Knowing who your customer is can help you enact protocols to deter financial crimes in financial institutions. KYC, short for “Know Your Client” or “Know Your Customer,” is a set of actions that help validate a customer’s identity before or while they do business with a financial institution, such as a bank. KYC verification can help keep run-of-the-mill fraud schemes like money laundering and terrorism financing at bay. 

If financial service providers verify a client’s identity and at the time of application and understand their transaction patterns, they are successful in pinpointing suspicious activities accurately. 

This blog will discuss the three essential components of KYC identification in detail. These include: 

1. Customer Identification Program (CIP): To identify if the customer is who they say they are. 
2. Customer Due Diligence (CDD): To assess the customer’s level of risk.
3. Continuous monitoring: To check a customer’s transaction patterns and report any suspicious activity on their account. 

1. Customer Identification Program (CIP)

In compliance with the Customer Identification Program (CIP), a financial institution asks customers for their identity information. Every Australian financial institution conducts its own process based on its risk profile. Hence, each institution may require different customer information. 

For individuals, most financial institutions require:

• A passport
• A driver’s license
• Medicare 

For companies, most financial institutions require:

• Certified articles of incorporation
• Business licenses issued by the government 
• Partnership agreements
• Trust instruments

For both businesses and individuals, a financial institution may require further verification. They might ask for:

• Financial statements
• Financial references
• Information from a public database or consumer reporting agency 

Using this customer data, documentation, and CIP, financial institutions can verify if the information provided is credible and accurate. There are several databases that use the power of identity data to facilitate banks, commerce, and financial services to unlock information about more than 5 billion people around the world. 

2. Customer Due Diligence (CDD)

Customer Due Diligence (CDD) is another essential component of KYC. It requires financial institutions to conduct detailed customer risk assessments. When carrying out CDD, financial service providers inspect the types of transactions a customer has made and will make to detect suspicious behaviour. 

Based on data from CDD, financial institutions assign a customer a risk rating to every customer that determines the frequency of customer account monitoring. All institutions need to conduct CDD to identify individuals that own 25% or more of a legal entity and individuals who control a legal entity.

There is no set standard method for conducting CDD. However, most institutions like to think of CDD in tiers:

• Simplified Due Diligence (SDD): SDD is the first tier for accounts low in value. It is conducted when financial terrorism or money laundering risk is not very high. 
• Basic Due Diligence (BDD): BDD is the second tier that financial institutions employ to identify a customer’s identity and risk level.
• Enhanced Due Diligence (EDD): EDD is the highest tier suitable for high-risk and high-net-worth customers. Financial institutions may need to gather more information about them to develop a deeper understanding of their financial activities and risks. 

3. Continuous Monitoring

The third and last component of KYC is continuous monitoring. Under this component, all financial institutions monitor their customers’ transactions on an ongoing basis to detect any suspicious or unusual activity. When such activities are detected, the financial institution is obligated to submit a report about the customer to AUSTRAC and other relevant Australian law enforcement agencies.

Final Words

KYC has far-reaching implications for financial institutions and their customers. All financial institutions in Australia are required to follow KYC standards when working with new customers. These standards reduce financial crime, money laundering, terrorism funding, and other illegal activities.