there could be several AML standards. Businesses such as financial institutions might be required to comply with these AML standards. AML is more geared towards preventing terrorism financing and money laundering. KYC is geared towards establishing identity, preventing fraud, and reducing risk factors. The common binding factor for both KYC and AML is that they verify identity.

Who benefits from KYC? Who needs it?

All types of online and offline businesses dealing with clients and customers need KYC. Regulations related to KYC are critical to all businesses dealing with money. Organizations must also transact with only KYC verified companies in B2B dealings.

There are various benefits of KYC for businesses. For example, if the company is a financial institution, it helps the financial institution’s customers verify the business’s identity. Customers have more confidence to seek out money from financial institutions and even invest their savings.

A business can also attract capital investments from institutional lenders. But without proper KYC verification, institutional lenders might not invest. KYC is necessary for investors to check the financial history, including assets owned by the business. Investors can also be lenders  – financial institutions lending short term or long term funds for business expansions.

Businesses can conduct business with others safely. All companies that are KYC verified can transact with each other safely and securely. This aspect limits fraud that arises due to the hiding of identification details. AML and KYC go hand in hand because it reduces the chances of money laundering and anti-social financial transactions to nil.

From a broader perspective, KYC brings investments into the country. It provides stability to the country’s economy. A stable economy of a country inadvertently affects the prospects of a business. It also improves the financial framework of the country. Investors from other countries will feel confident in investing in enterprises of this country.

Lenders and investors release funds because of decreased uncertainty and better financial climates. More liquidity allows for better cash flow. They can grow faster this way and need not resort to a slow organic way of growing.

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What are the triggers for KYC?

Unusual transactions in accounts usually have a median amount of funds. There is automated software that can detect such anomalies. Bank accounts where huge sums of money are deposited unusually are typically picked up for scrutiny.

A bank account will be categorized as a high-risk account only after a prolonged activity of unusual transactions. Internal banking processes determine the length of time. Once a bank account is categorized as high-risk, it is scrutinized. The scrutiny period is again dependent on the bank. Suppose the bank account is still conducting suspicious transactions after the scrutiny period. In that case, the bank account holder is sent a notice or asked to come in person to the authorities.

Any changes in the profile of a business, including its location, branding identification, tax identification, merger, acquisition etc., will require a KYC process. The KYC process will review the changes and verify if the business is legitimate.

When a business changes its core areas of expertise, KYC might be required to verify the company. Sometimes, companies might change their core competency areas to focus on more profitable ones. This could be driven by demand or a need to adapt to changing market conditions. KYC might be required in such cases.

Adding new shareholders or majority investors to the business will trigger a KYC process. For a company owned by a majority shareholder who has relinquished their shareholding to another incoming shareholder, then KYC might be required. The KYC will establish the identities of the shareholders, their source of funds, and their intentions.

What are the issues faced by businesses during a KYC process?

Some of the issues businesses face during a KYC process are listed below.

1. Geographical constraints

In a traditional process, customers will submit the documentation by being physically present. Businesses are constrained to choose banks nearby and in their vicinity. The geographical constraints can be solved using remote onboarding.

2. Elaborate documentation

Traditional KYC documentation is elaborative and extensive. It has endless paperwork and can result in errors. Maintaining photocopies of business cards, identities, bank statements, utility bills, and several such documents could become cumbersome.

3. Onboarding delay

Businesses might face delays in being onboarded and could face delays in payments and investments. The documentation requirements could be extensive, and businesses might not have the know-how on this. Applications could be returned for want of more information. So, companies can instead use a KYC service provider to avoid onboarding delays.

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Summing it up

KYC is not only an integral part of online businesses but a mandatory one. KYC verification methods from SEON help businesses decrease the price, time, and risks associated with the fraud. Without KYC, companies face many hurdles, investments are delayed, and customer trust erodes. A business might be categorized as transaction-risky and so on. So, to avoid this, choosing a proper KYC filing partner is a better way to go about this.

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