[Solved] Inadequacy or absence of KYC (know your Customer) standards (2024)

FAQs

What are the KYC standards? ›

Know Your Customer (KYC) standards are designed to protect financial institutions against fraud, corruption, money laundering and terrorist financing. KYC involves several steps to: establish customer identity; understand the nature of customers' activities and qualify that the source of funds is legitimate; and.

When a start-up fails to meet KYC requirements, it may be perceived as an irresponsible business that is not committed to combating financial crime. This can lead to the loss of customers, partnerships, and investment opportunities, which can ultimately result in the demise of the business.

KYC means "Know Your Customer". It is a process by which banks obtain information about the identity and address of the customers. This process helps to ensure that banks' services are not misused. The KYC procedure is to be completed by the banks while opening accounts and also periodically update the same.

Apart from fines, businesses that fail to implement adequate KYC processes may also face regulatory sanctions. These sanctions can include the suspension or revocation of licenses, restrictions on operations, and increased scrutiny from regulators.

KYC and Customer Due Diligence measures

Banks usually frame their KYC policies incorporating the following four key elements: Customer Policy. Customer Identification Procedures (data collection, identification, verification, politically exposed person/sanctions lists check) aka Customer Identification Program (CIP)

KYC checks remove the risk of onboarding customers involved with money laundering, fraud or other illegal activities like financing terrorism. This is very important when onboarding a politically exposed person, such as someone working in public office, who could be a target for bribery or corruption.

Following the 9/11 attacks in 2001, Congress passed the USA PATRIOT Act, which mandates that financial institutions know their customers (KYC) both as they onboard and as they interact with the institution. The USA PATRIOT Act also strengthened the BSA by setting more stringent AML standards for financial institutions.

Missing the deadline can lead to deactivation of your bank account. If your bank account has been suspended due to a re-KYC compliance failure, you can re-activate it. The process for activating one's bank account in case of re-KYC failure is the same for every bank.

The Reserve Bank of India initiated the KYC process as a part of compliance with the Prevention of Money Laundering (PML) Act and rules. The RBI introduced this process in 2004 and instructed all financial institutions to make KYC compliance mandatory for all their customers.

The five stages of KYC – customer identification, customer due diligence, risk assessment, ongoing monitoring, and reporting suspicious activities – are essential to ensure compliance with regulatory requirements.

Is KYC a yes or no? ›

It is compulsory as per RBI norms for customers to complete KYC before accessing services or making transactions at banks. You may consider KYC to be a protection against money laundering.

The Price of KYC Mistakes

Financial penalties: Regulatory bodies can impose hefty fines for non-compliance with KYC regulations. Recent penalties have reached millions of dollars, significantly impacting businesses. Reputational damage: Reported KYC failures can erode customer trust and damage your brand image.

Money laundering

Bad actors make use of technology such as deepfakes to falsify documents even facial features to trick financial institutions' KYC process. We are also seeing an increased number of money mules across the globe because crime syndicates hire foot soldiers with ease through digital platforms.

One way that banks and other financial institutions can ensure that they remain compliant with KYC regulations is to take action when new or existing customers do not follow the necessary steps to verify their identity. For example, banks can turn down new customers who don't complete the process.

KYC means “Know Your Customer”. It is a process by which banks obtain information about the identity and address of the customers. This process helps to ensure that banks' services are not misused. The KYC procedure is to be completed by the banks while opening accounts and also periodically update the same.

At their core, global KYC standards are designed to enable a uniform risk assessment and due diligence process so that the identity of individuals and entities engaging in financial activities can be verified and monitored across different jurisdictions.