Have you ever wondered why customers must have their documents verified during certain transactions? Yes, perhaps our initial response would be to protect the transaction parties from forgeries and fraud. However, knowing KYC (Know Your Customer) is more than that. It is an important process that every business, particularly those in the financial sector, should know. In this article, you will learn about KYC and its significance in various industries.
What Exactly Is KYC?
Know Your Customer (KYC) refers to how institutions verify the identities of their customers and determine the level of fraud risk they pose. This verification is carried out using various methods, not all of which comply with legal requirements.
Knowing your customer entails performing identity verification, reviewing financial transactions, and evaluating risk factors. KYC aids in the detection of money laundering, financial crime, and other types of illegal financial activity.
The Significance of the KYC Process
There are numerous situations in which we can see the value of a KYC process, but the primary focus of this verification is on financial institutions and business transactions.
- Detecting Inconsistencies
KYC documents are used in banking to determine if there is a discrepancy that occurred due to an irregular withdrawal of funds from a customer’s account. As a result, unauthorized transactions can be detected and prevented quickly by financial institutions.
- Reduced Risk of Identity Theft
The risk of having your identity stolen is reduced because the KYC process requires customers or clients to provide valid proof to establish their legal identity. In addition, institutions can check identities and spot fake accounts by keeping customer records and ensuring that only the right people are offered their services.
- Stay Away from Financial Crime
Some people involved in criminal activities such as smuggling, racketeering, and human trafficking would use dummy accounts in banks to store their money. Typically, the money is spread across multiple accounts to avoid suspicion before being transferred illegally to other countries for laundering. The government could use KYC to keep track of the accounts and methods used to transfer funds.
KYC also aids in the identification of accounts used for terrorist funding and financial fraud. The government provides a list of suspects’ names and accounts so that financial institutions can verify and check the transactions. Banks and financial services will freeze the accounts if determined that they are being used for financial crime.
- Business Investing
If you are looking for new investors for your business, it is critical to creating KYC documents that you can present during transactions. Your investors will be able to verify that you, your business operations, and your financial standing are all true and legal in this manner. It may also apply in reverse, as you can check your investors’ identities and records to see if they are involved in any financial crimes. It verifies both parties to the transaction and protects them from the risk of fraud and money laundering.
The primary objective of KYC is to confirm, with a high level of certainty, that customers are who they say they are and are not involved in criminal activity. This should not be used against the institution or business that is implementing this process; rather, it demonstrates that the institution is trustworthy and concerned about the safety of its customers.