Reasonable Methods in KYC Verification

Blog / Reasonable Methods in KYC Verification

KYC, short for "Know Your Customer" or "Know Your Client," is a method that companies use to verify the identity of their customers and evaluate their credibility. Financial institutions such as banks and insurance companies are among the most common businesses that employ this method.

KYC was first introduced in the United States in the 1990s, and it became even more critical after the 9/11 attacks, prompting tighter regulations.

The need for KYC has arisen due to the global nature of today's economy and the increasing need to monitor money flow. Governments worldwide attempt to prevent illicit activities and safeguard their stakeholders by monitoring the sources and movement of funds. KYC pertains to the procedures a financial institution (or business) uses to:

  1. Establish the identity of the customer
  2. Understand the nature of the customer's transactions (to ensure the funds are legitimate)
  3. Assess the risks of money laundering associated with the customer to keep track of their activities.

An effective KYC program requires three essential components: a Customer Identification Program, Customer Due Diligence, and Ongoing Monitoring.

how businesses can enhance their security measures by implementing robust KYC processes to protect against identity theft

Components of an Effective KYC Program

Customer Identification Program (CIP)

The Customer Identification Program in the United States requires that individuals making financial transactions have their identity verified. This program was established as part of the Patriot Act to prevent money laundering, terrorist financing, corruption, and other criminal activities. Similar provisions exist in other jurisdictions, and the Financial Action Task Force (FATF), a global organization dedicated to combating money laundering, has established guidelines for over 190 jurisdictions around the world, which include identity-checking protocols.

The primary goal of the CIP is for financial institutions to accurately classify their clients.

A comprehensive risk assessment, both at the administrative level and for each account, is a crucial component of an effective CIP. While the CIP provides guidelines, each organization is responsible for assessing the precise level of risk and implementing appropriate policies accordingly. The CIP explicitly outlines the minimum requirements for opening an individual financial account, including name, date of birth, address, and identification number.

Customer Due Diligence (CDD)

Customer Due Diligence is a crucial process undertaken by financial institutions to determine whether a new customer can be trusted. The main goal of CDD is to protect the company from potential risks posed by money launderers, terrorists, and Politically Exposed Persons (PEPs). This process is divided into three levels:

  • Simplified Due Diligence (SDD) is used when the possibility of money laundering or terrorism financing is low, and a complete CDD is not necessary. SDD is applied to accounts of minimal value.
  • Basic Customer Due Diligence (CDD) is the collection of information from all customers to verify their identities and assess the risks associated with them.
  • Enhanced Due Diligence (EDD) is an additional data collection process for high-risk customers that enables a better understanding of their activities and helps mitigate potential risks. While some EDD considerations are prescribed by law, it is ultimately up to the financial institution to evaluate the risks posed by its clients and take appropriate measures to ensure that they are not involved in illegal activities.

the link between KYC and CDD, highlighting their significance in AML compliance and fraud prevention

Ongoing Monitoring

Ongoing monitoring is a crucial aspect of financial risk management. Merely checking a client's identity during onboarding is not enough; banks and financial institutions must have monitoring software in place to track their customers regularly. The ongoing monitoring process is responsible for overseeing financial transactions and accounts based on the risk levels established as part of a customer's risk profile.

Periodic checks of high-risk customers are necessary to identify potential criminal activities. Continuous monitoring is used to periodically screen these high-risk customers against sanctions and PEP lists. Moreover, the ongoing monitoring process safeguards businesses against non-compliance and reputation loss. Depending on the consumer and the risk mitigation plan, it is essential to keep an eye on activities such as spikes, suspicious cross-border behaviors, individuals included on sanction lists, and negative media mentions.

If there is any irregular account activity, banks and financial institutions must report it by filing a Suspicious Activity Report (SAR).

Technological Improvements In KYC

In today's fast-paced digital age, it's becoming increasingly important for financial institutions to keep up with technological advancements to ensure the safety and security of their operations. One area where technology is making a significant impact is in the realm of KYC processes. With the rise of mobile devices and eKYC (electronic KYC) solutions, financial institutions now have more efficient and streamlined ways to verify their customers' identities and assess their risk levels. In this article, we will explore the latest technological improvements in KYC, with a particular focus on the benefits and challenges of mobile and eKYC solutions.

detailed examination of kyc and risk assessment products

Mobile KYC

Technological advancements have made it possible to conduct KYC remotely and securely, and one of the most promising areas is mobile KYC. In this method, mobile devices are used to collect, verify, and authenticate customer identity data.

Mobile KYC can provide several advantages over traditional methods, including convenience, speed, and cost-effectiveness. For instance, customers can submit their identification documents and personal information from the comfort of their homes or offices without the need to visit a physical location. This can save time and money for both customers and financial institutions.

Furthermore, mobile KYC can help financial institutions expand their customer base, especially in areas where traditional banking services are not easily accessible. By leveraging mobile devices, financial institutions can reach underserved or unbanked populations in remote areas, providing them with access to financial services.

Mobile KYC can also enhance security and reduce fraud risks. Mobile devices can capture biometric data, such as fingerprints or facial recognition, and use it to verify customer identity. This can significantly reduce the risk of identity theft or impersonation. In addition, mobile devices can track location data and detect suspicious activities, such as someone trying to open an account from a high-risk area.

Moreover, mobile KYC can improve compliance with regulatory requirements. Financial institutions are required to perform due diligence on their customers and ensure that they comply with AML/CTF regulations. Mobile KYC can help financial institutions meet these requirements by providing a robust and automated process for identity verification.

There are several methods of mobile KYC, including:

  • Selfie-based KYC: Customers take a selfie with their mobile device and submit it along with their identification documents. Facial recognition technology is then used to verify the customer's identity.
  • Video-based KYC: Customers record a video of themselves speaking and answering questions, which is then used for identity verification.
  • Mobile biometrics: Customers use the biometric sensors on their mobile devices, such as fingerprint scanners or iris scanners, to verify their identity.


Electronic KYC verification (eKYC) is a process that is gaining popularity due to its convenience and speed. eKYC involves using electronic identity verification (eIDV) methods to authenticate a customer's identity without the need for physical documents. This not only saves time but also provides additional security measures for financial institutions.

eIDV methods can include various non-documentary approaches, such as matching information from consumer reporting organizations, online directories, and other sources to verify the customer's identity. This process helps to ensure that the customer is who they claim to be and that their identity is not fraudulent.

Another approach to eKYC is to call the customer and verify their presence. This method can be especially useful when dealing with high-risk customers. Additionally, references from other financial institutions can be checked, and the customer's purchase history can be examined to validate their identity.

Financial institutions can also use a combination of documentary and non-documentary techniques to verify a customer's identity. For instance, they may use on-demand ID verification and eIDV procedures together, providing an additional layer of security while maintaining convenience for the customer.

eKYC has many benefits. For customers, it provides a quick and convenient way to verify their identity without the need for physical documents. For financial institutions, it offers a reliable and efficient way to ensure compliance with regulations while reducing fraud and risk.

advantages of Regtech in optimizing KYC and AML workflows, automating customer data screening, and reducing AML risk

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