Understanding KYC Requirements for Banks

Know Your Customer (KYC) process for banks is the first line of defence against financial crimes like money laundering and terrorist financing. Failure to comply with KYC requirements for banks can attract severe penalties as seen in the $186 million fine of Deutsche Bank in 2023 due to failure to fix “unsafe and unsound practices” in its money laundering process. 

The digital nature of banking today puts even more pressure on financial institutions to ensure they are not facilitating money laundering. Regulators constantly update anti-money laundering (AML) laws to reflect recent developments in the fight against financial crimes. To stay compliant, it is important that financial institutions understand the KYC requirements and implement them accordingly to stay compliant and effectively combat financial crimes. 

What is KYC in Banking?

KYC refers to the process by which banks collect and verify information on the identity of a customer. This includes key information such as their name, address, phone number, etc. to ensure that they are who they claim to be and the bank’s service is not misused for financial crimes like money laundering. 

KYC is conducted during customer onboarding and also periodically after the customer has been onboarded. During periodic KYC, the customer information is updated with the most recent changes in the bank’s database; e.g. if the customer has changed their address or phone number. The duration depends on the client risk profile as periodic KYC should be conducted on high-risk customers more often than those classified as low-risk.  

Conducting KYC for customers helps the bank identify high-risk customers who have a higher chance of committing financial crimes. It also spots fake actors and prevents account opening with identity theft. 

An Overview of KYC Regulation for Banks

KYC regulations for banks are generally stricter and have severe penalties attached when broken. Although KYC regulations are generally governed by the recommendations laid out by the Financial Action Task Force (FATF). For example, the European Union is guided by the Anti Money Laundering Directive (AMLD) and South Africa by the Finance Intelligence Center Act. Nigeria on the other hand, is governed by the Money Laundering (Prohibition) Act 2011.

Depending on the jurisdiction the bank operates in, it is important that they understand the relevant KYC requirements and set structures to meet them. This involves different KYC compliance stages like customer due diligence, ongoing monitoring, suspicious activity reporting and more. Further due diligence should also be conducted for high-risk customers compared to others. 

Why is KYC Important for Banks?

Some of the benefits of KYC for Banks include; 

i. AML compliance

KYC is a core aspect of AMl compliance efforts for banks. It helps the bank identify risky customers and put processes in place to ensure they don't take advantage of the banking system. This helps the bank achieve compliance requirements set by regulatory bodies. 

ii. Eliminate Financial Crimes

Performing KYC helps fight a range of financial crimes like terrorist financing, money laundering and other criminal activities. By verifying their customer and knowing their financial habits, banks can detect unusual activities which might be an indication of financial crimes. 

iii. Prevents Identity Theft

Identity theft is a rising concern due to the digital nature of banking today. Fortunately, KYC processes help banks ensure that the customer opening an account is truly who they claim to be and not a fake actor masquerading with a false identity. 

iv. Customer Risk Assessment and Management

The result obtained from conducting KYC verification helps the bank asses the risk a customer poses and subsequently manage those risks for the duration of the business relationship.

v. Protects their Reputation and Builds Trust

Falling victim to money laundering facilitation will negatively impact the reputation of a bank as well as the trust level customers have in them. Conducting KYC can help banks ensure they don't fall victim to this in the first place. 

What are the KYC Requirements for Banks? 

KYC requirements for banks generally involve four foundational stages. The specific steps and processes in each stage should be defined to suit the bank’s unique needs. The stages are: 

1. Collection of Customer Data 

Banks need to have the right information on a customer to be able to conduct KYC checks. This is where customer due diligence processes come in. By collecting data on a customer, financial institutions can effectively assess them to ensure they would not expose the institution to unwarranted risks that may attract regulatory scrutiny. 

2. Customer Due Diligence and KYC Verification

After collecting the customer information, the next step is to verify the information collected. This is to ensure that the customer is who they claim to be and if it's a business, they are a legitimate entity. Activities undertaken include:

• Identity verification of customer data
• Verification of business registration information
• Identification of Ultimate Beneficial Owners (UBOs) 
• Verification of stakeholders and shares distribution, etc

The verification result of a customer determines the risk category they are assigned to as well as the kind of account the bank will open for them. The risk level of the customer also determines whether enhanced due diligence checks such as AML screening would be carried out.  

3. Ongoing Monitoring 

Beyond conducting KYC verification for customers during onboarding, banks are to constantly monitor customer transactions for suspicious activities and report them to regulatory authorities. This is done because the customer risk profile may change over time and banks need to stay abreast of these changes and implement respective measures.   

Ongoing monitoring processes by banks should look out for: 

• Unusual rise in transactions on the customer account
• Adverse media and AML list mentions
• Unusual large deposits and withdrawals
• High volume or irregular cross-border transactions
• Transactions from high-risk areas or with high-risk individuals

4. Suspicious Activity Reporting

One of the key reasons why ongoing monitoring is compulsory for banks is to ensure that they report all suspicious activities within a stipulated timeframe. This is because money laundering activities when not caught at the right time could quickly become untraceable as criminals employ sophisticated methods to cover their tracks. 

Banks are mandated to report all suspicious activities as defined by the AML laws in the jurisdiction and provide necessary information to aid the investigation if one is launched. 

Documents Needed for KYC Requirements in Banks

Acceptable documents for KYC verification in banks vary from one jurisdiction to another. However, regulators in most countries generally allow: 

a. Identification Documents

• Passport 
• National Identity Card
• Driver’s license
• Other government-issued IDs

b. Address Documents

• Utility bills
• Property documents
• Another other legal property document that shows the address

c. Proof of Income

• Salary pay slip
• Bank statement
• Tax returns
• Tax ID

d. Passport Photographs

• Clear passport photo or a clear selfie for digital onboarding

Achieving KYC Requirements for Banks Through Automation

The constantly evolving nature of KYC requirements for financial institutions today makes it impossible for banks to keep up while relying on manual legacy methods regardless of the size of their compliance team. Fortunately, these requirements can be satisfied through automation.

Automation should be at the forefront of a bank’s KYC process to ensure that customer information is efficiently collected and verified without causing friction in the onboarding flow. 

Smile ID offers a suite of compliance solutions that simplify implementing KYC processes. Banks can conduct KYC due diligence, and AML checks, and compile the right data for suspicious activity reporting. This improves customer onboarding rate and makes it easier for the bank to comply with KYC/ AML regulations and protect it from money laundering and other financial crimes.

Book a free demo with our experts today to see how it works.