KYC (Know Your Customer) is a process used by all regulated institutions to verify their customers’ identities. As an anti-money laundering (AML) compliance tool, KYC verification is a legal obligation for financial organisations. 

To combat fraud, money laundering and illicit activities, all financial organisations must establish robust KYC and AML compliance. Compliance is difficult to achieve and is often a delicate balancing act; managing several workstreams whilst keeping productive is a challenge for teams. Disregarding compliance can cost a corporation lost income and brand damage.  

That is why any company that operates on a worldwide scale, regardless of its size or industry, devotes a significant amount of time and resources to ensuring compliance. 

Whilst most businesses have a strategy in place, only a small percentage of them understand how to effectively put it into practice, so they can keep the business running smoothly and profitably. The bulk of these businesses continues to make the same costly mistakes that harm their organisation time after again. 

What are the usual KYC mistakes?

Making simple but costly mistakes in your KYC strategy can put your organisation at a lot of risk. Listed below are the typical mistakes made in the field of KYC compliance. 

1. Failure to keep track of the regulatory framework as it evolves 

Businesses must adhere to continuously changing industry standards, national legislation and local and international regulations. It is important to note that there will always be a matching rule when a corporation is paid, undertaking financial transactions or dealing with personally identifiable financial data. These restrictions become more stringent, and the compliance rules become longer and more complicated every year. 

Companies frequently don’t comprehend or even realise what they need to be compliant with, such as due diligence on new clients, administration of AML procedures, monitoring of suspicious activity and so on. However, disregarding or failing to keep a close eye on the regulatory landscape can result in major errors in internal operations, as well as large fines, legal penalties and other regulatory implications. 

As a result, it’s critical for the compliance team to be informed of any minor change in legislation so that they can quickly adapt and respond to any compliance concerns that develop. 

2. Not staying up-to-date with technology 

Another major blunder made by businesses when it comes to building compliance is relying on outdated technologies that were either developed in-house or hired from a third-party service provider but never updated due to cost or technical limits. Many businesses assume that because the technology they use now has always worked well in the past and there has never been a problem with breaches, data loss or fraud detection, they will never need to improve. This is, however, a highly risky assumption. In fact, all types of con artists are aware of the advancement of fraud detection technologies. 

In 2017, the Financial Action Task Force (FATF) expressed optimism about technology advancements in the financial industry. It introduced RegTech in the same year and published a guide on using digital ID systems. This advice paper’s stakeholders include all regulatory agencies, government entities, and companies. 

It delves into the components, processes, and technological standards that go into using digital ID systems in the banking sector as the FATF wanted to bring about a significant change in KYC/AML compliance around the world.  

Further, the quality of forged documents has recently improved dramatically, and this trend is likely to continue, making it more difficult to spot forgeries in the future. As a result, having a secure identity authentication system in place is more vital than ever for your company. It will assist you in detecting fraudulent identities, remaining compliant and avoiding any KYC authentication errors. 

3. Lack of Complete Data 

Having access to data and knowing what to do with it is imperative. Internal data gaps can stymie compliance efforts and the ability to extract insights into customer behaviour, not to mention leave you open to financial crime risks. 

The significance of data cannot be overstated but many financial institutions keep and use incomplete customer data files. Missing and/or incomplete data allows criminals to exploit any flaws or mistakes in KYC and AML processes to commit crimes. Firms should prioritise improving the quality, integrity and accuracy of internal and external datasets. 

4. A breakdown in internal communication 

Internal communication helps all members of the team realise the significance of KYC compliance. When everyone is up to date on the most recent compliance requirements, the organisation is better protected from unpleasant audit surprises and bad actor damages. 

Furthermore, compliance officers do not need to waste time on things that are not within their purview. It is important to remember that a compliance error impacts the entire firm, thus everyone on the team should be able to prevent one. 

5. Using manual processes  

Using manual labour for tasks like data collection or overwriting existing documents might add flaws to the process. When compliance officers produce a document by hand, they run the risk of including material that is no longer valid or regulations that are outdated and unrelated. 

Financial organisations squander time and money on repetitive tasks that could be automated. By reducing tasks and saving time and money, data stream automation can improve performance and increase efficiency. As a result, time spent on data extraction and cleansing by analysts can be redirected to risk detection and mitigation. Automation helps the compliance department prevent human errors and guarantees that the company remains completely compliant with all regulatory upgrades. 

6. Risk evaluations that are inadequate 

A KYC risk assessment is basically a measurement of risk: either the danger provided by a single customer or the risk faced by an organisation. Most organisations calculate both risk scores since they are both equally significant. 

After you gathered data from your customers, you will have to compile them. And once completed, you can examine the data and calculate each client’s KYC risk assessment. If the consumer has a high-risk rating, you will need to keep a careful eye on them. 

7. Complacency in terms of security 

Businesses are responsible to guarantee the security of the papers stored in their system following the completion of KYC checks. 

According to the Government’s Cyber Security Breaches Survey 2020, 46 per cent of UK businesses and charities had experienced a cybersecurity breach or assault in 2019. Moreover, such attacks are becoming more common. 

It is the organisation’s responsibility to store the personal identification documents of the customers and protect the same from cyberattacks.   

When customers submit their personal identification documents to a company, they expect data security. Otherwise, a company’s reputation will suffer if its customers’ personal information is leaked. 

Why is KYC crucial?

All financial institutions are legally obligated to verify the identification of new customers to fight against crime and money laundering. 

KYC has become a requirement for each transaction involving a business-to-business relationship around the world. Any individual must first give adequate KYC documents – identity documents and proof of address – to banks, insurance companies and councils, as well as law and accountancy firms. You can read here to know more about the risk and the clients as well as to know why KYC is a crucial security layer for financial institutions and investors. 

Organizations use KYC authentication to verify the identity of their business partners and clients to comply with current laws and regulations. Failure to keep up with the KYC procedure could result in hefty fines for your business. As a result, in order to keep AML compliant, you must stay alert and up-to-date with your KYC procedure to avoid any costly KYC mistakes. 

Bolder’s KYC Solution

Whilst several organisations have the resources and understanding of KYC compliance to prevent costly mistakes, it is far more ideal and efficient to hire a third-party service provider who specialises in compliance management. This way, the company focuses on product quality and client satisfaction.  

At Bolder, we provide a broad spectrum of compliance services in all key jurisdictions throughout the world. We have a network of compliance teams from over 13 locations who are accustomed to local laws. Bolder’s whole due diligence workflow process includes compliance and KYC services for a variety of clients.  

Bolder has created a KYC platform that creates insights, assures consistency and provides complete transparency via an audit trail and reporting capacity to ensure KYC and compliance requirements are fulfilled and exceeded. 

Ready to partner with us? Reach out with our Bolder team today and strengthen your KYC/AML compliance.