In this day and age, it’s more important than ever to know your customer. Institutions like banks and other financial service providers are required to have Know Your Customer regulations in place to help prevent money laundering and terrorist financing. Increasing digitalization has created many challenges for businesses, as well as an exponential rise in online identity frauds and financial crimes. Integrating KYC compliance checks will be a secure and robust method of onboarding legitimate clients.
But what is KYC, exactly? And why is it so important? Keep to this article because we will answer those questions and more!
So, what is KYC?
KYC is a process that financial institutions use to verify the identity of their customers and assess the risk associated with each one of them. The goal of KYC is to reduce the risk of money laundering and terrorist financing by identifying and reporting suspicious activity.
Why is KYC important?
KYC is important because it helps protect both consumers and financial institutions from fraud and other illegal activities. By verifying the identities of their customers, banks can better identify those who may be engaged in criminal behaviour. This helps keep our banking system safe and secure for all users.
As mentioned earlier, examples of these criminal behaviours include:
- Money laundering – The process of disguising the source of money obtained from criminal activity.
- Terrorist financing – The provision or collection of funds to support terrorist activities or organisations.
How does KYC work in Australia?
The Australian government has also implemented KYC regulations to help combat money laundering and terrorist financing. The Australian Transaction Reports and Analysis Centre (AUSTRAC) is responsible for regulating financial institutions in Australia and implementing KYC procedures.
Customer identification and verification procedure
AUSTRAC requires all financial institutions in Australia to have a customer identification and verification procedure in place. This procedure must include:
- Verifying the customer’s identity – Financial institutions must verify the identity of their customers by asking for identification documents, such as a driver’s licence or passport.
- Checking the customer’s name against lists of known criminals and terrorist suspects – Financial institutions can use government databases to check the names of their customers against lists of known criminals and terrorist suspects.
- Assessing the risk associated with each customer – Financial institutions must assess the risk associated with each customer and can look into things like country of residence and occupation.
- Monitoring transactions for suspicious activity – Financial institutions must monitor all transactions for suspicious activity, including large or unusual transfers of funds. If they find any, they must report it to the AUSTRAC.
Challenges to KYC
While KYC is an important tool in the fight against money laundering and terrorist financing, it can also be challenging for financial institutions. It can be costly and time-consuming to verify the identities of all their customers, and banks must also balance the need to protect their customers against the risk of fraud.
KYC is a process that helps financial institutions identify and report suspicious activity, which helps protect consumers and the banking system from fraud and other illegal activities. Institutions like banks are required to have KYC regulations in place, and the Australian government has also implemented KYC laws to help combat money laundering and terrorist financing. Stay safe out there!