Think about this for a moment. Do you know your customer? In other words, are they who they claim to be? Is it risky to have a business relationship with them?
These questions are addressed by “know your customer” or KYC guidelines. All industries should practice due diligence to ensure that they are not dealing with customers who are guilty of fraud, money laundering, and bribery. Most countries in Asia, Europe, and the U.S. have established national identification programs to comply with KYC regulations.
Today, KYC has emerged from manual pen-and-paper checking to automatic verification against global data sources.
In this article, we will discuss how five industries benefit from following KYC rules.
Table of Contents
Banking and Finance
KYC is critical in industries involving large amounts of money. Banks and financial institutions are the main channels to launder money, evade taxes, or support illegal activities like terrorism and drug trafficking.
The 9/11 terrorist attacks in the U.S. led to the Patriot Act, requiring banks to verify their customer’s identity and their links to terrorist activities. Similarly, Australia has the Anti-Money Laundering and Counter-Terrorism Financing or the AML/CTF program that accomplishes two things:
- Identify and mitigate the financial risks of money laundering and terrorist activities.
- Streamline procedures to identify customers as well as beneficial owners, especially those tagged as politically-exposed persons (PEPs).
In the field of education, KYC is used to verify the identity of students taking significant examinations. In recent years, there have been reports of cheating in Australian universities wherein students cheat by asking other people to write their essays or take their exams. Some students even hire online cheating services to do ghostwriting.
Since real estate transactions are paid in cash or through loans and withdrawals from financial institutions, this industry is another channel for money laundering activities. In some cases, the source of funds and the identities of “real owners” remain concealed.
Another issue is title fraud wherein another person puts a mortgage of your property under your name. Real estate agents need to practice due diligence by verifying the identity of their customers.
Therefore, KYC in the real estate industry involves:
- Reporting transactions involving significant amounts of cash
- Declaring the buyer’s source of funds by providing documentation
- Conducting risk assessment based on factors like the customer profile, unusual relationships with third parties, the size of the deal, and the country
During the hiring and onboarding process, HR personnel follows KYC guidelines to check for the following:
- Fake or forged documents like diplomas and certifications
- Background checks
- Employment history
- Periods of unemployment
- Criminal record, including the sex offender registry
- Incidence of bank fraud or bankruptcy
In a recent case, imprisonment was the penalty for submitting fake documents – resume, references, and even a photo – to secure a job with the Australian government.
With the global market growing dependence on e-commerce businesses, there is a growing number of online frauds. KYC verification is done by online shopping portals to check if the buyer is valid. Aside from the usual customer details, credit card and nationality verification are essential to avoiding cashback requests.
By now, you should agree that KYC is essential in all kinds of industries. With the help of technology, the verification process is continually improving. Plus, with more countries developing their national ID system, more identity information can be shared across global databases.
Erica Jones is a freelance writer and a GOT fan. Apart from writing Technologies, she likes to read & write fiction. More than anything, she loves to spend her time with her family, explaining technologies to the elders.