A Brief KYC, KYB and AML Compliance Guide for FinTech Startups

New York City NY

18 March, 2021

6:09 AM

Description

With advanced technologies disrupting the financial industry, identity verification has taken the center stage. With skyrocketing data breaches and other financial frauds leaving individuals vulnerable to threats such as identity theft and account takeovers, regulatory authorities are taking a firm stance on KYC (Know Your Customer), KYB (Know Your Business), and AML (Anti-money Laundering) compliance. AI-powered identity verification solutions aim to reduce criminal activities, safeguard customer data, and minimize financial risk. Anti-money laundering (AML) regulations consist of an umbrella of techniques that can be used to counter these issues. Examples of such techniques include robust KYC and CDD (Customer Due Diligence) processes. For businesses, this means identifying legitimate customers through digital IDV solutions or hiring a third party for the same purpose. What is Meant by KYC for FinTech industries? KYC, abbreviated for Know Your Customer, is a business practice that enables companies to safeguard themselves and their customer base from a wide array of frauds. These practices have been made mandatory by global regulatory authorities on financial institutions such as banks, FinTech, insurance companies, etc. Any company that fails to comply with these regulations is liable to face hefty fines and penalties, reputational losses, and other legal issues. In order to prevent this from happening, FinTech is increasingly incorporating KYC standards to accurately verify the individuals they deal with. Generally, the KYC process consists of verifying and authenticating four basic elements of a customer’s identity: their full name, date of birth, residential address, and an official ID card number with their photo. By cross-matching personal details from public databases, FinTech can easily validate customer identity during the onboarding process. The second step in the KYC process involves verifying whether the existing or potential customer is trustworthy or not. For this purpose, customer due diligence procedures is carried out. As due diligence depends on the risk profile of each customer, the CDD levels are divided into two categories: Simplified Due Diligence or SDD: Performed on low-risk customers, for example, monitoring low-value transactions Enhanced Due Diligence or EDD: Performed on high-risk profiles, where a company requires additional documents to be submitted by the individual to better understand the risks, they may pose to the company What is Meant by KYB for FinTech Industries? KYB or Know Your Business is a part of the customer due to the diligence process that is performed on all organizations a FinTech may have a relationship with. Implementing such controls is not only mandatory for FinTech, but other financial institutions as well, such as banks, auditors, credit institutions, tax advisors, external accountant companies, etc. according to recommendations by the FATF and AMLD5. For FinTech to sustain itself in a highly competitive market, regulatory compliance has to be considered as a high priority. The five steps that make up an effective KYB process consists of the following: A basic application form has to be completed by the client business, that requires them to state the purpose of their company Official registration documents have to be provided for verification The Ultimate Beneficial Owner, a person that owns 25% of the business, is identified and is required to go through a thorough KYC process. This involves ID document checks and AML screening The business is required to identify the source of their income and the purpose of their intention to form a business relationship Once the initial KYB process is completed, ongoing monitoring is performed. This involves analyzing transactions and continuous screening of the business against global watchlists PEPs (Politically Exposed Persons) and sanction lists.What is Meant by AML for FinTech Industries? Due to increasing digitization, financial crimes have also evolved. Global regulatory authorities, such as the FATF, have imposed numerous regulations on the financial sector to reduce the likelihood of financial crimes. One of these regulations includes mandatory AML (Anti-money Laundering) procedures. Given these numbers, it has become evident that identity verification before onboarding customers is necessary, and traditional methods of identity verification are no longer sufficient. Therefore, most FinTech has integrated AML screening solutions into their systems or hired third-party identification service providers to keep a track of user risk profiles, to screen customers through global watchlists and sanctions within minutes, and to ensure that the customers are not in fact money launderers or terrorists.