To prevent money laundering, terrorist financing, and illegal financial crime from happening in plain sight, financial institutions must put customer identification front and centre. The risks each individual poses must be ascertained from the outset, and their financial activity regularly reviewed from then on.
This is where ‘know your customer’ (KYC) protocols, or KYC, come into play. But, exactly what is KYC? And, how big a role does it have in the day-to-day running of companies in Australia?
Let’s get to the following commonly asked questions:
When we talk about knowing your customer, we don’t just mean having their name and date of birth on file. What KYC is all about is in-depth identity verification as a means of establishing each customer’s risk profile.
Simply put, it is a way of preventing money laundering from going on within a financial institution’s customer network, and protecting other customers from any illicit activity carried out by criminals and politically exposed persons. This is usually done by taking steps during the customer onboarding process and then continuing to monitor each customer thereafter.
Crucially, it is not solely down to each institution or company to regulate their own KYC policies. In fact, regional, national, and global financial institutions all have regulatory bodies to answer to, as well as legal frameworks with which they need to comply.
For example, in the US, KYC compliance is overseen by the Financial Crimes Enforcement Network; while in Canada it’s the Analysis Centre. And, over here in Australia, the Australian Transaction Reports and Analysis Centre (AUSTRAC) sets out all KYC rules and regulations.
Australia, like other countries, has its own legally inscribed KYC procedures, which companies such as banks and brokerages have to follow. The KYC regulations in this country are based on a couple of key principles, including anti money laundering initiatives (also known as anti money laundering AML) and the countering of terrorist financing, also referred to as CTF.
These principles of AML/CTF must lay the groundwork for any customer identification program put in place by a financial institution in Australia. Outside of this mandate, though, other customer-focused businesses can voluntarily implement AUSTRAC regulations, which acts as a sign to clientele that safety and security are an organisation’s top priority.
As outlined above, all reporting entities like banks and financial service providers must introduce customer KYC measures under the guidelines set out by Australian and global regulatory bodies. However, it is not solely companies within the financial industries that implement KYC policies.
While anti-money laundering AML and CTF protocols are undeniably most relevant to companies operating within the financial sector, verifying customers is of similar significance to businesses in other sectors, including charities and consultancies.
Companies need to know that any customers who sign up for their services are, in fact, exactly who they say they are. All of this starts with the onboarding experience, during which time customer identity must be validated using high-level ID verification processes.
Note: KYC requirements also dictate that customer due diligence must be undertaken. Here’s more about these two keystones of KYC compliance processes.
The AUSTRAC outlines that all businesses that fall under its jurisdiction must “check a customer’s identity by collecting and verifying information before providing any designated services to them,” whether they be digital banking or six-figure lending services.
So, all financial institutions in Australia must secure ID documents from customers and use them as a means of verifying the identity of each individual. However, document verification is the bare minimum that companies should be doing.
With fraudulent digital identities a cause for concern for financial institutions, more and more companies are implementing high-tech identification methods. These include requesting forms of video identification, employing facial recognition software, and introducing biometric authentication as a means of ensuring a person is who they say they are.
As well as helping a company to establish the legitimacy of any new customer, by taking all of this personal information into account, companies can start to assess the risks a person might potentially pose.
Important: If, say, the information provided by an applicant is of poor quality or does not match the records held by external reporting agencies, that will stand out as an immediate red flag. Or, if a person does not pass liveness detection checks when using facial biometrics, companies will know that, at the very least, they have some investigating to do.
Carrying out effective customer due diligence is essential for businesses that want to ensure their financial crime compliance is thorough, both during the onboarding process and beyond. It involves understanding the customer in greater depth, so a quick look at a form of photo identification isn’t going to cut it.
Enhanced due diligence might also be necessary in certain cases and, depending on the customer in question, their transactions, business history, and other considerations. Either way, customer due diligence might involve any of the following:
Plus, any number of other CTF and AML compliance processes, intended to prevent illegal activity and reveal politically exposed persons.
As time goes on, digital safety and security become harder and harder to manage. But, at the same time, as people become increasingly accustomed to doing things online, they expect faster sign-ups and transactions as standard. The online world is associated with speed and convenience, and companies that can’t live up to that expectation are in danger of losing out.
So, to meet the progressively stringent criteria set by financial regulators like AUSTRAC, institutions operating in the financial market have had to find ways to balance the need to meet high KYC verification standards alongside managing customer expectations.
Note: With 86% of customers nowadays prioritising a positive customer experience when choosing who to do business with, it is more crucial than ever that banks find a way to get the balance just right.
One of the biggest hurdles businesses have to overcome is the fact that KYC compliance is about more than the detailed information customers provide in their initial application. In reality, risk assessment has to be an ongoing task if it is to be effective.
Ongoing monitoring is, therefore, a necessity for companies hoping to catch suspicious activity early and do something about it before it becomes a problem. This can happen on a smaller scale, for example when a credit card provider spots unexpected financial transactions and suspends a customer’s card. Or, it can occur on a larger scale, such as when transaction monitoring is intended to catch out money laundering schemes.
Important: In order to ensure that all checks are carried out with the highest possible degree of accuracy, dedicated financial action task forces or financial intelligence teams might be set up within an organisation. It will be their job to spot suspicious patterns and ensure that the information they have is as up-to-date as possible, so as to more accurately audit individual customers.
Whether a company is primarily concerned with offering out personal loans or dealing with debt consolidation, customer service must remain a priority. At the end of the day, the customer's customer satisfaction is key, because they have to be able to trust that your organisation can deliver on its promises, all while keeping their money and data safe.
Onboarding processes in particular can be problematic in this regard. Customers generally expect signing up for a service to be straightforward and relatively speedy, especially when the process happens online. But, with KYC laws serving to make digital onboarding a much more time-consuming process, companies are having to find other ways to streamline their services.
Ultimately, there are two priorities businesses have to balance when it comes to implementing KYC successfully. One is the security of their customer base and overall operating ecosystem; the other is the sort of positive customer experience that will keep clients coming back to do business in the future.
That’s why balancing a customers’ risk with their overall satisfaction is not an easy task. The perfect KYC solutions need to be thorough, adaptable, and scalable if they are to be effective, but without being too prohibitive.
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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.
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