Why is KYC Important for Banks?

Author: Eldon Broady

KYC verification is becoming increasingly important in the digital age, and many types of businesses and institutions should make sure they’re utilizing it. But what is KYC and why is it important for banks and financial institutions in particular? Read on to find out.

What is KYC?

KYC stands for Know Your Customer. Essentially, it’s the process where a business or institution collects information about a customer’s identity. The reason KYC verification is important is that it prevents things like identity theft, fraud, and more from happening. But this is just the beginning when it comes to the need for KYC procedures. Banks and financial institutions collect a variety of identity-related information about their customers to protect both the institution and the customer. Here’s why that’s important.

Why Banks and Financial Institutions Need KYC Verification

Banks and financial institutions are the primary users of Know Your Customer, and for good reason. When a bank or financial institutions has proper KYC verification processes in place, they can make sure their customers aren’t participating in money laundering, terrorist financing, or other illicit financial crimes. Not only does this prevent illegal activity, it also protects the bank from a legal standpoint. As mentioned earlier, it’s also valuable for the customers because it helps prevent them from becoming victims of identity theft or financial fraud.

How Banks and Financial Institutions Stay Protected

Banks must continue to update their KYC verification information to make sure their customers are always up to date. Know You Customer typically includes collecting information like government issued identification, verifying the proof of identity, and screening this information. This creates a customer profile for the bank and helps them determine the potential risk of any given customer. It also allows them to see which customers are at highest risk for financial crime, like politically exposed people, and monitor their activity more appropriately.

As you can see, KYC verification is exceedingly important for banks and financial institutions for a wide variety of reasons. Banks should make sure that they’re utilizing the best software possible and following best practices to ensure that their KYC is up to date and secure. Click here for more information on KYC verification.

Banks and financial institutions need to make sure their PEP screening processes are thorough and up to date. But what is PEP screening and how does it work? Read on to learn more.

What are PEPs?

PEP is a shorthand for politically exposed person. When a person does business with a bank or financial institution, they are screened for any potential financial risk. Politically exposed people are considered risks and are watched more closely due to their higher likelihood of being exposed to financial corruption, bribes, money laundering, and more. Due to this, PEP screening has become a standard process for financial institutions.

Who are PEPs?

PEPs are people who are entrusted with public functions. People can still be considered PEPs if they continue to hold influence after leaving their position. For the most part, PEPs fall under one of the following categories:

  • Public officials and representatives
  • Party functionaries
  • Former PEPs
  • Current or former official in branch of a foreign government
  • Senior executives of corporations or foreign owned commercial entities
  • Publicly know close associates or friends of a PEP
  • Immediate family members of PEPs

These are general guidelines, but the final risk assessment is up to the financial institutions itself.

How Does PEP Screening Work?

In general, PEP screening is more in-depth than the typical customer screening process. First, the bank or institution must approve them as a new client. They must also do identity verification measures. Enhanced due diligence will also be part of the process including, but not limited to, verifying an individual's source of wealth and funds. After the PEP becomes a client, enhanced monitoring and periodic review will be required on an ongoing basis.

If a bank or financial institution has done extensive PEP screening, they will be much more likely to prevent financial crimes such as corruption and terrorist funding. That’s why it’s important for banks to make sure that they’re staying on top of the latest PEP software and procedures. It ensures the safety of potential victims of financial crimes and it protects the institution from a legal standpoint.

Author Resource:-

Eldon Broady writes about identity verification and business verification service. You can find his thoughts at ID verification service blog.