KYC Compliance Checklist for Financial Industries.

KYC Compliance Checklist

Financial fraud and identity theft is an ever-present threat in financial industries. With more and more financial transactions occurring online and an overall digitalization of the field, this problem has become even more apparent and imminent.

KYC, or Know Your Customer, is a set of regulations that ensures the prevention of this unlawful activity. Different variations of these regulations exist worldwide, yet they are still enforced in most major financial systems. For example, in 2020, financial institutions were fined for more than $10.4 billion relating to KYC and data privacy violations. If you don’t want to become one of them, here is what you need to know about KYC.

What You Need to Know About KYC Components

The whole process that ensures the KYC compliance of the organization consists of several components. Each of them can be done with a certain level of scrutiny, with higher levels reserved for suspicious customers. While closer inquiry guarantees better security, it takes much more time and is more troubling for the customers. The KYC components, or steps, go as follows:

1. Customer Identification Program

The first step consists of determining a customer's identity and financial background. This is usually done through the forms of identification approved by a state or country. The main tools used for that are state-issued documents, like passports, driver’s licenses, social security numbers, etc.

Phases of Team Development

The amount of data needed for identification is determined by the institution. Still, it usually consists of the customer’s full name, date and place of birth, current address, and a unique ID. The document confirming this data should be thoroughly examined in terms of being relevant and valid.

When it comes to the CIP of a company, the identification should be made with the help of an official business license issued by the government. If the information provided is not enough, the financial institution should not hesitate to request additional information or relevant documents.

2. Customer Due Diligence

This step is meant for financial companies to determine how trustworthy their potential customer is. This is the primary step meant to prevent any fraudulent activity from happening; thus, it requires the most time and resources to be completed.

The first step in CDD is to determine the initial risks. Usually, this step is meant to filter out trustworthy customers with a long history of cooperation and great financial history that pose no substantial threat.

Phases of Team Development

The next part of due diligence is to ask the customers to provide the information that will allow the financial institution to investigate their financial history. This information is usually then tracked and used to determine the risks for any future transaction.

In the cases of high-risk customers, the institution may request further details on their financial activities. This is considered an Enhanced Due Diligence, and the data gained here is often used to categorize the customer profiles based on the potential for suspicious activity.

3. Customer Monitoring

Last but not least, the Know Your Customer compliance should continue after the transaction is completed, up till the customer discontinues their account. This requires continuous monitoring of the customer’s financial activity.

Phases of Team Development

The procedure behind it is different for each financial institution. However, most of them try to focus on unusual deviations of certain variables. Special attention is paid to offshore transactions and transactions to unidentified parties.

While the previous steps prevent suspicious activities at the moment, customer monitoring ensures security in the long run. However, the surrounding procedures are often tedious and require a lot of human resources to complete.

KYC Compliance Checklist

To help you ensure your conduct is compliant with the KYC, here is a checklist on how to actually know your customer and protect yourself from fraud:

Customer’s Proof of Identity

The first item on the list is an integral part of the CIP. The essential documents needed to complete it include:

  • Government-issued documents with proof of identity (driver’s license, voter ID card, passport, etc.)
  • A Permanent Account Number card. Make sure that the picture on the card matches the customer’s appearance;
  • A currently active credit or debit card, issued by an accredited bank.

Business’ Proof of Operations

If you’re dealing with an organization instead of a person, the CIP is still an essential process, but the documentation required is different. Among the documents you can ask for are:

  • Business license;
  • Certificate of Incorporation;
  • Company Tax Number.

Proof of Address

The next step is to confirm the physical address of the customer. The documents used to achieve this goal include:

  • Utility bills (water, electricity) with a verifiable address;
  • Driver’s license (make sure to confirm the conformity between the picture and the appearance);
  • A copy of the sale (or lease) agreement;
  • The same identification documents made in the name of a spouse.

Supporting Documents

If you feel that the information provided is not enough to ensure the security of the transaction, ask for one of the following supporting documents:

  • IRD number;
  • Tax files;
  • Proof of identity of a close relative or a first contact person.

KYC Automation Solutions

Manual KYC has a wide variety of problems. These include high costs, a high rate of errors due to the human factor, customer frustration, long hours, lack of standardization, and many more. Process automation can solve a lot of these issues. The existing technological solutions that can be used in the area include:

Artificial Intelligence and Machine Learning

Artificial Intelligence, and especially its branch in machine learning, has a great potential in automating a significant number of processes in KYC. Machine learning is based on data analysis, pattern identification, and improvement with experience.

Machine learning is a highly versatile tool. It can be used to analyze the data we have on fraudulent activity to determine specific patterns and recognize them in future transactions. It can also be “trained” simply to discover the missing information and automatically request the client to provide it. Right now, it is popular to use it for quality check automation, with the algorithm detecting the low-quality images and informing the customers of the need to provide another one.

Natural Language Processing

Natural language processing is a branch of artificial intelligence, which is also connected to linguistics. It deals with algorithms that recognize human speech and successfully translate it to a computer. It deals with word recognition, context clues, and other specifics of the natural language.

NLP can be effectively used to recognize and categorize large volumes of data you gain from the customers. It can be used in combination with virtual chatbots to pick the most useful and relevant information gathered in the conversation.

Intelligent Character Recognition

Intelligent character recognition is another branch of artificial intelligence that deals with text digitalization. This tool analyzes large pools of data to recognize the text on paper or the image and turn it into a text document.

As you might’ve noticed, KYC compliance requires the analysis of many documents, and they are often presented by clients in the form of a photocopy. ICR is a great tool to digitize such documents to simplify their further analysis, quality assurance, relevancy analysis. Furthermore, advanced algorithms are even able to recognize and digitize handwriting, which can be even more helpful in document analysis.

Software Robots

Another effective method of process automation is simply to mimic the repetitive actions humans perform with the help of the software solution. This is one of the easier-to-realize solutions, as, unlike artificial intelligence, it doesn’t need to be “taught” – the automation is the result of a straightforward code.

Such solutions greatly improve the efficiency of the KYC processes, especially if you consider that, unlike humans, such software robots can process the applications 24/7, without any breaks. They also don’t get fatigued by tedious tasks as humans do, which can often result in minor errors that are difficult to weed out.

Biometric Scanners

Moving from software technology trends, let’s take a look at hardware solutions that have become increasingly more popular in the financial industry. Biometric scanners, including fingerprint scanners and facial identification, are a part of most modern mobile devices. Their availability to the users makes them easy to utilize for KYC compliance.

Biometric scanners have a high fidelity rate, meaning that it is doubtful that a person can fake the biometric data read through such a scanner. However, the challenge is to get access to the database that contains the biometric data of your customer. Fortunately, there are certain other ways to confirm the person’s identification through biometric data, but the process needs to be worked on and improved.

Adapting KYC Protocols for Future Challenges

In an era where financial security is paramount, refining the Know Your Customer checklist to meet future challenges is essential. Financial institutions must anticipate changes in regulatory landscapes and adapt their KYC components accordingly. This involves not only a thorough understanding of current KYC components but also an anticipation of future demands and technological advancements.

A comprehensive KYC checklist should therefore be dynamic, incorporating both established and emerging components of KYC to ensure robust customer verification and risk assessment. By doing so, institutions can safeguard against evolving threats and maintain compliance with global standards. This forward-thinking approach ensures that the KYC checklist remains a cornerstone of financial security, providing a clear framework for institutions to follow while allowing for the flexibility needed to adapt to future developments.

Choose EXB Soft

EXB Soft is a web and mobile software development company committed to providing high-quality services from the start of product development to its quality assurance. What makes us especially relevant to this discussion is our experience developing an online banking system for small and medium enterprises. Not only was the system equipped with a well-designed UI and UX, with a wide variety of features, including different types of transfers and currency exchange, but the team is also KYC compliant.

If you need to develop a similar system, or you require any other type of KYC-compliant software solution, contact us to discuss our possible partnership!


Different jurisdictions have different requirements. Account holders must, however, generally provide a government-issued ID as proof of identity. Some establishments demand two forms of identification, such as a driver's license, birth certificate, social security card, or passport. The address must be validated in addition to confirming identity. This can be accomplished with either proof of identification or an accompanying document verifying the address on file.

According to Consult Hyperion research from 2021, financial institutions reported spending $60 million per year. According to a 2022 Thomson Reuters survey, some companies spend up to $500 million per year on KYC.

KYC triggers can include:

  • Atypical transaction activity
  • Client changes or new information
  • Changes in a client's occupation or the nature of his or her business
  • Adding new account participants

Proof of identity with a photograph and proof of address are the two basic mandatory KYC documents. These are required to establish one's identity when opening a savings account, fixed deposit, mutual fund, or insurance policy.

The distinction between KYC and AML is frequently misunderstood. They do mention some of the same requirements, but KYC is essentially a subset of all AML requirements. All regulatory processes in place to control money laundering, fraud, and financial crime are referred to as AML. KYC is the risk-based approach to customer identification and verification required by AML regulations.

Another distinction between AML (Anti-Money Laundering) and KYC (Know Your Customer) is that AML refers to the legislative and regulatory framework that financial institutions must adhere to in order to prevent money laundering. KYC is more specific and refers to the verification of a customer's identity, which is an important component of the overall AML framework. However, the terms AML and KYC are frequently used interchangeably.

IDnow has the right solution for a wide range of markets and use cases. IDnow offers compliant solutions for all other EU markets in addition to the BaFin from Germany and the FMA from Austria.

KYC Identity Verification is carried out by businesses or by commissioned third-party service providers. The goal is to validate customers' identities in order to assess their legitimacy and credibility while adhering to the regulatory requirements of the respective country.

Traditional banks, fintech, neo-banks, and cryptocurrency platforms, in particular, are required by law to conduct KYC processes before doing business with new clients. KYC processes aid in determining the legitimacy of a customer's identity and identifying potential risk factors (such as Politically Exposed Persons), fraudulent incidents (such as money laundering and identity theft), and other financial crimes (e.g. terrorism financing).

Furthermore, money laundering is still a major issue around the world. According to the UN, it accounts for 2% to 5% of global GDP (approximately US$800 billion to US$2 trillion). In the United Kingdom alone, the National Crime Agency reports that over £100 billion in laundered money affects the economy each year. Thus, through KYC processes, banks limit the ability of criminal and terrorist groups to operate.

The various Know Your Customer (KYC) identity verification procedures are typically classified as follows:

The customer is who they say they are, according to the Customer Identification Program (CIP).

Customer Due Diligence (CDD): Evaluate the customer's level of risk, including a review of a company's beneficial owners.

Ongoing monitoring of client transaction patterns and reporting of suspicious activity

KYC stands for "Know your Customer". KYC is a process used by banks and financial institutions to verify customers' identities. It occurs during the onboarding of a new customer and continues throughout the customer relationship. KYC is the process of knowing and verifying a customer's identity and financial activities, as well as determining the risk they pose.

In banking, the KYC process typically entails gathering customer information such as name, address, date of birth, and government-issued ID number. KYC assists banks in meeting anti-money laundering regulations and preventing fraud.

KYC is intended to protect both the bank and the broader financial markets from illegal activity. This includes participation in deception, money laundering, corruption, or bribery.

The Financial Action Task Force (FATF) first introduced KYC regulations in the 1990s, and their scope has expanded since then. The three components (or pillars) of KYC are sometimes mentioned. This refers to the three components required for a complete KYC program. Financial institutions are responsible for the technical implementation of KYC processes, but these components provide a framework for KYC.

A Customer Identification Program is the first component (CIP). Any customer, both individuals and corporations, must have their identity verified. CIP should verify that the customer is who they say they are. Beneficial owners are involved in corporations.

Customer Due Diligence is the second component (CDD). This entails gathering additional customer data in order to create a risk profile. Customers who pose a higher risk necessitate more thorough screening.

Continuous monitoring is the third component. KYC and AML are more than just one-time checks on a customer. Throughout the relationship, customer activity and status must be monitored on a regular basis. The extent and frequency of ongoing monitoring will be determined by the risk profiles of the customers, but it may include monitoring transactions, sanction lists, and media coverage.

The FATF provides regularly updated guidance for both KYC and AML, but it is up to individual country governments to make it law so that banks can comply. This is then overseen by a government regulator.

Over 190 countries follow FATF recommendations, with national financial regulators enforcing KYC and AML regulations. KYC is mandated by the Patriot Act of 2001 and overseen by the Department of the Treasury's Financial Crimes Enforcement Network (FinCEN).

The AMLD regulations (first issued in 1991 and most recently updated in 2021 with 6AMLD) and the eIDAS Regulations govern KYC and AML in Europe. The Proceeds of Crime Act 2002 and the Electronic Identification and Trust Services for Electronic Transactions Regulations in the United Kingdom are similar to those in Europe (2019).

Customer Due Diligence (CDD) has two tiers that reflect the level of checks that should be performed: Simplified Due Diligence (SDD) and Enhanced Due Diligence (EDD) (EDD). SDD is used for customers and accounts with a low risk of money laundering involvement, and it requires fewer identity checks.

When a customer is determined to be at a higher risk of money laundering or terrorist financing, EDD is used. Extra checks, such as transaction monitoring and sanctions list checking, are required to fully understand activity.

Account creation:

  • Identifying the ultimate beneficial owners
  • KYC refresh for loan or credit application based on risk level
  • COngoing sanction and PEP notification

The Financial Industry Regulatory Authority enacted the Know Your Customer Rule 2090 and the FINRA Rule 2111. (FINRA). Firms are required by the Know Your Customer Rule 2090 to take reasonable steps to gather information about their customers investment profiles, including their risk tolerance and investment objectives. In contrast, FINRA Rule 2111 addresses the suitability of investments for customers and requires firms to have a reasonable basis for recommending any securities products. These rules, taken together, help to protect investors by ensuring that they are only recommended products that are appropriate for their specific needs.

In order to obtain KYC, you will typically need to contact the company or institution directly. Many banks, for example, have online KYC forms or a KYC process that you can complete with little effort online. Furthermore, KYC requirements may apply when opening certain types of accounts or receiving certain types of services. Overall, obtaining KYC is a simple process that can help to ensure your safety and security when dealing with any type of financial institution.

The person certifying KYC documents must be authorized to do so by local regulations. Typically, financial institutions and government agencies bear this responsibility, but in some cases, a knowledgeable third party such as IDnow may be able to provide certification services. Regardless of who is in charge of certifying KYC documents, it is critical that they have the necessary skills and experience to accurately assess the authenticity of those documents. This entails going over the individual's identity information and looking for signs of forgery or tampering. Businesses can only feel confident in their ability to comply with KYC requirements and fulfill legal obligations when conducting transactions involving individuals or entities from other countries once the document has been certified.

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