What is KYC?
Know Your Customer (KYC) is a method of confirming a customer’s identification. Because many financial services have moved online, consumers and service providers frequently do not contact face to face. As a result, KYC is becoming more vital in the fight against money laundering. Regulatory authorities also require it to collect significant information on clients before allowing them to conduct transactions.
Aside from money laundering, other risks have emerged in recent years that have necessitated a stringent regulatory response. Money transfer routes are utilized to finance terrorist activities all around the world, making terrorist financing a major issue. As a result, it became critical to not only know a customer’s identification, but also to analyze their character and the potential reasons for which they would use the service. KYC laws apply to any institution that provides financial services through which users can move money, not just banks. Online wallets like PayPal and Skrill, money transfer services like Western Union, exchanges and brokerages, and so on are examples of these services.
KYC regulations apply not only to individual individuals, but also to businesses and organizations that use financial services. KYC requirements varies from country to country. If you’ve ever tried to buy bitcoin from an online exchange, you’ve probably encountered a lengthy verification process. Some exchanges ask for images of your ID and passport, as well as evidence of residency.
You may have also observed that some exchanges require more verification and information than others. This could occur for a variety of reasons. Some jurisdictions may take a more stringent approach to KYC regulations, while others may take a more relaxed approach. As a result, various regulations may apply depending on where the service provider is incorporated. Furthermore, despite the fact that regulatory bodies oversee the KYC process in private organizations, they do not always offer specific guidance on how to accomplish a successful user identification process. It is up to the companies in these situations to decide how thorough a process to adopt. Some prefer to be safe and ask for more information from clients, while others believe that a lengthy registration process may turn off potential customers.
A new trend has evolved in the introduction of multiple levels of authentication for internet services. When more documentation is supplied, a higher level is reached. Different functionality can be available with a higher verification level. This enables businesses to gain a user base without violating KYC laws.
Common KYC procedures in Africa
So, what is the KYC process that some financial institutions may be forced to follow? Customers’ identities are verified, accounts are checked to see if genuine individuals are behind them, forbidden lists are double-checked to see if the customer has been flagged, and the customer is assessed to see whether the services will be used for money laundering or other unlawful activities in the future.
Companies in the United States must comply with two KYC requirements: the Customer Identification Program (CIP) and Customer Due Diligence (CDD). While particular standards may vary by country, the essential concepts are followed throughout the developed world. Individual clients and companies have different KYC procedures. Companies must collect the following information about individual customers for CIP: name, date of birth, address, and identity number. Additional information may be required depending on the riskiness of a client. In some cases, banks and financial institutions may rely on third parties for this information.
Individual clients and companies have different KYC procedures. Companies must collect the following information on individual clients for CIP: Name, date of birth, mailing address, and social security number Additional information may be required depending on the riskiness of a client. Under certain circumstances, banks and financial institutions may rely on third-party KYC providers for this information. Service providers may be required to gather the following information for companies under CIP: certified articles of incorporation, company license, financial statement, financial references, and so on.
CIP is a less complicated procedure. CDD, on the other hand, necessitates a more in-depth examination of each consumer. Companies must evaluate the trends of individual clients’ transactions as part of their Due Diligence. These evaluations are later utilized to determine if a client’s transaction fits into the pattern. Each consumer must be allocated a distinct risk rating based on this approach. If the risk is too great, the customer’s services may be terminated.
Customers may be asked to give additional information in addition to the data acquired throughout the CIP process if they have CDD. This information could include their occupation, a description of their commercial activity, a description of the transactions’ aims, references, and the origins of the monies used, among other things. It is the service provider’s responsibility to determine what information will best assist them in determining a client’s riskiness.
Why choose a third party KYC solutions provider in Africa?
There is a clear trade-off between security and profitability for organizations. Overburdening KYC standards may reduce the danger of being fined for noncompliance, but it may cost the company a user base, since many innocent customers would be denied access to services. Failures in KYC could result in hefty fines. For this reason, a few significant banks were recently fined $2 million apiece. On the other side, certain jurisdictions provide regulatory havens for businesses. Those with the financial means to transfer their activities to those areas may be able to provide more easily accessible services to their customers. It’s important to strike a balance, which is frequently easier for experienced KYC professionals and teams to do.
Furthermore, acquiring and processing data is typically costly and necessitates human resources that aren’t always readily available in businesses. In such circumstances, finding KYC outsourcing providers that have the processes already set up and ready to go is typically easier and less expensive.
What do the KYC solutions providers in Africa do?
KYC solutions offer a wide range of services. Some may take on an advising role, providing legal advice on how good a company’s KYC services are. Others provide technological solutions such as biometric processing and client registration method engineering. It is hard to comply with KYC rules without automating the process for nearly every firm that handles money and has a significant customer base. Only modern technology, which is costly to develop, can accomplish this. As a result, third-party KYC service providers have developed, offering pre-configured automated processes.
Some businesses provide additional ongoing services, such as transaction monitoring. These companies employ clever technologies to examine users’ transactions in more depth. They can detect operations that are out of the usual for a particular user. There are also blacklist KYC providers, who keep track of consumers who have previously been deemed high-risk. These lists are used to cross-reference the customer base in order to quickly identify high-risk clients.
It is the responsibility of businesses to tell regulators when they discover a consumer who may pose a risk. This process can also be automated by using third-party suppliers who specialize in this type of communication.
The importance of KYC in Africa
The importance of KYC as a method of combating the rising number of illegal activities, such as identity theft, fraudulent financial schemes, money laundering, criminal financing, and round-tripping schemes, cannot be underestimated, especially as the financial and banking sectors grow at an increasingly rapid rate. In fact, KYC processes have become so established in the industry that significant industries have become completely reliant on KYC service providers for smooth operations. This has been notably clear in a number of industry examples, which we will investigate further.
KYC in insurance
The insurance industry is the first area we’ll look at because it has perhaps benefited the most from KYC as a service. The insurance industry as a whole is one of the industries that is most vulnerable to illicit activities and fraudulent schemes, and sees significant losses every year as a result. While it may appear that individual examples of daily frauds have little impact on the massive insurance sector, the opposite is actually true, and when the consequences of small scale daily frauds are added together, the negative impact becomes fairly significant.
The main reason why some insurance companies fall victim to the activities of scammers and fraudsters is due to insufficient KYC procedures, which result in cracks within security measures, cracks that aforementioned fraudsters seep through, with the results being very visible, resulting in insurance companies losing an average of $30 billion per year.
While the variety of such frauds is astounding, the two most popular methods are money laundering and fronting, both of which have evolved in recent years.
The money laundering strategies are rather simple. The deception is broken into three stages, making it more difficult to detect. The money launderer first deposits the “dirty” money into a financial account before moving on to the second stage, where the funds are moved in a series of transactions to reduce the risk of being identified as illegitimate, effectively “cleaning” the money and bringing us to the third and final stage, where what now appears to be completely legitimate funds are brought into circulation and used for various other purposes.
Money launderers buy insurance with large sums of money, which grants them premium life insurance plans, and then easily submit claims, terminate their policy, and launder their illegal funds. The relatively cheap cost of withdrawal fees that they must pay appeals to them the most using this strategy.
Another common tactic used by fraudsters is identity theft, in which insurance policies, often the most expensive, are purchased in the name of another person, who is unaware of the transaction.
The financial impact of such operations on insurance firms is not the only one; the frequency of frauds attracts the attention of regulators, and the resulting exposure harms the insurance company’s status and reputation.
This is when the window of opportunity for KYC data suppliers opens up, benefiting insurance firms significantly. KYC screening exposes possible fraudsters, preventing any form of criminal activity from taking place, thanks to the services given by KYC providers.
Forex trading in Africa and KYC
When it comes to KYC service and Forex trading, these two industries have a unique interaction. Forex is expanding at an exponential rate, with more and more traders from all over the world entering the market, and new brokerages springing up on a near-daily basis to participate in this tremendously profitable industry. The introduction of new regulations and the expansion of existing ones is an unavoidable reality as the field continues to expand globally, with traders from developed countries participating regularly in daily trading, developing countries seeing steady growth in their own share of the market, and emerging companies vying to increase their presence in the industry.
These restrictions have a direct impact on how the entire sector runs, affecting things like licensing, auditing, customer onboarding, and more for both traders and brokers. However, because Forex is a worldwide phenomenon, there are no unified criteria for how the sector should function as a whole. Instead, it is governed by a diverse set of laws and regulations that apply in different parts of the world, with differing scopes and ramifications that are difficult to quantify.
The AML and KYC laws, on the other hand, are nearly universally relevant to the Forex business in general, regardless of where brokers operate, and have a direct impact on how they recruit new traders to join their platforms. Brokerages are required by these requirements to conduct careful checks on their prospective clients, ensuring that their identities are validated and confirmed.
However, tackling such a mammoth endeavor may be easier said than done, especially in an era where Forex trading is instantly available from any mobile device, at any time. Manually checking and authenticating everyone who wants to join a specific Forex platform is a waste of time and resources, needing additional labor to be committed entirely to this work. Not to mention that doing it manually will almost certainly result in frequent errors and a longer customer onboarding process, neither of which is something any firm wants to undertake.
Because of these inefficiencies, brokers are hesitant to complete the verification process manually, which is where an AML KYC service provider comes in. The onboarding process is made incredibly efficient, fast, and effective through their services, ensuring that all regulatory criteria for customer verification are satisfied and protecting brokerages from any fraudulent schemes, all while keeping onboarding simple and quick.
KYC in online lending
When it comes to the fast increasing sector of internet lending, it’s no surprise that it’s growing so quickly, since it provides more convenience, ease-of-access, and speed of service compared to more traditional lenders, especially after the financial crisis in 2009. Surprisingly, with the quick expansion of this industry, a slew of scammers and fraudsters have flocked in, drawn by the promise of new, rich prospects for financial crime.
Similar to insurance, there are a variety of various fraudulent schemes in online lending, but a handful of them have been experienced considerably more frequently in recent years, as the number of such schemes has been continuously increasing.
The so-called application fraud is one of the most typical types of fraud found in this industry. This scheme works by combining various information gathered from data breaches and social media accounts to create a fake identity, which is often stolen, or a Frankenstein’s monster-esque synthetic identity, which is created by combining various information gathered from data breaches and social media accounts. What occurs is that the fraudster uses these identities to apply for a large loan, with no intention of repaying the lender. The use of a phony name assures that the debtor is almost untraceable, resulting in enormous losses for online lenders.
Because of the nature of the security procedures in place at many online lending organizations, such fraud schemes are often successful. While those algorithms are capable of detecting suspicious features in individual applications, phony identities are usually well-crafted enough to not raise any suspicions at first glance. What such systems fail to account for is the reality that fraudsters frequently apply with multiple phony identities at the same time, all of which have identical tendencies. However, the inability to see through these patterns is what allows such con artists to get away with large quantities of money.
This is when KYC software suppliers come to the rescue once more. They are able to better evaluate loan applications by employing a large network of digital data that is gathered from a variety of sources and businesses, and they are much better at finding common trends across numerous applications, making it easier to detect application fraud.
How to choose a KYC solutions provider in Africa?
Choosing a KYC provider is a crucial decision since, if it fails, the companies would be held liable for their mistakes. Companies can examine the reputation of providers because there is no inexpensive or simple way to audit the internal processes of KYC solutions. If the service providers have a broad client base, they are likely to be successful in adopting effective KYC procedures. It’s also crucial to see if the provider’s clientele suits one’s business requirements. As previously said, different jurisdictions have different regulations, thus if a provider has experience dealing with the KYC requirements of one regulatory body, they may not be as effective when dealing with another.
The type of KYC service provider chosen is also determined by the information required by the business. Businesses that need to verify the identities of internet users require distinct services than those that interact with clients face to face.
When selecting to engage a third-party KYC vendor to perform KYC procedures, there is also a legal element to consider. Some regulators may hold opposing viewpoints on the subject. A third-party provider may or may not be acceptable to the regulator, depending on the business and process. Many of these difficulties can be resolved directly with the service providers.
Furthermore, depending on the services supplied by KYC solutions, some business activities may alter. If too much work needs to be outsourced, the company may face additional risks, and relinquishing control of business operations is not in any organization’s best interests.
Requesting a demo is a quick method to check out the services ahead of time. Many organizations provide free access to their KYC solutions for a limited time in order to allow businesses to evaluate multiple providers and select the one that best suits their needs.