KYC, an acronym for ‘Know your Customer,’ refers to the customer due diligence process that B2C or Direct to Consumer companies put in place to protect their businesses and customers from illegal activities such as money laundering or fraud. Conversely, B2B companies refer to the same due diligence process as KYB; ‘Know Your Business.’
Knowing who you’re doing business with and verifying that they are who they say they are is a vital part of compliance in most countries and crucial in doing business in the digital economy. While technology allows businesses to automate their services and expand reach, online fraud and financial crime have become more prevalent. More than ever, there is the need to protect businesses from establishing relationships with entities associated with fraud, terrorism, corruption, identity theft, or money laundering, among other crimes.
KYC is often required for some organizations — primarily financial institutions — to identify the customers they are doing business with while ensuring that their products and services are accessible to everyone. Some level of KYC is implemented before the business establishes a relationship with the customer, and other KYC procedures get implemented during the period of the business transaction.
Why is KYC important?
Every serious business or entity should establish some level of due diligence — investigation or background check — before committing to a contract, transaction, or agreement with another party. It is only normal that KYC procedures help fulfill basic levels of customer due diligence.
Hence, KYC is continuous due diligence, extending a one-time capture of customer data to include verifying its truthfulness and accuracy consistently throughout the engagement.
Compliance with Regulations
As businesses grow, reaching more customers and expanding their footprints in new countries, complying with the KYC policies of each country remains essential. KYC requirements are standard practice around the world, especially with regard to financial transactions and investments.
Each country has variations in terms of the exact information and documentation necessary to collect from customers and investors. However, the processes are similar and with the same intentions to better safeguard the financial industry and provide customer protection.
Reduced Potential for Fraud, Money Laundering, and Other Scams
An extra layer of security is no longer optional but necessary in this digital age to prevent fraudulent activity. Failure to include a detailed identity verification process in your business could leave you vulnerable to fraud and financial crimes. According to the Nigeria Inter-Bank Settlement System Plc (NIBSS), in the first nine months of 2020, fraudsters attempted 46,126 attacks on banks, ecommerce platforms, and individuals. 91% of these attacks were successful and were carried out via mobile apps, web platforms, and POS machines.
Protects Your Customers and Helps Build Trust in Your Brand
Verifying customers’ identities can improve transparency and build customer trust — when users are confident in the security of your business and that they are protected, they are more likely to continue using your services.
Trust is a major deciding factor when customers choose who to do business with. Setting up a thorough KYC process acts as quality assurance and assures customers that you value security and safety.
KYC as a Major Part of Compliance Across Countries
Most countries have a set of KYC regulations to protect their citizenry while also adopting money laundering recommendations outlined by the Financial Action Task Force (FATF).
The Financial Action Task Force (FATF) is a global policymaking body that designs and establishes international standards and policies, both at national and international levels, to combat money laundering and the financing of terrorism.
Here’s what KYC procedures look like in some African countries.
As part of efforts to increase financial inclusion and reduce the incidence of identity fraud, the Central Bank of Nigeria (CBN) introduced three tiers of KYC policies.
Some highlights of these policies are:
- Customers are no longer required to make a deposit before opening a bank account. This readily makes banking services accessible to everyone.
- The first tier of the CBN KYC policy requires that the bank has the following customer data: passport, name, place and date of birth, gender, address, and phone number. Tier 1 accounts do not need to verify this data and are limited to a singular deposit of ₦20,000.
- Tier 2 account holders must provide the same data as Tier 1. However, unlike Tier 1, they must also provide valid documents such as BVN, NIN, international passport, driver’s license, utility bill, or national ID card to verify this data. Tier 2 account holders are limited to singular deposits of ₦50,000.
- Tier 3 account holders must provide the same data as Tier 1 and support documents as Tier 2. Some benefits of Tier 3 accounts are that there are no deposit limits and they can act as both savings and current accounts.
- Financial institutions must monitor customer accounts for suspicious transactions.
These policies are not restricted to banks but also apply to mobile money operators (MMOs) and fintech companies like PiggyVest, Cowrywise, etc.
While the main objective of these policies is to promote and deepen financial inclusion, they also act as a safeguard against money laundering & financing of terrorism.
Guidance on KYC obligations in Ghana is laid out by the Financial Intelligence Center (FIC) as part of its framework called the Anti-Money Laundering Act. The Act states, “Accountable institutions shall not establish a business relationship until all relevant parties to the relationship have been identified and the nature of the business they intend to conduct ascertained.”
In compliance with the Act, institutions must:
- Access customer data such as their full name, date and place of birth, nationality, and address.
- Verify the customer data with valid Proof of Identity documents like passports, ID cards, etc.
- Retain customer data for at least five years after the account is closed or the business relationship ends.
The Bank of Uganda’s Anti-Money Laundering Act was defined to enable the prohibition and prevention of money laundering. The Act requires that all accountable bodies or cooperations should verify their clients’ identities using reliable, independent source documents such as their driver’s license, passport, and ID card.
As part of Uganda’s AML and KYC procedures, the Act also requires that individuals must now produce a national ID card, alien/refugee ID card, or passport to open a bank account.
Besides regulations placed on banks, Uganda’s financial regulators, Financial Intelligence Authority (FIA), have been pressuring the government to implement crypto regulations.
The Government of Kenya’s Proceeds of Crime and Anti-Money Laundering Act (POCAMLA) bill was set up to combat the offense of money laundering in Kenya and further strengthen the integrity of the Kenyan financial system. The Act requires the Board of Directors of financial institutions to ensure that their management obtains, maintains, and ensures proper identification of customers.
It places an obligation on financial institutions to store and maintain customer records and to monitor and report suspicious transactions or suspected money laundering activity to the Central Bank of Kenya (CBK).
What are KYC documents and requirements?
To ensure KYC regulations are complied with, businesses in Nigeria are required to collect the following details from their customers where appropriate:
- Date and place of birth
- Phone number
- Email address
- Occupation and name of employer
The following identity documents can be used to verify the captured customer details:
- National Identity Card
- International passport
- Driving license
- Voters Card
- Bank statement
- Current utility bill (water, electricity, gas, etc.)
- Tax assessment
- Birth certificate
- Bank Verification Number (BVN)
- National Identification Number (NIN)
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