The three main categories of Know Your Customer (KYC) are Identity Verification, Customer Due Diligence (CDD), and Ongoing Monitoring.
Here's a breakdown of each category:
1. Identity Verification
- Purpose: This is the foundational step, focusing on confirming the customer's true identity.
- Process: It typically involves collecting identifying information like name, address, date of birth, and government-issued identification (e.g., passport, driver's license). This information is then verified against reliable and independent sources.
- Example: A bank requiring a new customer to present a valid driver's license and a utility bill to open an account.
2. Customer Due Diligence (CDD)
- Purpose: CDD goes beyond basic identity verification to assess the customer's risk profile. It helps determine the potential risk they pose for money laundering, terrorist financing, and other illicit activities.
- Process: This involves gathering information about the customer's business, occupation, transaction history, and the purpose of the business relationship. Risk assessments are conducted based on this information.
- Example: A financial institution asking a business customer about their source of funds, business activities, and expected transaction volume. Enhanced Due Diligence (EDD) is required for high-risk customers.
3. Ongoing Monitoring
- Purpose: This involves continuous monitoring of the customer's transactions and activities to detect any suspicious behavior or changes in their risk profile.
- Process: This can involve automated systems that flag unusual transactions, periodic reviews of customer information, and manual investigations of suspicious activity.
- Example: A bank's system flagging a sudden large transaction in a customer's account that is inconsistent with their typical transaction patterns.
In summary, KYC is an ongoing process involving verifying a customer's identity, understanding their risk profile, and continuously monitoring their transactions to prevent financial crimes. These three categories work together to create a robust KYC program.
