Full Form Of Kyc Know Your Customer How It Works

Full Form of KYC – KNOW YOUR CUSTOMER

The KYC is a full form of three broad words: KNOW YOUR CUSTOMER. Sometimes, it is also referred to as KNOW YOUR CLIENT.

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Know Your Customer is a standardized process carried out by an entity to verify and determine future new engagements or clients’ identities. It is alternatively also used to assess the scope of business relationships.

Purpose

It is employed to facilitate comprehensive background checks.It is a standardized procedure utilized to gauge the requirements and intentions of the client.It assesses whether the intentions are legitimate or illegitimate.One may use it to reduce the problem of adverse selectionAdverse SelectionAdverse selection occurs when one party takes advantage of the other and holds back information that could potentially put the ignorant party at a loss. An example of adverse selection is when a company takes advantage of the buyer’s ignorance regarding the demerits of a financial asset introduced by them. Resultantly, they succeed in selling it to an unsuspecting buyer by using this information asymmetry.read more.Adverse selection is a situation wherein the entity in question has a bad profile for doing business and is interested in taking up additional risks on its head since the entity taking up service has more knowledge than the seller.Additionally, one may utilize it to reduce information asymmetry.It has broad usage in identifying customers or entities involved in money laundering.

Requirements

Normally, KYC is utilized in the onboarding of new customers by banks and financial institutions.To perform KYC, the bank may ask the new customer to submit valid ID proof.Acceptable proof of identity documents ranges from voter ID card, passport, and driving license.A valid ID proof should detail the first name, last name, and visible and identifiable picture with the birth date.It additionally asks for address proof.Address proof may range from utility bills, credit card bills, or acceptable ID proof.The address proof should detail the first name, last name, and address associated with the full name.It asks for a valid date of birth proof in some process.These documents help the bank understand how the entity, customer, or client looks and where they come from.As technology has progressed immensely, KYC representatives have also started collecting biometrics information.Some instruments store fingerprints and retina scans into fully secured databases.

Procedures

The individual wishing to engage with the bank or financial institutionFinancial InstitutionFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more for business has to reach the nearest financial institution branch.Once reaching out to the nearest branch, the individual has to reach out to the nearest available representative facilitating KYC’s process in the branch.The individual has to ensure that the individual has valid documents and there is no scope for invalid documents.The documents should decimate information on the individual’s background, and there should be no discrepancy.Submit the valid documents along with the biometrics to the nearest KYC representatives.

Implementation

For the implementation, the central bank of the nation establishes broad guidelines.The broad guidelines generally cover the cross-verification of KYC documents with the latest information in the government database.Therefore, as a KYC representative, the individual should specifically ask for the latest ID proof and address proof to facilitate the cross-verification of information.The representatives should ask and direct questions to the individual concerning their background. In turn, helps gauge the intentions of the party as to why they are looking to collaborate with the business.At the corporate or business levels engaging with a different business, the entities generally hire third-party vendors to facilitate the background checks for the employees hired under them.They lay down the guidelines to the third-party vendors on how they would perform KYC on their hired resources.Normally, a bank, financial institution, or corporation may collect ID proofs, address proofs, and biometrics of their employees or business entities.One must collect additional consent from banks and corporations for biometrics to curb potential misuse.Based on the entities’ risk, the process can be bifurcated into basic and enhanced KYC.The basics would cross-validate the details of the entity with KYC documents only.Suppose the risk posed by the customer or entity is relatively very high. In that case, the bank or third-party vendor will scan them using proprietary software that facilitates KYC.It can run scans regarding adverse media, politically exposed persons, etc.

Importance

The KYC has a broad application in detecting money laundering activities and the imposition of sanctions on funding terrorist activities. Money laundering is an activity that involves the illegal usage of financial assetsFinancial AssetsFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash.read more by disguising them altogether. The people involved in money laundering transform the money earned from illegal or illegitimate sources into legitimate sources.

The nation’s central banks establish broad guidelines of Know your customer, ensuring that money laundering activities curbs altogether. However, to maintain business reputations, big corporations have not taught the practice of knowing your client or customer to ensure that only the right candidates with no criminal backgrounds are on board for the job. Instead, the corporates specifically engage third-party vendors or businesses performing such checks.

These checks may include address verification and verification of credit scores. They also verify the education details and ensure that the corporation is not committing fraud to the organization.

Advantages

It reduces information asymmetry.It reduces the scope of adverse selection.It helps in onboarding only legitimate individuals, entities, or businesses.It prevents any potential threats from money laundering.Big corporations who onboard a prospective individual to the jobs perform background checks to ensure that the candidates are not involved in any illegal activities.

Conclusion

The Know Your Customer is a comprehensive process performed by banks, financial institutions, and big corporations. Moreover, it ensures that the business deals with and onboards only legitimate entities.

The process can bifurcate into several broad aspects. For example, as per the business need and criticalness of transactions, the KYC could be pursued in simplified form, or it can be enhanced to validate the credentials of the individuals.