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What Is KYC And What Does It Mean For Compliance?

The banking industry has recently faced new and increasingly complex regulations. This has led large global banks to look for how they can streamline compliance within the ever-changing regulatory landscape that impacts onboarding and transaction times. Innovations in RegTech is rising with newly emerging start-ups and leading technology providers. The most sophisticated global banks are making efforts to eliminate risk and be more customer-oriented in their digital transformation agendas to create competitive advantages. One of the outstanding innovations in RegTech is KYC (short for Know Your Customer) whose screening process helps prevent identity theft, financial fraud, money laundering and funding for terrorism.

What Is KYC?
Know your customer, also known as KYC, is a RegTech policy adopted globally in the financial sector. KYC laws were first introduced in 2001 as part of the Patriot Act in the United States to provide a variety of means to deter terrorist behavior. Financial institutions need to know and understand their customers as well as their financial dealings for risk management. Banks or housing financial companies get to know their customers by following a Customer Identification Program (CIP) using a reliable and independent source of documents, data or information to verify the customer’s identity, current and permanent address, nature of business and financial status and so on. Usually, documents required for KYC compliance include ID card, passport and driving license. Furthermore, ongoing monitoring of transactions, known as Customer Due Diligence (CDD) watches for unusual transactions, cash transactions and suspicious transactions. Due to rapid globalization, financial institutes all over the world should stress KYC, keeping track of customer movements, risk assessment and profiling across borders. Breach of KYC rules and regulations can result in serious penalties by the regulators.

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Large global banks have begun looking at how they streamline compliance and the ever-changing regulatory landscape

Why Does This RegTech Matter For Compliance?
In 2014, more than 1.7 million suspicious activity reports were filed with the Financial Crimes Enforcement Network, 35 percent more than in 2013. Money-laundering and terrorist financing often depends on anonymously opened accounts. KYC will help avoid these problems by verifying customers’ identities and intentions and understanding their customers’ transaction patterns, financial institutions to therefore more accurately identify suspicious activities.

Apart from detecting fraud in transaction patterns, this RegTech application even lets banks detect suspicious or potentially fraudulent customers before they get to the bank, which lets them stop the fraud before it happens. This proves to be essential use of KYC because if fraud is detected in any business’ bank account, financial institutions will likely be required to pay a substantial fine. What’s more, if fraud costs skyrocket, they might lose the partnerships of credit card companies or banks, for example, or get a bad reputation among customers.

Moreover, regulations have become more diverse and strict, meaning financial institutions have to spend more money to comply with them. Yet there is still a lot ambiguity in terms of implementation. According to Iza Wojciechowska from fin.plaid.com, $4.3 billion in fines were levied against financial institutions in 2013 and 2014, a sum that quadrupled the fines of the nine previous years combined. JP Morgan and HSBC were recently each fined $2 million for a failure to report suspicious activity. To solve this, KYC allows them to absorb new regulation more readily.

The RegTech application of KYC allows banks to comply with regulation while still attending to their most pressing concern: giving their clients adequate time and attention. Moreover, with innovative products integrated into their clearing services, banks can help their partners provide risk mitigation for corporates – even when working in new, unfamiliar locations.

Challenges In KYC & Client Onboarding Faced By Financial Institutions And Corporates
The onboarding stage is often critical to the long-term profitability of a customer, yet the delay time often reduces revenue and generates customer-satisfaction issues. For instance, banks need four to five weeks, and in some cases three to four months, to bring a new corporate customer on board, which seems like an eternity in this digital world of online immediacy. This glacial pace can obviously frustrate corporate clients. Typically, onboarding systems at financial institutions are also largely disconnected from other systems, including KYC (Know Your Customer), credit and account opening. Banks need an onboarding application that helps them to deliver a seamless experience for their corporate customers.

Besides, many financial institutions are wary of the regulations leading to greater friction with customers who don’t appreciate having transactions blocked or having to constantly provide additional information.

Onboarding via KYC is an ideal alternative. The best applications are those that are able to manage regulatory changes globally, integrate with leading KYC utilities and legacy systems, globally manage complex entity onboarding and due diligence, and are able to scale.

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What Blockchain Can Do for KYC
Blockchain Technology can be a powerful tool to to improve KYC procedures. The technology allows for all data to be stored and transferred much easier and safer. The decentralized ledger system makes it possible to receive personal data and financial records without an expensive, time consuming middleman. This addresses current issues regarding onboarding times.

Information stored on blockchain cannot be manipulated or altered and therefore the data is more trustworthy. In regards to KYC, companies and institutions can therefore have even more faith in the data used to verify identities and personal activities. Entities that rely on blockchain for their KYC benefit from reduced costs, increased speeds and an overall greater level of trust that the information is true and people are accurately representing themselves.

How Blockpass Meets KYC Needs
One of the newly emerging options for applying blockchain technologies to KYC is Blockpass, a collaborative project between Infinity Blockchain Labs (IBL) and Chain of Things. Through the use of blockchain technology and smart contracts, Blockpass is a production ready Regtech platform offering shared regulatory and compliance services for humans, companies, objects and devices. It relies on KYC to verify identities of all connected humans and machines. The one-time KYC verifications then allow users to have their identities trusted by all parties they interact with. Data and information required for KYC verification is all transferred and stored on blockchain, which makes it inherently more secure and faster. The increased speed is especially attractive considering that is one of the issues facing KYC adoption.