Organisations such as law firms working with new customers are constantly starting new relationships. And like any relationship, they will hopefully be mutually beneficial, long term and where both parties understand and trust each other. Therefore, during the initial stages of engagement you must get to Know Your Customer (KYC), and the end-to-end KYC process. Fortunately, there are some well understood standard processes for doing this which can increase efficiency and reduce risk for lawyers, law firms, and wider professional services.
The KYC process focusses on obtaining information about your customers for identification purposes. Effectively, the KYC procedures are fundamental in assessing customer risk and legal requirements when complying with Anti-Money Laundering (AML) laws. If the KYC process has been executed proficiently then knowing a customer’s identity, their financial activities, and the risk they pose should all be accounted for. The primary goal is to establish that the source of the customers funds is legitimate.
The KYC process can be broken down into three fundamental steps to complete the compliance framework, these are; customer identification; customer due diligence; and ongoing monitoring.
This is the first stage of the KYC process, and it focuses on verifying the customer’s identification documents to ensure that there are no inconsistencies. This tends to be done by checking that your clients name matches with their ID - usually a passport or a drivers licence. Identity verification is a crucial first step in the KYC process.
The due diligence stage follows several avenues including, collecting all available data on the customer (from trusted sources), determining the , intended nature and crucial beneficiaries of the relationship. Furthermore, within this stage there are more specific due diligence areas to focus on.
At the more basic end of the scale is, simplified due diligence which is where there is low risk of money laundering or unreliable funding, and customer due diligence is not necessary.
Following on is customer due diligence is where you obtain the customer information and verify their identity and asses the risks along with them.
Enhanced due diligence is a type of exercised due diligence which requires additional information about the customer to be collected due to them being a higher-risk customer. An example of someone who would be targeted for enhanced due diligence are those with political exposure. This procedure usually requires a greater level of scrutiny of potential partnerships and highlights risks that cannot be detected by customer due diligence.
This process simply ensures that after the customers initial checks and verifications, nothing further has been missed. Ongoing monitoring can be done in various ways, the approach is usually dependant on the specific customer and the risk mitigation strategy. There are aspects to look out for when monitoring for suspicious activity within a customer’s profile, these include, adverse media mentions, spikes in activities and out of area or unusual cross-border activities. If any of these occur, then potentially a suspicious activity report will need to be filed and accounted for.
AML is directly linked to the KYC process because AML is the blanket term for the constantly evolving laws and regulations that are in place to prevent money laundering and other related financial crimes. AML compliance is exceedingly more comprehensive and includes KYC compliance as one of its main requirements.
Looking to the future in this field it is clear that organisations must continue to increase the efficiency and performance with their customer onboarding, customer due diligence and AML end-to-end processes, and incorporate new regulatory changes, to retain the licence to operate and provide an acceptable client experience standard.
The future of KYC lies in digitalisation. With increased usages of artificial intelligence and machine learning it is these advancements which can help organisations with the rising issue of recognising and detecting new unseen patterns which reveal illicit activity and understand where their risks come from.
Overall, the Covid-19 pandemic has significantly accelerated businesses digital transformation and adoption of new technologies. In the new digital-first economy, organisations will no longer have a choice but to revolutionise and adapt their business models to the new advanced normal.
In relation to the customer onboarding, customer due diligence and AML processes, organisations will have to reconsider and reengineer its methods of gathering customer information. Also, there are opportunities to generate more insights for greater cross and up-selling.
For example, the scope of the data gathering digital process for KYC, customer due diligence and risk scoring, which is used at the start of the relationship and during the customers lifecycle, could be extended to gather supplementary relevant data.
Quite possible that digital transformation will enable a much wider geography between customer and supplier, and this means ‘remote’ relationships which reinforce the need for digital onboarding.
As you can see, when it comes to your company’s security, verifying digital ID is an absolute must. This ensures the safety of your company, staff, and clients’ data.
Here at Validient we help verify individuals using their digital identification to make it easier for you to start working with your clients, whilst ensuring you’re ticking all of your compliance boxes!
Additionally, Validient takes your client through the next steps for them to be fully engaged throughout their transactions. This includes regular transaction updates, additional documentation upload, and providing insights to your firm. For more information book a demo at https://validient.com/demo or contact us at email@example.com