Know Your Customer (KYC) checks are all about the processes behind identifying and verifying who customers are before a relationship can start.

They are a core part of what regulated firms do to conform to anti-money laundering compliance. They play a key part in helping to confirm customers are who they say they are, in assessing what level of risk, if any, they present, and in supporting much safer onboarding decisions.

These aren’t simply administrative steps; this is the first line of defence against threats such as money laundering, fraud, terrorist financing, misusing identities, and other forms of financial crime. By having a robust KYC process, businesses can gain a better understanding of who they’re dealing with, keep accurate records, and start to spot those potential risk indicators right at the start, so that they can apply the right level of due diligence.

In practice, KYC checks can include a few different processes to:

• Confirm a person’s name
• Check their address
• Validate their date of birth
• Verify any identity information against reliable sources
• Screen for sanctions or politically exposed person (PEP) status
• Monitor customer activity over time
  
  

For many businesses, it’s not the checks themselves that are the challenge, rather the fact of how long they can take and if they are performed consistently, without creating any unnecessary friction for genuine customers. It’s with these particular concerns where digital KYC checks and automated AML compliance technology can help.

What does KYC mean?

Understanding the KYC meaning isn’t just about what it stands for; it’s about the reason behind it and the purpose of KYC. For a business, the purpose of KYC is to perform checks to ensure they know who they’re dealing with, so that they can reduce the risk of being used for financial crime as much as possible.

KYC checks usually form part of a wider customer due diligence process and can help to answer questions such as:

• Is the customer who they say they are?
• Is the customer’s information a match with reliable data sources?
• Does the customer have any links to sanctions, PEP or other risk indicators?
• Is the customer’s behaviour consistent with the expected relationship?
• Does the customer require standard due diligence, simplified due diligence or enhanced due diligence?
  
  

KYC is more commonly associated with banks and financial services, but it is also extremely relevant to legal firms, accountancy firms, estate agents, letting agents, investment firms, and many other regulated organisations.

Why are KYC checks important?

Performing these checks is so important as they help businesses to reduce any financial crime risk before a customer relationship even starts.

Without these effective KYC checks, there may be a situation where a business unknowingly onboards a customer who is using false details, trying to hide their identity, has links to criminal activity, is subject to sanctions, or is acting on behalf of someone else.

A strong KYC process supports businesses by helping them to:

• Verify customers before onboarding
• Identify those individuals who are higher-risk
• Support AML compliance
• Reduce any exposure to fraud
• Maintain accurate customer records
• Apply a level of due diligence that is right for the situation
• Support thorough audit trails and regulatory reporting
• Protect the business, genuine customers and the wider financial system
  
  

KYC also has the added benefit of supporting a stronger customer experience when it’s handled properly. Traditional manual checks can often be slow and repetitive, which can leave them prone to error. Digital KYC checks, on the other hand, can support businesses in verifying customers faster. They can reduce the amount of document handling and make the whole onboarding process one that is much smoother for legitimate customers.

How does the KYC process work?

The process itself will vary depending on the type of business it is, the sector it’s in, the type of customer you’re dealing with, and the level of risk that’s involved. However, for most, the KYC process will look something similar to the structure below:

1. Collect customer information

At the start of the process, the first step is to gather any key information about the customer. For an individual, this can include:

• Their full name
• Their date of birth
• A current address
• A previous address (where relevant)
• The best contact details for reaching them
• Their nationality or country of residence
• Any identity document details (where required)

The exact information you’ll need for a particular customer will depend on what the business relationship is and the level of risk you're dealing with.

2. Verify the customer’s identity

Once you have all of the information, it’s about verifying that the customer is who they say they are.

To do this, you’ll need to check the customer details against any reliable and independent data sources. These sources can include:

• Electronic database checks
  

• Identity document verification
• Address verification
• Credit reference data
• Government data
• Biometric checks
• And any other approved verification methods
  
  

The aim of this is to confirm that the details you’ve been given are correct and that you’re dealing with a real person.

3. Screen for sanctions and PEPs

When performing KYC checks, they will often include screening customers against sanctions lists, politically exposed person lists and other necessary watchlists.

A PEP, or politically exposed person, is someone who has held or currently holds a position of prominent public function. It’s important to remember that this can also extend to close associates or family members. If a customer is a PEP, then this doesn’t automatically mean that they’ve been involved in any wrongdoing; however, it may be an indicator of a higher level of risk, so would require additional review.

When it comes to sanctions screening, businesses are on the lookout for any individuals or entities who are subject to relevant sanctions restrictions, as these relationships should be avoided.

4. Assess customer risk

Once the customer has been verified, it will become about the level of risk that you’re dealing with.

Via the KYC checks, a business may assess factors such as:

• The location of the customer
• The type of product or service being used
• What is the purpose of the relationship?
• What is the expected transaction behaviour?
• Where the funds or source of wealth has come from (where relevant)
• Checking against sanctions lists or for PEP exposure
• If there are any links to high-risk industries or jurisdictions
• If the customer is acting on behalf of someone else
  
  Through answering all of the above, the business will be able to identify the level of due diligence necessary.

5. Apply customer due diligence

Customer due diligence, also known as CDD, is the wider process that takes place to identify, verify and assess a customer.

For customers identified as lower risk, the standard checks may be sufficient, but for those labelled as high-risk, enhanced due diligence may be necessary. This may involve collecting additional information from deeper checks, more senior approval and enhanced monitoring.

This all highlights that KYC is a key part of CDD, but CDD is much broader than KYC alone.

6. Monitor the customer over time

It’s important to remember that KYC is not always a one-and-done task; a customer’s risk profile can change after onboarding, so ongoing monitoring is crucial.

This monitoring assists businesses with identifying changes that may need further investigation. Changes to look out for can include behavioural differences, transactions you wouldn’t expect, any updates to sanctions or PEP status, amendments to personal details, or any new risk indicators.

Performing these ongoing checks means any changes in risk levels that are identified will be spotted early and the appropriate action can be taken.

What information is needed for KYC checks?

In order for the right checks to be carried out and the correct level of risk to be identified, certain information will be required. Some checks will call for physical documents, whilst others may only require digital identity verification or electronic data matching, amongst other check combinations.

You will need to ensure you get the customer’s full name and date of birth initially, along with their current residential address and contact details. Following this, gather their identity documents and, if needed, proof of where their funds have come from. In addition, any work carried out on their sanctions screening and PEP status, along with their current level of risk, will also be needed.

Businesses need to be confident in their KYC verification decisions, so reliable information and keeping accurate records are a must.

What is the difference between KYC and KYB?

Know Your Customer (KYC) is all about getting to know the individual, but Know Your Business (KYB) is about checks surrounding an organisation.

Whilst they’re closely related, they are different, so KYC requires checks such as identity and risk profile; KYB verifies that a company exists, confirms its registration details, its board of directors (understanding those with significant control and the beneficial owners), and screens those people and the company as a whole for risk.

Put simply,

• KYC checks are there to verify individuals.
• KYB checks verify businesses.
• CDD assesses the wider customer relationship and risk.
• AML is the overall framework which helps to prevent money laundering and related financial crime.
  
  

So when looking at KYC vs KYB, many regulated firms will require both checks to be performed. For example, it may be necessary to check a business (KYB), whilst also verifying the individuals themselves behind that business (KYC).

When verifying businesses, SmartSearch’s KYB checks help organisations to verify companies, identify the people who have significant control and the ultimate business owners, as well as supporting corporate onboarding.

What is the difference between KYC and CDD?

KYC and CDD are often used together, but they do have different functions. KYC focuses on identifying and verifying the customer, whilst CDD, or Customer Due Diligence, goes further into the entire customer relationship to assess the level of risk involved.

CDD may include elements of identifying and verifying the customer; however, it also involves:

• Having an understanding of the purpose of the relationship
• Assessing what risk is involved
• If relevant, identifying any beneficial owners
• Carrying out checks on sanctions lists and conducting PEP screening
• Ensuring enhanced due diligence is applied where necessary
• Conducting ongoing monitoring of the relationship
  
  

KYC is therefore just one of the important parts involved in customer due diligence, but it certainly isn’t the whole process.

How does KYC support AML compliance?

AML, or Anti-Money Laundering, is the policies, processes and checks businesses carry out in order to put an end to criminals using legitimate organisations for the purposes of hiding the proceeds of crime.

By carrying out KYC checks, this supports AML compliance by helping companies understand who it is they’re dealing with and whether or not they present a financial crime risk.

Effective KYC checks can stop a business from onboarding anonymous or fake identities by:

• Identifying customers on sanctions lists and with a PEP risk
• Understanding if the customer relationship as a whole makes sense
• Applying risk-based due diligence
• Keeping thorough records of identity verification
• Triggering enhanced due diligence where it is needed
• Supporting the process of ongoing monitoring to spot any suspicious activity
  
  

This isn’t a case of KYC vs AML; a strong and thorough KYC process is a crucial part of a wider AML compliance programme, and it should work in conjunction with KYB checks, sanctions and PEP screening, CDD, enhanced due diligence, risk assessment and ongoing monitoring.

What are digital KYC checks?

Rather than simply relying on manual checks that are open to human error and are often very time-consuming, digital KYC checks utilise technology, alongside data sources, to verify identities in a fraction of the time and more accurately and consistently.

Digital KYC checks often include verification of:

• Electronic identity
• Address
• Various documents
  
  

In addition to this, they can also assist with:

• Screening sanctions lists
• PEP screening
• Conducting fraud risk checks
• Creating a thorough audit trail
• Performing ongoing monitoring and receiving alerts
  
  

For those businesses looking to onboard customers quickly, but still maintaining high KYC compliance standards, making use of automated KYC software for checks can have the effect of making the process itself a lot more efficient and less prone to error.

Manual KYC checks vs automated KYC software

 When looking at which are the right checks for a business, we can see that manual KYC checks are time-consuming, with teams having to follow a laboured process themselves, involving:

• Requesting all of the relevant documentation
• Performing a manual review of all documents
• Verifying details across multiple sources
• Recording all of the evidence found
• Following up with customers
  
  

These steps all then have to be repeated as soon as any of the information changes or updates. This detailed process can create delays for other customers and may risk there being inconsistent checks.

By employing more automated checks via KYC software, businesses are able to complete checks more quickly and consistently. It can bring all of the usual checks into a more unified and connected workflow.

The benefits can include:

• A speedier onboarding process
• Fewer manual tasks
• Checks that are more consistent
• Fewer errors and inconsistencies
• Thorough and more robust audit trails
• A simpler process for ongoing monitoring
• A clearer view across compliance
• An overall enhanced experience for customers
  
  

Of course, automation doesn’t take away the need for there to be a risk-based approach, and businesses will still need to have the appropriate policies, controls and review processes in place. However, it can help to make the whole process easier to manage, and this is key for those firms dealing with high volumes of customer checks.

Who needs to carry out KYC checks?

It’s usually those businesses within regulated sectors that need to perform KYC checks, and particularly those more exposed to financial crime risk.

Examples of such firms include:

• Banks and financial services firms
• Legal firms
• Accountancy firms
• Estate agents and property businesses
• Letting agents
• Insurance firms
• Investment firms
• Gaming and gambling businesses
• Crypto and digital asset businesses
• Payment service providers
• Other regulated or high-risk businesses
  
  

Various sectors will have various obligations to follow, along with different risk profiles and customer types. If you take, for example, a property firm, they may need to consider the source of funds or wealth, but a financial services firm may be more focused on performing ongoing monitoring for a customer.

The right KYC process needs to reflect the business model and the typical customer base, not to mention the regulatory environment and the level of associated risk.

When is enhanced due diligence needed?

Knowing when to use EDD, or Enhanced Due Diligence, is crucial as it’s usually for those customers who present a higher level of risk.

This is highlighted by the following signs:

• The customer is linked to a high-risk jurisdiction
• There are complex ownership structures in place
• Unusual transaction patterns show up
• They have PEP status
• They are on sanctions lists
• It’s unclear where their source of funds or source of wealth has come from
• There are inconsistencies within their customer information
  
  

These signs are usually associated with those customers interested in higher-risk products or services. EDD helps by gathering together more information and performing additional checks, so you have a clearer picture of what’s happening. It also helps by enabling you to obtain senior approval, if needed, and to monitor the relationship more closely.

How SmartSearch can help with KYC checks

There are a lot of steps to take when carrying out KYC checks, and SmartSearch helps regulated businesses by enabling them to complete fast and accurate checks as part of their wider AML compliance process.

With the help of SmartSearch, firms are able to:

• Verify individual customers
• Support CDD
• Screen against sanctions lists and for PEP status
• Maintain thorough records of checks carried out, all within one platform.
• Reduce manual admin
• Conduct a faster onboarding process
• Apply a more consistent approach to AML compliance
  
  

With SmartSearch you have a more connected compliance workflow, not siloed processes that encourage inconsistencies and errors. For those businesses looking to quickly and confidently verify their customers, SmartSearch’s KYC software helps make the whole compliance process faster, clearer and easier to manage.

For regulated businesses, effective KYC checks are essential for verifying customers, identifying risk and supporting wider AML compliance. SmartSearch brings identity verification, sanctions and PEP screening, customer due diligence and ongoing monitoring together in one platform, helping you create a faster, more consistent onboarding process. To strengthen your KYC approach and reduce risk across the customer lifecycle, request a free demo today or contact our team to find out how SmartSearch can support your compliance requirements.