KYC, AML and Identity Verification

Understanding who financial services clients are and the risks they pose is fundamental to achieving regulatory compliance. Balancing that with fast, convenient onboarding can help organizations build trust and fuel growth.

Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations govern financial services nearly everywhere in the world. Those regulations require companies gather and verify identity information, run sanction checks and perform due diligence to achieve compliance and mitigate risk.

Financial Services Compliance Requirements

Financial services are highly regulated in all their forms. Some compliance requirements apply to the entire industry, while others focus on specific sectors, such as wealth management and online trading. 

Financial services regulations vary by country and, in many instances, by state or province. Adding to the complexity, the requirements often change with updates or new guidance.

Financial crime compliance requirements are designed to counter crimes such as:

• Money laundering
• Cybercrime
• Bribery
• Corruption
• Securities and commodities fraud
• Bank fraud
• Mortgage fraud
• Insurance fraud
• Embezzlement
• Insider trading
• Market manipulation
• Credit fraud

Despite shifting compliance requirements around the world, there are some consistencies.

Program Governance

Compliance needs robust corporate governance, ongoing operational controls, sufficient staff and regular training to carry out its mandate. 

Data Privacy and Security

There are numerous data laws governing financial information. Privacy laws mandate requirements for personal data. Financial privacy laws determine how personal financial data is handled and shared. Digital records laws dictate standards for securely storing and managing financial records. 

Data lifecycle management processes can help organizations manage storing, using, sharing, archiving and destroying financial information.

Risk-Based Approach

A risk-based approach is a strategy of systematically analyzing the business, customers, partners, regulators, and the security and risk environment. A solid compliance program is characterized by understanding potential risk and taking corresponding actions.

AML and KYC

Running identity checks and watchlist screening helps prevent bad actors from getting an account. Those measures also help inform the due diligence process and establish risk profiles.

Organizations can also apply AML and KYC at key steps in the customer journey, such as in response to unusual account activity, exceeded transaction thresholds, major withdrawals, changes in personal information and account changes.

Payment Security

Compliance depends on ensuring funds flow securely in and out of accounts. Secure account access controls must be in place to protect against fraud, money laundering, account takeovers and other malicious activities.

Account Monitoring

It’s not enough to perform due diligence at account opening. Transaction values and types can change, altering the account’s risk profile. Transaction monitoring also can help reduce fraud, mitigate risk and improve operational control. 

Reporting

Maintaining complete, transparent records and reporting to regulators are fundamental compliance measures. Communicating with regulators, understanding their requirements and keeping them informed are hallmarks of a good compliance program.

Audits 

Performing continual reviews and audits to ensure systems and processes are robust helps avoid compliance failures.

Asset and Wealth Management Compliance

Asset and wealth management represents a significant portion of the global economy, with an estimated $103 trillion in assets under management as of 2020.

Wealth management firms offer a range of services including investing, estate planning and tax accounting. Due to the range of services, firms often need multiple licenses and must meet different reporting requirements. 

Many wealth management firms build their compliance programs around industry best practices. That approach helps standardize global operations and shows clients the firm takes security seriously.

AML Requirements

Many investment advisers might not face direct AML requirements, but their activities often require using entities that fall under compliance guidelines. 

For example, executing trades and holding securities requires broker-dealer platforms, which must ensure any investment adviser they do business with isn’t dealing with accounts connected to money laundering or other illegal activities. There are also Office of Foreign Assets Control and Securities Exchange Commission (SEC) guidelines around safeguarding client assets and protecting the integrity of the U.S. financial system.

“In light of the increased pressure by the SEC,” according to global business advisory firm FTI Consulting, “investment advisers may be better served viewing customer relationships through an AML lens, even if not currently required, since the fallout of failing to do so may already be at their doorstep.”

Learn more information about wealth management identity verification and KYC.

Enhanced Due Diligence

Enhanced due diligence (EDD) procedures can come into play when wealth management firms are onboarding clients. Some EDD practical steps, suggested by the Financial Action Task Force, include:

• Obtaining identifying information from a robust sources, and using it to assess customer risk
• Carrying out additional searches, such as through verifiable adverse media, to build the customer risk assessment
• Commissioning an intelligence report on the customer or a business’s beneficial owner to better understand if there’s a risk of criminal activity
• Verifying the source of funds involved in the business relationship 
• Seeking additional information from the customer about the purpose of the business relationship

Transforming Wealth Management

Once a traditional in-person business, the wealth management industry is adopting new technologies to better serve clients digitally. Mobile apps, robo-advisers and other wealth technology innovations are creating new ways to manage finances.

The first step in the digital customer journey is onboarding. Clients understand and respect robust security procedures. But they also don’t want to be burdened with slow and cumbersome processes.

Agile, intelligent digital onboarding technologies can help firms customize and optimize the experience to achieve compliance without compromising the customer experience.

Stock Trading and Broker-Dealer Compliance

Innovations such as fractional share trading, alternative systems and 24/7 access have created a global market for online trading. 

Securities compliance for broker-dealers includes general regulations and securities-specific requirements such as those covering sales and trading practices. Compliance is mandatory.

For online trading companies, success starts at onboarding. Broker-dealers with smooth AML, KYC and identity verification processes can streamline onboarding and build their client base.

“We needed a seamless onboarding process, one that not only addresses the regulatory requirement, but that also makes the process between sign-up and trading rapid and simple. We were also looking for a partner that has a global footprint, that is able to scale with us as we grow — there was only one option, and that was Trulioo.”
Dan Silver, Chief Operating Officer of Stake

Five Steps to Financial Services Compliance

Keeping up with the ever-changing complexities of financial services regulatory compliance is difficult. Add in rapidly evolving technologies, innovative service opportunities and expanding global markets, and the demands on compliance can be daunting.

But there are ways to streamline onboarding, automate identity verification and gain valuable customer insights. An agile, global identity verification platform can help financial services organizations build customer trust, achieve compliance and expand their global reach.

• Automated Onboarding

As financial service customers increasingly turn to digital interactions, automated onboarding can keep pace. Manual checks might be necessary in some cases, but many AML and KYC checks can be done automatically.

For KYC, digital identity verification can take input from people and match the data against known identity data sources. Identity Document Verification can compare photos of ID documents to government templates and ensure authenticity. It can also compare the photo on the ID to a live selfie.

For AML, Watchlist Screening checks identity information against thousands of AML watchlists worldwide to help prevent known criminals and corrupt officials from getting accounts.

For onboarding businesses, organizations can verify a company’s information and identify any connected entities and ultimate beneficial owners (UBOs). Assessing a business customer’s risk requires knowing the ownership structure and who benefits from its operations. That includes running AML and KYC checks on the UBOs.

• Adaptable Risk Assessments

Risk-assessment tools let companies tailor the information they gather to meet their needs. The tools enable automated identity verification workflows to adjust quickly to different scenarios based on customer or location risk. That approach protects the business but also ensures smooth onboarding in low-risk situations.

Customer risk levels often break down into four buckets:

• Low — Customers who can be easily verified
• Medium — Customers who could pose a higher risk and may require further due diligence and monitoring
• High — Customers requiring enhanced due diligence and close monitoring
• Prohibited — Customer profiles that strongly indicate suspicious behavior and risky transactions

• One Integration

Identity verification and compliance systems are often a patchwork of tools, data silos and isolated processes. Adjusting those systems can require new rounds of negotiations, additional integrations and more development time.

When financial services organizations leverage all those services from a single integration with one platform, the silos disappear, the tools work in tandem and the streamlined services can enhance and accelerate customer onboarding. When those services work together, organizations can unlock data analytics and customer insights that can mitigate risk and improve customer experiences.

• Perpetual KYC

Ongoing transaction and account monitoring helps financial services companies quickly flag changes in a customer profile to aid compliance and fraud prevention.

Understanding account status in real time can be a powerful organizational tool, providing insight into emerging risks and triggering reviews to prevent deeper problems. Automated checks that raise flags for further analysis reduce the burden on staff members while enhancing risk mitigation. 

An ongoing understanding of accounts can also lead to meeting customer expectations for additional services. In that context, KYC can help organizations strengthen client relationships.

• Streamlined Audits

Compliance programs typically must undergo audits of the information they collect. Automated onboarding and compliance workflows make that easier by providing clear digital audit trails.

Those automated processes provide additional strategic value over manual record keeping. Every customer who enters information into the system adds to its data analysis capabilities.

Intelligent internal audit processes can account for deeper data sets and analysis that can decrease risk and improve performance. It’s an additional line of defense that helps protect the compliance process by double-checking accounts after onboarding. 

The digital audit trail is a cornerstone of creating a resilient, agile and scalable compliance program. 

Balancing Compliance With Streamlined Onboarding

With the right tools, processes and expertise, financial services compliance operations can be much more than a necessary cost. They can enable fast, convenient onboarding and reduce customer abandonment. 

Automated, global and comprehensive identity verification can lift compliance programs above simply meeting regulations. It can provide insights into customer patterns, use cases and other data points that can improve risk mitigation and fuel growth.

When financial services organizations achieve compliance, enhance security and meet customers’ onboarding expectations, they’ve taken the first step toward long-lasting customer relationships.

Understanding Banking AML and KYC Requirements

Compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations is a critical component of banking operations.

A financial institution’s efficiency achieving AML and KYC compliance influences its ability to quickly onboard customers. The average onboarding process for a new corporate client can take up to 100 days, and more than 40% of that time is spent on KYC due diligence and account opening. 

Inefficient AML and KYC processes can lead to frustrated customers, lost business and sanctions or fines for noncompliance. When customer onboarding and ongoing monitoring are smooth, financial institutions can build consumer trust and expand.

Customer onboarding is crucial because it sets the tone for the business relationship. A slow, cumbersome process can sour the relationship and even lead to customer abandonment.

A clear understanding of what to collect and why can lead to smooth processes that take into account the customer’s point of view.

Why Does the Banking Industry Need KYC and AML Compliance?

AML processes are fundamental requirements in banking. Almost every country has strict AML regulations, with noncompliance leading to fines, sanctions and the risk of reputational damage.

Robust AML procedures often include:

• Clear, up-to-date written policies 
• A designated compliance officer with the power to influence the company’s actions
• Proper training so employees understand the company’s policies and procedures
• Periodic reviews to keep the program tested and current
• KYC is a critical function in banking and a requirement in complying with AML laws. It involves verifying a customer’s identity, financial activities and risk level.

KYC requirements during account opening vary based on local regulations, but they often include collecting and verifying identity information such as:

• Name
• Birthdate 
• Address
• Identification number

Identity verification can include validating documents or using other methods, such as comparing a potential customer’s information with data from consumer reporting agencies or other sources.

Once an identity is verified, financial institutions can perform additional due diligence to understand the nature of a potential customer’s financial activities. The due diligence steps financial institutions take depend on their risk-based approach to verification, which is influenced by factors such as:

• The types of accounts offered by the bank
• The bank’s methods of opening accounts
• The types of identifying information available
• The bank’s size, location and customer base, including the types of products and services used by customers in different locations

Watchlist screening also plays a crucial role in onboarding by checking if a potential customer is on a sanctions list or politically exposed. Those checks help financial institutions determine the risk of performing financial activities with people or businesses.

What Is KYB and Why Does It Matter in Banking?

Just as banks perform KYC on people, they need to perform Know Your Business (KYB) procedures for corporate customers. KYB entails knowing a business’s identity, its financial activities and the risk it poses.

KYB requires regulated entities verify a company’s:

• Business registration number
• Legal name
• Address
• Operational status
• Key management personnel
• Incorporation date

Depending on the risk assessment, further enhanced due diligence (EDD) might be necessary. EDD involves collecting additional information for higher-risk customers to gain a deeper understanding of their financial activity. 

Some countries require regulated entities have proper risk assessment and control procedures. Others outline the circumstances when EDD is necessary. 

Factors to consider for EDD include:

• Business location
• Nature of the business
• Purpose of the business transactions
• Expected pattern of activity in terms of transaction types, amount and frequency
• Expected payment origination and method 
• Articles of incorporation, partnership agreements and business certificates
• Understanding the business customer’s customers
• Identification of ultimate beneficial owners (UBOs) of an account or business customer
• Details of other personal and business relationships the customer maintains
• Approximate annual sales
• AML policies and procedures the customer has in place
• Third-party documentation
• Local market reputation through review of media sources

What Are UBOs and How Can Financial Institutions Identify Them?

The UBO owns or controls a business or legal entity. Understanding who UBOs are and the risks they pose is a critical part of EDD and can help financial institutions achieve regulatory compliance and enhanced security.

The definition of a UBO varies by country. The U.S. Financial Crimes Enforcement Network definition of a UBO, for example, includes:

“Any individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25 percent of the ownership interests of a reporting company.”

UBO information is often difficult to find. Nominee shareholders can hide true ownership. Shell companies or trusts can obscure information. The ownership percentage can be difficult to pinpoint and might require following complex paper trails.

There might not even be paper trails. Despite regulatory recommendations to the contrary, some parts of the world don’t have documentation requirements for beneficial ownership, meaning there is no shareholder information to investigate. 

Building an efficient UBO verification program often requires four key steps.

1) Receive company vitals

Collect and verify company records such as identification number, name, address, key management personnel. 

2) Analyze the ownership structure and percentages

Determine who has an ownership stake, either through direct ownership or another party.

3) Identify beneficial owners

Calculate the total ownership stake, or management control, of any associated person and determine if it crosses the threshold for UBO reporting.

4) Conduct AML and KYC checks

Perform AML and KYC verification, including watchlist screening, on everyone identified as a UBO.

There are technologies that can help financial institutions acquire, process and analyze KYB information. Leveraging a digital, automated platform can help financial institutions accelerate verification, ensure accuracy and quickly onboard business customers.

Deploying Robust and Scalable Bank AML and KYC Solutions

The global banking system processes more than a billion transactions every day, including through transfers, domestic and international payments, loans, and account opening. Each transaction represents an opportunity for financial crime, whether it’s money laundering, identity theft, fraud or terrorism financing.

Financial crime attack vectors continue to evolve, requiring changes to compliance requirements. New risks and regulations require analysis, strategies, processes, training, implementation, monitoring and adjustments.

Banking customers understand and appreciate the need for security. But slow, cumbersome onboarding can lead to frustration, potential abandonment and lost revenue.

Building and maintaining online trust in such a complex and diverse environment poses extreme challenges. A person and business verification can help financial institutions overcome those challenges by:

• Automating manual processes, such as data acquisition and data entry
• Using artificial intelligence to enhance data verification
• Combining data sets from multiple sources to develop a holistic understanding of customers and their associated risk

Automatically gathering data, fine-tuning risk-based processes to match specific situations and delivering accurate responses in a standardized format can help financial institutions save time and make informed decisions.

Compliance with AML, KYC and KYB regulations is not optional for financial institutions. But leveraging an agile, automated, global verification platform can help ensure organizations quickly achieve compliance while building customer trust and expanding their worldwide reach.

Understanding Know Your Customer Requirements for Cryptocurrency Exchanges

Like financial services, cryptocurrency exchanges have legal requirements to Know Your Customer (KYC). The goal is to better protect and maintain the assets and privacy of consumers in the onboarding processes.

What Is KYC?

KYC is a set of procedures critical to assessing customer risk and is legally required to comply with Anti-Money Laundering (AML) laws. KYC involves knowing a customer’s identity, financial activities and risk.

What Is KYC Crypto?

KYC for crypto is a set of steps cryptocurrency exchanges take during onboarding to verify customer identity and perform due diligence to understand their financial activities and risks. Those steps are legally required and, when executed correctly, should be relatively quick and secure.

During the KYC process, the crypto company obtains identifying information such as:

• Legal name
• Birthdate
• Address
• National ID number

Each country has different KYC requirements. Some call for ID documents. Others require customers fill out an online form to get an account.

Behind the scenes, the crypto company uses an identity verification service to ensure the identity is legitimate. Those identity procedures help protect the exchange and the financial system from money laundering, fraud and other financial crimes. 

Crypto exchanges are often legally obligated to preserve account information with advanced security technology. Applying KYC for a crypto account is a standard and safe process.

What Is AML for Crypto?

Crypto Anti-Money Laundering (AML) covers the requirements for regulated exchanges to prevent criminals from performing transactions. The goal is to stop illicit funds from entering the legitimate financial system.

KYC is part of AML, which also includes creating and enabling policies, training, designated responsibilities and review procedures. Screening accounts against watchlists, monitoring transactions and deploying an adaptable risk-based approach to verification helps ensure an exchange is compliant with AML regulations.

What Are KYC Standards?

KYC standards help safeguard regulated organizations — such as banks, credit unions, financial firms and crypto exchanges — against fraud, corruption, money laundering and financial terrorism. KYC measures also inform investment advisors about a client’s risk tolerance and financial position.

Essentially, crypto exchanges must ensure their clients are who they claim to be. Several steps comprise KYC measures:

• Establish customer identity
• Understand the nature of clients’ financial activities and the legitimacy of their funding source
• Assess money laundering risks associated with customers

The KYC process can include digital identity verification, biometric identification and ID document verification.

KYC procedures are essential to ensuring transactional security between crypto exchanges and their clients by assessing and monitoring risk and potential illegal activity. Exchanges may pause a business relationship or refuse to open an account if a client fails to meet the minimum mandatory KYC requirements. 

The pressure to conform to KYC standards increases as crypto becomes more mainstream and regulators ramp up penalties and fines.

Are Crypto Exchanges Money Service Businesses?

In the U.S., AML and KYC measures are mandatory for most crypto exchanges because they are defined as money service businesses (MSBs) under federal regulations. According to the Financial Crimes Enforcement Network (FinCEN), the Bank Secrecy Act (BSA) applies to companies that involve cryptocurrencies.

“The definition of a money transmitter does not differentiate between real currencies and convertible virtual currencies,” according to FinCEN. “Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter under the regulations implementing the BSA.”

MSBs must register with FinCEN and are subject to AML controls and regulatory compliance regarding record keeping and reporting requirements.

KYC and Crypto Exchanges

Crypto exchanges enable fast digital financial transactions. But with ease of use comes vulnerability to illicit activity and privacy invasions.

That increases the need for powerful, efficient KYC. But it can be challenging because:

• Regulations differ around the world and are constantly evolving
• Different identity verification solutions use different technology
• Global markets and decentralized channels create loopholes and uneven enforcement

KYC does not have a single definition or rigidly accepted course for compliance across different countries and institutions, making for varying and often confusing verification requirements.

With hundreds of providers in the market, deciding which crypto trading platform to use can be challenging. But exchanges with strong KYC steps demonstrate they understand compliance requirements and take those obligations seriously. The top crypto exchange platforms require identity verification procedures to meet KYC requirements.

Some other crypto exchange considerations include:

• Ease of use
• Security and privacy measures
• Reasonable trading fees and requirements
• Coin availability

What’s Next for KYC and Cryptocurrency?

KYC regulations are evolving to defend against illegal financial activity and better protect the digital transaction space. Those regulations continue to adapt as crypto expands and innovates and new threats emerge.

Travel Rule

Following Financial Action Task Force (FATF) recommendations, regulators are increasing requirements for the Travel Rule, which would establish rules around originator and beneficiary information to monitor transactions.

Different industry groups are working to create coordinated systems to comply with those rules.

Decentralized Finance

Decentralized finance (DeFi) uses smart contracts to perform functions that were the sole domain of financial entities. The World Economic Forum has cited DeFi proponents’ views of the DeFi benefits.

“Open-source technology, economic rewards, programmable smart contracts and decentralized governance might offer greater efficiencies, opportunities for inclusion, rapid innovation and entirely new financial service arrangements,” according to a World Economic Forum report.

But DeFi protocols that enable financial transactions without KYC could open the door to money laundering or other illicit financial activities.

Non-Fungible Tokens

Non-Fungible Tokens (NFTs) are mathematically provable as unique, and their ownership is verifiable on a public blockchain. NFTs aren’t just fancy digital collectibles. They’re a way to bring foundational business concepts such as ownership and contracts into developing web 3.0 platforms.

Without KYC, though, money launderers could convert tainted funds into NFTs to hide their assets or cover a money trail with multiple transactions.

Custodial vs. Noncustodial Crypto Wallets

A customer’s crypto holdings reside on a blockchain, but how can a customer access them? A crypto wallet contains a customer’s private keys to keep crypto assets secure and accessible. 

People can use a custodial or noncustodial wallet to store their assets. Most crypto wallets are custodial, in which a third party controls the private keys and holds more responsibility for fund security.

In eliminating third-party control, noncustodial wallets give consumers total control over their private keys and funds. They also provide anonymity because they don’t require registration with regulated exchanges.

KYC requirements around anonymous crypto wallets are not defined, but both the U.S. and the EU are starting to investigate.

The Metaverse 

As the use of virtual worlds increases, how will people interact and transact safely?

“I think cryptocurrency will become the coin of the realm for the metaverse,” said Hal Lonas, Trulioo chief technology officer. “It just makes sense. And all those same concerns will travel with crypto into the metaverse. As we look at that financial bridge, as money moves across the boundary,” it will require scrutiny.

Why KYC Is Essential to Cryptocurrency’s Longevity

KYC regulations protect cryptocurrency systems by decreasing customer risk factors, enhancing fraud prevention and prioritizing AML standards. A comprehensive identity verification platform helps secure digital transactions for people and businesses. Compliance with KYC regulations also can increase customer confidence in crypto by creating a sense of trust and safety.

It’s up to exchanges to protect the privacy of their clients. As regulations become clearer about information that must be legally disclosed, exchanges that focus on privacy, security and compliance could find a competitive advantage and opportunities for growth.