4 Pillars of KYC: Strengthen your Business

4 pillars of kyc

For many financial organisations, one of their key concerns is to remain aware of illegitimate activities such as money laundering or corruption where funds are moved illicitly to another institution. Therefore, in order to remain compliant with anti-money laundering regulations and to mitigate these risks, these firms implement KYC regulations. However, KYC regulatory requirements are based on four main pillars that are crucial to apply to prevent any sort of fincrime. 

Today, we will explore these 4 pillars of KYC that help financial businesses strengthen their security system and protect the sensitive data of their customers.

What is KYC?

KYC stands for Know Your Customer, which is a process by which banks and financial organisations acquire user information for the identification of their customers. It helps them ensure that they are building a legitimate customer relationship and that their services are not misused.

Occasionally, these financial companies need to update their clients’ KYC details in order to mitigate any possible risks associated with them. However, they need to follow and implement specific KYC elements to successfully fulfil the regulatory process.

The 4 Pillars of KYC Regulation Process

Financial firms should not only verify the identity of their clients but also keep track of their transaction history to observe any unusual or mysterious activity. These activities are reviewed in detail and companies determine whether the customer is involved in any illegitimate act or not. This procedure is based on 4 pillars of KYC:

i. Customer Acceptance Policy

Banks and financial organisations should build transparent acceptance policies and procedures for their customers. It should include a description of the type of customer, who is more likely to bring any possible threat to their firms. Such policies should include the origin country, client’s background, business activities, lined bank accounts, and other associated elements.

However, these companies should develop these policies that need more comprehensive due diligence for customers with higher risk levels. For instance, these policies may need the most fundamental requirements for account opening, such as account balance to some amount. It is significant that the customer acceptance policy is not limited because it may result in the denial of account access for the general public.

On the flip side, comprehensive due diligence is also crucial for clients with high net worth, especially those with unclear sources of income. It helps financial firms to make decisions about whether or not these high-risk customers should be onboarded to do business with in the future.

ii. Customer Identification Procedures

The customer identification procedure is another one of the 4 pillars of KYC, which is considered an important element. Financial firms should make a systematic process to recognise new users. Yet, in case of unsatisfactory KYC outcomes, these firms should not develop relationships with these clients.

iii. Risk Management

In order to implement effective KYC, financial firms should practise proper risk management processes to identify and control any possible risks. These companies should be completely committed to efficient KYC regulation by developing proper processes. Other than this, there should be an internal procedure for assessing whether the company’s legal regulatory compliances are being met. 

iv. Ongoing Monitoring

So, the last element of the 4 pillars of KYC is continuous monitoring, which is also an important part of the KYC process. Financial institutions are only able to control and mitigate possible risks that may be associated with the new user. However, in order to do that, these firms should be aware of insights into the unusual transactions with pepper cases, for which, ongoing monitoring is required.

This process usually involves the use of automated systems to recognise any red flags of transactions. Firms review customer information and documentation periodically and verify this data with the customer’s identity. The purpose of ongoing monitoring is to ensure that customer data is authentic and updated without any potential threats to the firm.

Final Thoughts

So these were 4 pillars of KYC and without any of them, effective implementation of the KYC program is not possible. However, each of these elements helps financial organisations mitigate and reduce any possible risks associated with money laundering, corruption, or financial crime.In case, a financial firm does not fulfil the standards of KYC regulations, it becomes more vulnerable to encountering illicit financial activities, and eventually loss of customer and market repute. Want to learn more about the latest trends and insights on this topic? Head over to KYC AML Guide for expert analysis and in-depth coverage.

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