Financial Crime World

The Evolution of Know Your Customer (KYC) Regulations in the Financial Industry

Introduction

Know Your Customer (KYC) regulations are a crucial aspect of preventing money laundering and terrorist financing in the financial industry. Over time, KYC procedures have evolved from paper-based checks to digital verification processes that incorporate biometrics such as facial or fingerprint recognition.

Key Points:

1. Anti-Money Laundering Directive

  • The European Union’s fourth Anti-Money Laundering (AMLD4) directive was enforced in June 2017, with a new set of rules aimed at protecting against money laundering and financing terrorism.
  • AMLD4 introduced stricter requirements for customer due diligence, including enhanced checks on high-risk customers.

2. KYC Process Flow

Banks typically frame their KYC policies incorporating four key elements:

  • Customer Policy: Establishes the bank’s approach to KYC, including the level of risk it is willing to take.
  • Customer Identification Procedures: Defines the methods used to verify a customer’s identity, such as document checks or biometric authentication.
  • Risk Assessment: Involves evaluating the level of risk associated with a customer based on their background and behavior.
  • Ongoing Monitoring and Record-Keeping: Requires banks to continuously monitor customer activity and maintain accurate records.

3. Digital ID Verification

A digital ID verification process enables a bank to automatically capture customer demographic data, which can be integrated into enterprise systems like CRM to streamline the customer onboarding process, conduct further due diligence, and review for PEPs (Politically Exposed Persons).

4. Enhanced Due Diligence

Enhanced Due Diligence (EDD) is a KYC process that implements a more profound analysis to provide higher identity assurance.

5. Innovative Approaches Welcome

US agencies have encouraged banks to experiment with artificial intelligence and digital identity technologies, while the European Supervisory Authorities promote new solutions for consistent standards across the EU.

How Gemalto Can Help:

Gemalto provides an ID Verification solution that helps private customers comply with CDD (Customer Due Diligence) and KYC obligations. The solution includes:

  • Digital Capture of Customer Information: Automatic capture of customer demographic data for instant auto-fill in enterprise systems.
  • Multichannel Identity Document Verification: Adaptable security levels for identity document verification.
  • Biometric Authentication: Option to authenticate customers using biometric technologies.
  • Risk Assessment: Option to review PEPs, sanctions or watchlists.

More Resources on AML/KYC:

  • FATF recommendations (as amended February 2023)
  • The Anti-Money Laundering Act of 2020 (FinCEN June 2021)
  • Sanctions and Anti-Money Laundering Act 2018 (UK)
  • KYC and eKYC in India: What is KYC as per RBI?
  • RBI Allows Video-based KYC yet
  • Video KYC for digital bank opening is growing in India