Full Form of KYC – KNOW YOUR CUSTOMER
The KYC is a full form of three board words which stands for KNOW YOUR CUSTOMER. Sometimes, it is also referred to as KNOW YOUR CLIENT.
Know your customer is a standardized process carried by an entity to verify and determine the prospective new engagements or clients’ identity. It is alternatively also used to assess the scope of business relationships.
Purpose
- It is employed to facilitate comprehensive background checks.
- It is a standardized procedure that is utilized to gauge the requirements and intentions of the client.
- It is assessed whether the intentions are legitimate or illegitimate.
- It is used to reduce the problem of adverse selection.
- Adverse selection is a type of situation wherein the entity in question has a bad profile for doing business and is interested in taking up additional risks on its head since the entity taking up service has more knowledge than the seller.
- It is additionally utilized for reducing information asymmetry.
- It has broad usage in identifying customers or entities involved in money laundering.
Requirements
- Normally, KYC is utilized in the onboarding of new customers by banks and financial institutions.
- To perform KYC, the bank may ask the new customer to submit valid ID proof.
- Acceptable proof of identity documents ranges from Voter Id card, passport, and driving license.
- A valid ID proof should detail first name, last name, visible and identifiable picture with the birth date.
- It additionally asks for address proof.
- Address proof may range from utilities bill or credit card bills or an acceptable ID proof itself.
- The address proof should detail on First name, last name, and the exact address associated with the full name.
- It asks for a valid date of birth proof in some process.
- These documents help the bank understand how the entity or customer or client looks and where they come from.
- As technology has progressed immensely, the KYC representatives have started collecting information on biometrics as well.
- There are instruments that specifically stores fingerprints, retina scan into fully secured databases.
Procedures
- The individual wishing to engage with the bank or financial institution for business has to reach to the nearest branch of the financial institution.
- Once reaching out to the nearest branch, the individual has to reach out to the nearest available representative facilitating KYC’s process in the branch.
- The individual has to ensure that the individual has valid documents, and there is no scope of invalid documents with them.
- The documents should clearly decimate information on the individual’s background, and there should be no discrepancy.
- Submit the valid documents along with the biometrics to the nearest KYC representatives.
Implementation
- For the implementation, the central bank of the nation establishes broad guidelines.
- The broad guidelines generally cover the cross verification of KYC documents with the latest information available in the government database.
- Therefore, as a KYC representative, the individual should specifically ask for the latest ID proof and address proof to facilitate the cross verification of information as available.
- The representatives should ask and direct questions to the individual with respect to their background that, in turn, helps in gauging the intentions of the party as to why there are looking to collaborate with the business.
- At the corporate level or on the business levels engaging with a different business, the entities generally hire third-party vendors to facilitate the background checks for the employees hired under them.
- They lay down the broad guidelines to the third-party vendors as to how they would perform KYC on their hired resources.
- Normally, a bank or financial institution or corporation may collect ID proofs, address proofs, and biometrics of their employees or business entities.
- For biometrics, additional consents have to be collected by both banks and by the corporates to curb any potential misuse.
- Basis of the entities’ risk, the process can be bifurcated into basic KYC and enhanced KYC.
- The basic would cross-validate the details of the entity with KYC documents only.
- If the risk posed by the customer or entity is relatively very high, the bank or third-party vendor will run scans on them by utilizing proprietary software that facilitates KYC.
- It can run scans in terms of adverse media, politically exposed persons, etc.
Importance
The KYC has a broad application in the detection of money laundering activities and in the imposition of sanctions in the funding of terrorist activities. The money laundering is an activity which involves the wrongful usage of financial assets by disguising them altogether. The people involved in money laundering transforms the money earned from illegal or illegitimate sources to legitimate sources.
The nation’s central banks establish broad guidelines of Know your customer that ensures that the money laundering activities are curbed altogether. For big corporations also in order to maintain business reputations, have not inculcated the practice of the Know your client or customer to ensure that only the right candidates with no criminal backgrounds are onboard for the job. The corporates specifically engage third-party vendors or business that performs such checks for them.
These checks may include address verification, verification of credit scores. They also verify the education details and ensure that the corporate is not employing any fraud to the organization.
Advantages
- It reduces Information Asymmetry.
- It reduces the scope of Adverse selection.
- It helps in onboarding only legitimate individuals, entities, or businesses.
- It prevents any potential threats from money laundering.
- For big corporates who onboard a prospective individual to the jobs, perform background checks to ensure that the candidates were not involved in any illegal activities.
Conclusion
The know your customer is a very comprehensive process. It is performed by banks, financial institutions, and big corporates. It is performed so as to ensure that the business deals with and onboard only legitimate entities.
The process can be bifurcated into several broad aspects. As per the business need and criticalness of transactions, the KYC could be pursued in simplified form, or it can be enhanced to validate the credentials of the individuals.
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