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Regulatory News27 Feb 2023

Harnessing the Power of KYC in Africa: Compliance Requirements and Key Benefits

Rachael Wambua

Content Marketing Manager

Know Your Customer (KYC) is a process that helps companies know whether or not their users are who they claim to be. It is an essential tool businesses can use to protect themselves from fraud, keep up with regulations, and ensure their customers are safe. It helps businesses to combat fraud, financial crimes, and the risk of being affiliated with individuals who participate in illegal activities such as terrorism or corruption. It also aids in the development of trustworthy relationships between a company and its customers.

In addition to knowing who their customers are and what kind of danger they might pose, businesses must also be familiar with the policies they must follow and other compliance needs specific to their business and industry. In this article, we will highlight these regulations, provide examples of the acts that control them, and go into the fundamental KYC steps that will assist your organisation in remaining compliant.

Some Compliance laws and regulations

Anti-Money Laundering (AML) Laws and Regulations

Anti-money laundering regulations require organisations to implement proper measures to combat the use of the financial system for money laundering, terrorism funding, and other financial crimes.

In 2022, banks and other financial firms were fined roughly $5 billion for anti-money laundering violations, sanctions violations, and failures in their KYC systems, increasing the total since the global financial crisis to nearly $55 billion, with companies in the EMEA region being fined a total of $11 billion.

Businesses must do customer due diligence, monitor transactions for signals of suspicious activity, and report any suspicious activity to the appropriate authorities to comply with anti-money laundering regulations.

In South Africa, for instance, the Financial Intelligence Centre Act (FICA) was introduced in 2003 to combat money laundering and terrorist financing. In 2022, amendments were made to the act to strengthen and modernise this CDD/KYC requirement by requiring financial entities to identify the natural persons who ultimately own and use legal structures like companies /trusts (known as beneficial owners). It introduced a risk-based system of Knowing-Your-Customer (KYC), making it easier for customers to comply with the FICA (popularly known as "FICAD") if they pose less risk of committing financial crimes. It also requires financial entities to better manage their relationships with prominent foreign Public Officials and influential domestic Persons

Data Protection Laws

These laws regulate how customer data is collected, stored, and used, requiring businesses to obtain the necessary consent from customers before collecting their data. The value of privacy and data protection is becoming increasingly recognised as more social and economic activities occur online. As a result, governments and organisations are increasingly being held to higher standards when it comes to protecting individuals’ data, with clear and transparent processes put in place to ensure the data is used only for authorised purposes.

For example, in Nigeria, their data protection laws are regulated by The Nigerian Data Protection Regulation (NDPR), Nigeria's primary data protection framework. To query identity information under NDPR, it is necessary to comply with policies, including: soliciting explicit consent for the processing and cross-border transfer of personal data and ensuring the right of erasure. The Central Bank of Nigeria (CBN) also requires your business to be licensed to process BVN information directly.

These KYC laws and regulations have been implemented to safeguard businesses and consumers. As the digital economy grows, it's becoming increasingly important to follow fundamental KYC procedures and the laws of the country and industry you operate in. There are core KYC measures that a company must follow to get closer to KYC compliance and ensure that they only do business with trusted users.

Fundamental steps for KYC

Customer Due Diligence (CDD) - is the most basic step in the Know Your Customer (KYC) process and is mandatory for all businesses in Africa. Before conducting business with a customer, it is necessary to verify their identity to determine whether or not they are who they claim to be and to determine the level of risk posed by that customer.

Most regulations require the following information to be collected:

For individuals

  • Full name
  • Date of birth
  • Residential address

For businesses

  • Full name
  • Headquarters in the country of incorporation
  • Principal business address
  • Owners, directors' information

After collecting this, it is prudent for businesses to validate this information and check the user against global watchlists to ensure they are not on any sanctions lists. This is done during the Enhanced Due Diligence stage.

Enhanced Due Diligence (EDD) - is a higher level of KYC that requires more in-depth background checks as well as acquiring extra information about the customer, such as where their money comes from, if they are on sanction lists or are Politically Exposed Persons (PEP). Customers in this category might also be working in high-risk industries such as gambling or cryptocurrency.

Ongoing Due Diligence (ODD) - It is a great practice to keep tabs on user behaviour on your profile, no matter the logged risk level at CDD. ODD can be utilised to maintain a log of a customer's risk profile and guarantee that it is constantly accurate and up to date; this may require evaluating the customer's information regularly and conducting additional checks if their profile or user behaviour changes. ODD is important for figuring out what risks might arise over time and how to protect your business from them.

Some potential behaviours to look out for include:

  • Transaction frequency - An unusually high number of transactions is cause for concern.
  • Amount of each transaction - Customers who transact large sums of money may also indicate a problem.
  • Transaction location – Offshore or international transactions can indicate unlawful activity

Benefits of Efficient KYC Process To Business

In the previous sections, we covered the regulatory requirements and basic steps businesses must take to comply with KYC procedures. This section will focus on the key benefits of following KYC procedures. By implementing effective KYC procedures, businesses can:

  • Protect themselves against financial crime - Know Your Customer (KYC), and compliance measures provide protection against a wide range of financial crimes, including fraud, money laundering, and the financing of terrorist organisations.
  • Build trust - Customers in Africa are becoming increasingly concerned about the security and privacy of their personal information. This allows businesses to build trust with their customers.
  • Enhance brand reputation - Consumers perceive organisations that prioritise KYC policies and compliance as more responsible and trustworthy, and this perception can help the company's reputation and brand image. This can lead to higher client loyalty and retention in the long run.
  • Provides access to new markets - Many African countries have extremely severe KYC and compliance regulatory frameworks, notably in the finance and telecommunications industries. Companies that comply with these standards and fulfil their requirements can easily expand their consumer base and gain access to new markets.
  • Reduce costs and increase efficiency - Implementing effective Know Your Customer (KYC) and compliance practices can help to speed up corporate procedures and reduce regulatory compliance costs. This can result in improved operational efficiency. In the long run, this may result in increased efficiency and profitability.

How can Smile Identity help you harness the power of KYC?

Smile Identity helps you meet your company's day-to-day needs while complying with current regulations. We have an extensive understanding of the compliance requirements that govern various countries across the continent and localised experience. Using our platform, you can do user and business verification, ensuring that you are conducting business exclusively with legitimate people and corporations. We are on a mission to make Africans the most trusted users in the world, and we would like you to join us. Contact us and join leading African companies as we take this journey together.

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