“Know Your Customer” or KYC, is a set of guidelines that businesses, mostly financial institutions, use to verify the identity of their clients or customers, assess their suitability and understand the risks involved in establishing a business relationship. These guidelines form part of the Anti-Money Laundering (AML) regulations.

What is AML? 

Anti-Money Laundering (AML)  is an umbrella term for various measures, controls, and processes that organisations implement to achieve regulatory compliance. KYC is a component of AML, it refers to how firms establish and verify their customers’ identities, understand the nature of their business relationships, and monitor their transactions for any unusual or suspicious activity.

Financial institutions such as banks, insurers, export creditors, and others increasingly require customers to provide extensive due diligence information. This helps businesses protect themselves and the financial system from illicit activities such as money laundering, financing terrorism, and fraud.

Why is KYC needed?

The finance industry is vulnerable to financial fraud and money laundering. Every year, financial institutions like banks, payment platforms, and fintech providers onboard countless clients across the globe, which can increase the potential for corruption, fraud, or other forms of wrongdoing.

According to the KPMG Fraud Barometer, the total value of alleged fraud reaching UK Crown Courts in H1 2022 was £532.6 million, an increase of 288% compared to £137.4 million in H1 2021. Of those, fraud cases against Financial Institutions were the highest in value at £305.2 million in H1 2022, a jump of 4,333% compared with the same period in 2021.

There is further evidence of this drastic increase in economic and financial crime. For example, 51% of surveyed organisation in PwC’s Global Economic Crime and Fraud Survey 2022, revealed that they experienced fraudulent activities in the past two years (2020-2022), the highest level in their 20 years of research.

As a provider of financial services, we at Sonovate perform KYC checks to remain compliant with AML regulations. We use multiple intuitive and comprehensive systems to perform these checks in a way that is efficient for our customers. Our specialist Financial Crime team oversee the process and makes resources available to our customers to help keep their business protected.

Which businesses require KYC checks?

While these regulations were initially only applied to financial institutions, they are now applicable to other regulated industries and sectors such as charities and non-profit organisations.

Although not all businesses are obligated legally to carry out KYC checks, knowing more about customers can help mitigate risks and keep out unwanted business relationships. Also, when an organisation demonstrates KYC compliance, it helps to build trust.

At Sonovate, we recommend that our customers in recruitment, consultancies and labour marketplaces apply their own customer due diligence processes when working with clients, umbrella agencies and candidates. With the rise in fraud across all sectors, the use of forged documents, edited images, or even misleading information is becoming common place in recruitment.

Although KYC checks must be carried out when onboarding a new customer, regulations state these checks should also be repeated at regular intervals to monitor changes in data and circumstance.  To ensure KYC Compliance, a monitoring system and internal controls need to be implemented so that any money laundering threats can be flagged as and when it happens. Having the right approach for your KYC across your business can help you avoid the risk of being fined, facing criminal prosecution or incurring reputational damage.

KYC regulations are constantly evolving. If you believe your market is more likely to become regulated in the future, getting a head start on it now could save your business a painful redeveloping process.

In Summary: why are KYC regulations an essential part of any financial process? 

  • KYC processes help to protect financial organisations from money laundering and flags suspicious activity that point towards questionable sources of money, undervalued corporations or even illegal trade.
  • Establishing customer identity is an essential part of KYC.
  • The KYC process helps prevent financial fraud, such as identifying the use of fake or stolen IDs to apply for a loan, and receiving funding using fraudulent accounts.
  • Understanding the nature of customer activities is also crucial for KYC checks. This monitors transactions to analyse customer activity and ensures that a person or an organisation’s funding sources are legitimate.
  • KYC can also help you learn more about your client’s needs and goals to give them well-informed suggestions to support their business.
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