ID Verification - KYC

Know Your Customer

January 20, 2023
Table of Content

What is KYC?

KYC is an acronym for Know Your Customer or Know Your Client. It refers to the mandatory customer verification process that all banks, financial institutions and fintechs must adhere to while initiating a new relationship and before onboarding a prospective customer.


Why is KYC needed?

KYC is an essential verification mechanism that is needed to ascertain the correct identity of a customer – to establish that the person is actually who they claim to be. This authentication helps businesses protect themselves and their users from fraudulent transactions as well as prevent criminal activities such as money laundering.

Banks, financial institutions, fintechs, crypto platforms, and sports betting platforms deal in significant amounts of money, which is attractive to fraudsters. If unchecked, malicious users can exploit the digital services to commit numerous types of financial crimes including money laundering. Therefore, to protect their platforms and maintain consumers’ trust, it is the interest of these businesses to conduct thorough checks through KYC.

For businesses where KYC is mandatory – such as banks, financial service providers, fintech, crypto, sports betting, and so forth – non-compliance may lead to penalization, sanctions, and hefty fines.


What is the KYC process?

The KYC process broadly consists of the following four steps:

Customer verification: To ascertain the true identity of the prospective customer by collecting data – name, date of birth, address, and identification number, photo identity, among others. This data is then checked against reliable, independent databases and consumer reporting agencies to check if the person belongs to any restricted lists, sanctions or is politically exposed (PEP).

Risk assessment: A critical element of the KYC process, risk assessment helps understand whether the customer is reliable or has any risks associated. Customer due diligence is employed to verify that the source of funds is legitimate and prevent money laundering or fraudulent transactions. The customer may be requested to provide more information in order to understand the purpose of the account being opened.

Identifying the beneficial owner: To understand the ownership pattern, and verify the identity of the ultimate beneficiary. Customer due diligence is conducted to manage risks and safeguard consumer and business interests.

Continuous risk assessment: Monitor customer activities continuously to spot anomalous behaviors and patterns, and take prompt corrective action, if needed. This includes monitoring consumers’ financial transactions on an ongoing basis to keep their records up-to-date, detect unusual activity, or note inclusion in restricted lists.


What is eKYC?

Leveraging digital technologies namely: artificial intelligence, machine learning, face recognition, and optical character recognition (OCR), among others, to conduct the KYC verification process is called e-KYC. More and more financial institutions are now embracing eKYC due to the speed and accuracy it brings.


Benefits of eKYC

There are several benefits of eKYC. Some of these include:

Faster customer onboarding: eKYC speeds up the otherwise lengthy KYC process and allows businesses to onboard more customers in a relatively shorter duration.

Enhance user experience: Shorter verification processes and lesser friction helps improve customer experience.

Greater accuracy: As compared to manual KYC, eKYC can quickly spot errors allowing for making corrections in no time.

Fight fraud: Accurate KYC helps businesses detect risky users early in the cycle and spot suspicious behaviors throughout the customer journey, ensuring protection of users throughout their online journeys.

Anywhere, anytime KYC: eKYC is also convenient for consumers as they can complete the process anywhere, anytime and on a device of their own choice. With the growing usage of smartphones, eKYC using mobile phones is on the rise.

Personalized services: Better data analysis can help businesses to personalize their services according to consumer preferences.

Regulatory compliance: When it comes to evolving regulations, eKYC processes can be tweaked to implement the changes and remain compliant even in a dynamic regulatory landscape.

Lower costs: Faster and more accurate eKYC reduces costs associated with customer acquisition and regulatory compliance.

What is corporate KYC?

Corporate KYC or Know Your Business (KYB) is the verification and ongoing monitoring of corporate accounts. It is similar to the KYC process for individuals, except that its requirements are more detailed.  

Do different industries have unique KYC requirements?

Yes, owing to the specific nature of services offered and the associated risks, every industry may have specific KYC requirements. KYC for some of the industries are as described below:

Financial institutions: Financial institutions, especially banks, face the most stringent demands for customer KYC. This is owing to the huge potential of financial crimes, notably money laundering, terrorism financing, tax evasion, and numerous types of financial fraud. KYC compliance is the responsibility of the banks. They must make every effort to verify the identity of their customers and the risks associated with them, failing which they may become non-compliant to the KYC regulations and attract legal action and heavy fines. The KYC process in financial institutions usually includes verification of identity, face, and documents, such as proof of age, residence, and employment.

Fintechs: The convenience of digital transactions and a growing consumer base is exposing fintech platforms to a horde of cybercrimes. To protect their platforms from being used for criminal activities, fintechs are obliged to conduct KYC for their customers before onboarding. KYC is a 4-step process for fintechs, which includes: customer identification, customer due diligence, simplified due diligence, and enhanced due diligence. Some of the common documents requested for KYC include proof of identity (passport, driving license, or any other photo identity) and proof of address. Fintechs usually conduct eKYC and smartphone-based KYC leveraging technologies such as optical character recognition (OCR), facial recognition, facial biometrics, liveness detection, artificial intelligence, and machine learning, among others to verify the documents submitted.

Cryptocurrency platforms: The latest entrant in the financial world is cryptocurrency, or digital currency. In recent years, there has been a rise in the use of cryptocurrency, but it is still an unregulated segment in many countries, which makes KYC difficult. Owing to fraudsters using cryptocurrencies to exploit digital businesses, some countries have issued directives mandating KYC checks for all users. For instance, following the KYC and AML regulations issued by the European Parliament and the European Central Bank, users who could otherwise access the crypto platforms and transact upto a certain limit without verification, also need to complete their KYC. Crypto platforms leverage the latest digital technologies, similar to those used by fintechs, for eKYC and mobile-based KYC for customer verification.

Online sports betting platforms: Sports betting platforms are vulnerable to several types of attacks, prominent among them being money laundering, fake new account fraud, account takeover, bonus abuse, friendly fraud, age fraud, and self-excluded players trying to access the platforms. Most countries prohibit politically exposed people, children under 18 years of age, and people on restricted lists, from participating in betting or online gambling activities. Therefore, sports betting operators perform stringent KYC – usually eKYC and mobile-based KYC – to verify their users across parameters. This helps them ensure only legally allowed persons access the platforms, protect their platforms and users from online abuse, and stay compliant with the regulations.

Do KYC requirements differ according to the countries?

Businesses that serve consumers globally should be mindful of the KYC requirements of each country they operate in. This is because the KYC requirements may differ for each country. A number of international organizations such as the Financial Action Task Force (FATF) have compiled recommendations for the member countries to help promote a common standard that can be useful in fighting financial crimes.


What are some of the country-specific KYC requirements?

Each country can formulate specific KYC requirements to meet its local needs. Here’s a peek into the KYC requirements of some countries:

The United States of America: The Bank Secrecy Act (BSA) and the USA PATRIOT Act establish KYC requirements in the USA and are enforced by the Financial Crimes Enforcement Network (FinCEN), the US Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), US Commodities Futures Trading Commission (CFTC), and others. Businesses must verify a customer’s name, date of birth, residential address, and identification number (Taxpayer Identification Number such as an SSN or EIN).

United Kingdom: KYC requirements in the UK are specified in The Money Laundering Regulations, which are regulated primarily by the Financial Conduct Authority (FCA), as well as the HM Revenue & Customs (HMRC) and the Gambling Commission. Businesses are required to verify a customer’s name, residential address, and date of birth using documents (preferably government-issued) such as passport, driver’s license or any other ID which contains a customer’s photo and mentions their name, date of birth, and address.

France: In France, businesses must comply with the AMF General Regulation of 2009, which mandates collection of a government-issued photo ID and documentary proofs of customer’s address, occupation, and income.

Germany: The Federal Financial Supervisory Authority (BaFin) and the Federal Ministry of Finance (BMF) regulate the KYC in the country whereby businesses must verify a customer’s name, date of birth, place of birth, address, and nationality, as specified in the German Anti-Money Laundering Act (GwG). The documents required for verification purposes include a national identity card, passport, diplomatic passport, passport replacement papers, residential papers, and birth certificate as acceptable documents.

Mexico: The most important law establishing KYC requirements in Mexico is the Federal Law for the Prevention and Identification of Transactions with Funds from Illicit Sources. Businesses must verify their customers and request for information including name, gender, date of birth, country of birth, nationality, employment information, address, phone number, email address, Code of Taxpayer Registration (RFC), and electronic signature.

Argentina: The KYC requirements in Argentina are specified in the anti-money laundering law (Law 25.246) and is regulated by the Unidad de Información Financiera (UIF) and the Banco Central de la Republica Argentina (BCRA). The type of documents required for KYC are determined by the classification of the customers as ‘permanent’ or ‘not frequent’. A ‘permanent’ customer is required to provide documents verifying name and address while a ‘not frequent’ customer would need to provide documents verifying date of birth, place of birth, and citizenship in addition to name and address.

KYC in Brazil

In Brazil, regulations regarding digital account opening have existed since 2016. Using the Open Data Portal, consumers with authenticated digital identities can open their accounts online.

The KYC requirements in the country may differ according to the industry and the persons being onboarded. The common KYC requirements across industries may, however, include:

For domestic persons: To perform KYC of domestic persons, usually full name, date of birth, place of birth, address, email address, phone number, nationality, national ID number, ID expiration date, and identity documents (passport, driving license, credit/debit card) are needed.

For international persons: The KYC requirements to onboard international persons are the same as for domestic persons and need information including name, date of birth, place of birth, address, nationality, and identity documents.

For corporate entities: Corporates in Brazil are required to provide information including name, address, type and date of constitution of the entity, and nature of the business.


Why work with Caf for KYC?

KYC is an obligation which businesses must fulfill, regardless of the geographical location of their business operations. As regulations evolve in an increasingly digitized and dynamic economic landscape, businesses need processes that can adapt quickly. Failure to comply with changing regulations may lead to penalties and legal action, damaging the brand equity of the business.

That said, KYC need not be a burden – neither for the business nor for the consumers. Unnecessary friction or lengthy procedures can frustrate users, who may choose to switch over to a competitor. Poor KYC can also increase the workload of manual reviews for the operators' security teams.

Streamline your KYC process with Caf. Some of the biggest global brands trust Caf’s best-in-class KYC solutions to onboard millions of consumers every year and scale up their businesses across geographical locations. We remove the complexities in the KYC process to make the verification to onboarding process a breeze for the consumers, while reducing false positives. Onboard more customers quickly and securely so as to maintain the user experience you are known for, and gain the much-needed competitive edge.

Our market-leading solutions including identity verification, document verification, background checks, CPF consultation, facematch with liveness detection, and continuous monitoring, provide our clients with superior KYC enabling them to balance user experience, fraud prevention, and regulatory compliance.

Leveraging the latest technologies – artificial intelligence, machine learning, facial biometrics, optical character recognition, MFA, and so forth – the Caf platform helps deliver automated KYC, user authentication and onboarding. Our biometric technology is iBeta certified and our document verification can validate the authenticity of more than 3,500 Brazilian documents. Tapping into the threat intelligence from the global Caf network and ALL.ID, we help our clients augment their defenses against current and evolving threats, ensuring long-term protection from fraud.

To learn how Caf’s superior KYC solutions can help you accurately and quickly verify your users, book a demo or talk to a Caf expert now.

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