Every enterprise is involved in financial activity, which can expose them to illegal processes such as fraud and money laundering.
Hence, it is pertinent for enterprises (businesses, companies or corporations) that want to escape the antics of fraudsters and money launders to know the importance of KYC in order to inculcate the processes in their enterprise.
These are the major importance of KYC:
- It helps reveal the source of a customer’s funds.
- It protects an enterprise from financial risks like fraud and money laundering.
- It monitors the monetary transaction between an enterprise and a customer.
- It helps with early detection of irregularities in a customer that may lead to risk for the enterprise.
- It updates an enterprise on the past financial transaction like the assets and liabilities of a customer.
- It provides an effective and objective way to streamline the process of verifying the authenticity of a customer.
Analysis of the Spike in Fraudulent Activity in 2021
In an article written by GlobeNewsWire, it was revealed that the number of suspected e-commerce fraud attempts during the 2021 holiday season was 25% increase over the 15.73% of fraud attempts observed in the year January to November 29th.
An identity fraud report by Veriff shows that fraudulent activity has had a spike of 61% increase in 2021 compared to 2022.
In US and Europe, the fraud rate was 8% in US while in Europe, it was 6%. In 2021, Europe has seen identity fraud doubled compared to the year before.
The federal trade commission also stated in an article reporting 2.1 million fraud cases were reported by consumers in 2020. Consumers reported losing more $3.3 billion to fraud in 2020 up from $1.8 billion in 2019.
What is KYC?
It is an acronym for KNOW YOUR CUSTOMER. It is a standard requirement globally used to mitigate, curb the irregularities in financial enterprises. It is a process used to reduce financial risks in business transactions between an enterprise and its customers.
KYC is an inclusive term for the processes and guidelines put in place globally for financial institutions and financial related institutions to know their customers.
There are certain programs, procedures and techniques to run an effective KYC procedures. They are Customer Identifications Program (CIP), Customer Due Diligence (CDD) and Ongoing Monitoring.
- Customer Identification Program(CIP): The CIP program is a type of program used by financial enterprise to create some level of trust for their customers. This involves taking steps to have the necessary details about their customers in order to have the reasonable belief that all customers are who they say they. Steps like knowing the name date of birth, address, Identification number, occupation, salary range and so on.
- Customer Due Deligence(CDD): This is a process used to collect facts about a customer that will enable an enterprise access whether a customer exposes the enterprise to risk or the extent to which a customer exposes the enterprise into risk. The approach includes collecting the identification of a customer from their company’s address. It involves collecting information about the activities a customer is engaged in and the financial enterprise they engage in. It involves collecting info about the other entities with which a customer transact with. It collects information that will show the likelihood of a customer involving in a financial crime.
- Ongoing Monitoring (a customer’s follow-up technique): After collection of the data from a customer, an enterprise monitors the transactions performed by the customer and ensure they align with expected behaviour. Customer profiles and financial engagement changes, thus, it is important to continuously monitor a customer. This process collects data that helps an enterprise keep up with the activities of a customer. It collects data that identify the purpose and nature of changing business.
The importance of knowing your customer can not be overstated due to the hike in Fraudulent activities as a result of poverty and unemployment. Hence, all enterprise should inculcate the KYC processes and guidelines in their business transactions. It helps to build a better customer service as well.