KYC Compliance: Its Requirements & Steps to Follow

KYC compliance is demanded by regulators and often feared by businesses.

Today, we look at why it’s so challenging in our digital age and offer tips on meeting KYC regulations the smart way.

What Is KYC Compliance?

KYC compliance covers the steps your business must legally take to verify user identities. KYC requirements are set by governments, which is why there are variations from one country to the next.

The compliance part is verified by auditors. It’s their job to ensure that your business meets due diligence requirements – which you can do either by logging the data yourself or relying on professional third parties (for instance, accounting firms). 

It is worth noting that, historically, keeping a KYC audit trail for compliance has proved challenging. However, in the digital age, many businesses rely on third-party tools such as KYC software to automate record-keeping in a safe and reliable way.

Why Is KYC Compliance Important?

All legal KYC requirements must be complied with or you could face heavy fines from regulators. Nearly $1 billion was issued in KYC and AML fines in the first half of 2021 alone. This is just one of the many reasons why KYC compliance is a must for online businesses:

• Avoid heavy fines: The most direct – and dramatic – consequence for a non-KYC–compliant business is the fines. They can be punishing, not to mention a huge drain on legal resources.

• Reduce fraud: KYC is either mandatory or optional depending on your line of business, but it’s always a good idea to implement it to reduce fraud. The more you know about a user, the less likely you are to allow fraudsters on your platform.

• Protect consumers: Indirectly, blocking access to criminals on your site helps them reduce their activity, which means you are protecting people whose identities could have been stolen.
  

Maintain a good business reputation: staying in regulators’ good books isn’t just a benefit for your legal and compliance team. It also helps avoid PR disasters that could damage your business reputation in the eyes of customers and stakeholders.

What Are the KYC Requirements to Remain Compliant

KYC requirements may vary slightly from one locale to the next, but they generally require that you perform customer due diligence, create a customer identification program, and deploy ongoing monitoring. Let’s break down each process in detail.

Performing Customer Due Diligence (CDD)

Customer due diligence is of a series of risk-based checks designed to ensure that your customer is who they say they are and do not present a risk to your company or the country. 

The steps may include:

• Identifying the location of the customer
• Re-verifying ID documents
• Monitoring their transactions and payment methods

Note that there are other levels of due diligence, namely Simplified Due Diligence, which requires less information, and Enhanced Due Diligence (EDD), which requires the collection of additional data. 

Deploying a Customer Identification Program (CIP)

A customer identification program, or CIP, is the core of the KYC process. It is designed to establish steps to gather a customer’s

• Name
• Date of birth
• Residential address

In some jurisdictions, such as the US, you may also have to ask for personally identifiable information, or PII, such as a social security number. 

Ensuring Ongoing Monitoring

Ongoing monitoring ensures that your custom due diligence doesn’t stop after the onboarding stage. You should regularly flag suspicious activities and behavior, such as a spike in transactions, high-value payments, or logins from new locations.

While ongoing monitoring mainly focuses on transactions, it is also important to check your records for a customer’s change in status. For instance, a customer may become a politically exposed person (PEP), which requires the creation of reports for compliance officers.

The Challenges of KYC Compliance

Unfortunately, even the businesses with the best intentions face challenges when attempting to meet KYC compliance requirements. Here are just a few examples: 

• Data protection: There are two opposing forces there. On the one hand, you need to keep a paper trail. On the other, privacy-focused policies such as the GDPR force you to protect user data. How can you balance both?
• Automation and scaling: Back in the days of offline verification, KYC checks were limited by the number of agents who could verify identities. But in the online age, when businesses can be global and operate 24/7, you need a different set of features. The challenge is to find the right solutions that can grow alongside your volume of KYC checks.
• User friction: Adding identity checks in the way of users can be seen as a serious obstacle. This is especially true of companies targeting younger generations, such as challenger banks or BNPL.
• Cost: KYC costs & fees can be prohibitively expensive. A video ID verification vendor, for instance, will set you back on average $3 per check.

Steps to Follow for KYC Compliance

Now that we’ve established the importance of KYC compliance, let’s look at the tools and strategies at your disposal. 

1. Create a KYC Checklist

Did you know that legal KYC requirements are completely different for working with individuals and businesses? Or that you might need to check hundreds of different document types, depending on where you operate in the world?

The truth is that KYC compliance can be a logistical nightmare. Luckily for you, we’ve compiled a checklist of the best KYC practices and a 5-step process for you to get off on the right foot.

2. Deploy KYC Software

KYC software is increasingly popular, affordable, and easy to integrate with your business and help automate kyc. The range of features available varies greatly from one vendor to the next, but the key benefits should be similar across the board:

• Solves the problem of scalability and automation: No need to burden your team with manual reviews – the KYC tool will do all the heavy lifting, while you can concentrate on optimizing your onboarding process and only verifying medium-risk users.
• Outsourcing document verification to specialists: Most KYC vendors will operate globally, with relevant ID checks depending on the geolocation. This takes the burden off having to deal with local variations in regulations.
• Identification and authentication: Identifying users the first time is great. Ensuring nobody else accesses their accounts is even better. The best KYC software will let you do both by monitoring data both at the onboarding and login stage.
• Reduce fraud rates and boost competitiveness: Compliance might be seen as a hurdle, but it actually has a positive impact on reducing risk. By identifying users, you decrease the risks of identity fraud, which can lead to lower operational overheads and higher customer satisfaction. 

3. Make Sure Your Onboarding Is Fraudster-Proof

For many online businesses, the issue isn’t that they don’t have KYC checks. It’s that fraudsters have no problem bypassing them. And yes, even if you have tried your best to meet KYC requirements, this could put you at the mercy of the regulators. 

So how do you boost KYC compliance with anti-fraud checks? Here are some key tips:

• Don’t just ask for IDs: Fraudsters have plenty of resources at their disposal to find IDs, from phishing to data breaches – as well as synthetic ID methods.
• Be careful with video ID services: Sure, video selfies can work for verification. But they also add friction, cost a lot of money, and fraudsters can trick them using hired accomplices, photoshopped documents, or even deepfake technology.
• Look at alternative data too: Basic KYC checks for customers require that you verify a full name, address, and official document. But you can also go the extra mile with what is called data enrichment. This allows you to complete the picture based on a single email address or a phone number, and it’s a great way to immediately flag fraudsters before they risk making you non-compliant.

And speaking of data enrichment checks…

4. Consider Pre-KYC Checks

Data enrichment has another advantage when it comes to KYC compliance. It allows you to filter out junk users before they go through costly identity verifications. 

Put simply, it’s about saving time and resources – and ensuring you boost your chances of remaining compliant. 

Here’s an example of how pre-KYC data enrichment such as SEON’s can help. Consider this scenario:

1. A user signs up for your service.
2. Their IP points to proxy usage.
3. Browser fingerprinting shows that their browser has a suspicious configuration.
4. The phone number comes from a virtual SIM card.
5. Their email address isn’t linked to any social media profiles.

In short, all the signs here point to the fact that you’re dealing with a fraudulent user.

Do you really want to continue with the identity verification process? It stands to reason that you’re better off blocking them from your site straight away (and saving the data to look for similarly bad users in the future).

5. Combine KYC With AML and Ongoing Monitoring

KYC compliance and AML compliance are two different things, but they tend to go hand-in-hand. AML also overlaps with fraud prevention. Why not kill two birds with one stone when deploying your KYC software tools by also ensuring they can meet AML requirements?

This is why you could be looking for:

• the ability to check PEP and sanctions lists
• a real-time transaction monitoring software to flag and log those above a certain amount (this varies from one country to the next)

Regarding the latter point, this is also something your fraud prevention tool should be able to do, allowing you to keep your operations safe.

How SEON Can Help With Your KYC Compliance

SEON is a fraud detection system that is modular, allowing you to choose features that make sense for your business. 

And when it comes to KYC, some of the most innovative leaders rely on it to augment their identity verification process. For instance, for:

• Deploying SEON as pre-KYC filters to save on expensive checks
• Adding SEON’s IP, email, and phone data enrichment modules to verify identities, authenticate users, and complete their profiling
• Deploying device fingerprinting to understand how customers connect to your site
• Enabling real-time alerts for transaction monitoring to boost AML

Curious about how it all fits together and why 6000+ businesses rely on SEON for a wide range of use cases, including KYC compliance? You can see this for yourself in a demo using your own data.

Frequently Asked Questions:

Sources

• Fintech Global: Nearly $1bn was issued in AML, KYC and data privacy fines during H1 2021