What KYC means for Financial Institutions

Are you meeting your obligations?

While knowing your customer sounds like a fundamental element of any successful business, in the context of New Zealand’s Anti-Money Laundering and Countering Financial Terrorism Act (AML/CFT), it takes on a very specific meaning. Since the Act was established in 2009, financial institutions have been required to meet certain obligations to keep financial terrorism and money laundering at bay. A key obligation is the Know Your Customer (KYC) process, a critical step in the identification and minimisation of suspicious activity. 

Why Know Your Customer?

The finance industry is particularly susceptible to money laundering, as services can involve large transactions that can be used to hide illicit activity. Compounding the issue is the rise in digital transactions and online business activity, making it even easier for criminals to provide fraudulent details and false documents. As a result, KYC regulations have been put in place to keep both businesses and our economy safe.

What are the requirements?

To combat illegal activity, the AML/CFT Act requires financial institutions to get a clear picture of their customers before engaging in a business relationship. KYC compliance begins the moment a new customer account is created, and typically involves the following three steps:

1. Verifying customer identity

Sometimes known as a Customer Identification Program (CIP), this step involves collecting and verifying basic information such as name, date of birth and address.

2. Customer due diligence (CDD)

This step looks at whether a customer is trustworthy, and helps financial institutions manage their levels of risk. There are three levels of CDD - simplified, basic and enhanced – each correlating to different levels of risks (low, medium and high). Information obtained from customers ranges from the nature of the business relationship through to establishing the source of funds – depending on the level of risk identified.

3. Ongoing monitoring

Screening your customer once at the beginning of your relationship isn’t enough. KYC requires ongoing monitoring at the level of risk that has been identified. This can identify everything from spikes in spending to adverse media mentions (such as inclusion on politically-exposed-persons [PEP] lists) or unusual activity in unexpected countries. In these cases, a Suspicious Activity Report (SAR) may be required.

The benefits of a robust KYC process

While KYC is a legal obligation for financial institutions in New Zealand, the benefits extend much further than ticking a regulatory box. A robust KYC process not only prevents money laundering and fraud but brings stability to financial institutions. By limiting risk and decreasing uncertainty, institutions can lend to more customers and, therefore, increase profits.

KYC for your financial institution

While the requirements sound relatively straightforward, integrating KYC into your processes and systems can be anything but. Processes need to be simple enough for staff to implement and user-friendly enough for customers to manage. At First AML, we create AML/CFT solutions that make it easy. Our software can help you gather all the KYC information you need, ensure you meet your legal obligations – and give your customers a seamless, stress-free experience.