The KYC process: why verify a customer’s identity?

KYC: Everything you need to know about the Know Your Customer procedure

According to the Legal Affairs Department, money laundering represents 1.3% of European gross domestic product (GDP), or hundreds of billions of euros. Among the many means put in place to combat this crime, the Know Your Customer (KYC) procedure constitutes the essential prerequisite for entering into a relationship.

What exactly does this process involve? Why is it essential to ensure it operates correctly? What are the applicable regulations for financial institutions? Treezor explains in detail the principles of a successful KYC mechanism.

What is KYC (Know Your Customer)?

Definition of KYC

The acronym KYC stands for Know Your Customer, or “Connaître son client” in French. This is a process that aims to verify the identity of a customer and to ensure that their activities comply with applicable laws and regulations.

This control concerns the integrity and probity of the client in the context of the fight against money laundering and the financing of terrorism (AML-FT), the prevention of identity theft and the fight against tax and financial fraud.

The KYC procedure consists in collecting and analyzing multiple data and documents provided by the customer so that they can access the services and products offered by a financial institution. These checks can be carried out remotely, by video and secure digital authentication.

Regulation of the KYC process

Laundering allows the profits from criminal activity to be transformed into a legitimate source of income. With the globalization and digitalization of transactions, fraudsters’ techniques are continuing to evolve and improve, pushing the regulator to adapt.

KYC is thus part of a long line of European Anti-Money Laundering Directives (AMLD), the first of which dates from 1991. While a sixth directive (6AMLD) strengthens financial transparency and the security of exchanges with stricter measures, we owe the harmonization of KYC practices on a European scale to 5AMLD.

At the same time, the regulation relating to electronic identification, authentication and trust services (eIDAS), adopted in 2014, legalizes certified video identification in identity verification procedures. Thanks to this, it is not necessary to physically submit supporting documents.

Furthermore, the KYC process must comply with the European General Data Protection Regulation (GDPR). The processing of information is thus strictly supervised to achieve the dual objective of fighting fraud and protecting customers’ rights.

In France, the Prudential Supervision and Resolution Authority (ACPR) ensures that financial institutions comply with AML-FT rules and is responsible for sanctioning offenders.

Who is affected by KYC?

The KYC process concerns all customers, natural or legal persons, of regulated companies subject to the obligations of AML-CFT regulations. With successive AML directives, the list of players in the financial sector has grown and now includes:

• credit, payment and electronic money financial institutions;
• general, supplementary health and life insurance companies;
• intermediaries in banking operations and payment services;
• investment firms;
• gaming operators;
• dealers in works of art, precious stones and metals;
• cryptoasset service providers;
• self-employed professions such as accountants, lawyers, attorneys, etc.

When to initiate the KYC process

Customer knowledge is essential from the start of a relationship, as it conditions the continuation of the commercial relationship. Subsequently, the collection and storage of information is carried out continuously, in order to regularly assess the client’s risk profile.

Regulated establishments must therefore be attentive to updating documents, changes in situation, but also to certain levels of transactions (cash, donations, etc.)

How to perform KYC

The KYC process is not limited to the simple examination of data, but is part of the more global customer journey. 

Essential information and documents

To carry out due diligence operations with a client, the organization responsible for KYC needs a range of information, of which here is a non-exhaustive list: 

• Customer identity, natural person, or the legal representative for companies: surname, first name, postal address, email, telephone, date and place of birth. 
• Legal documents: identity document, passport, proof of address less than 3 months old, extract of the company registration certificate (Kbis), copy of the articles of incorporation, etc.
• Live video: for 100% digital onboarding, live video is essential, because it makes it possible to authenticate the customer in question and guarantee the conformity of the supporting documents collected.

The customer journey

The KYC journey of the customer, natural or legal person, starts with opening an account on their mobile device or the website of the regulated institution. He or she then enters the data relating to their identity and sends their documents in digital format without forgetting to attach a photo or video for authentication.

Then, the establishment checks all the elements and validates or not the KYC procedure. This step can be digital via a dedicated API or manual through a consistency check of the file. The failure of KYC is sometimes explained by the poor quality of the supporting documents or the absence of one of the documents. The customer must then complete or renew their request.

During the identification process, the body responsible for KYC compares the customer profile to a series of official lists such as: 

• international sanctions (asset freeze register, EU sanctions, etc.);
• or Politically Exposed Persons (PEP), defined under article R561-18 of the Monetary and Financial Code.

To learn more about the KYC journey, discover in detail the stages of customer knowledge !

What are the benefits of customer knowledge?

The Know Your Customer (KYC) procedure allows you to accurately assess the client’s risk profile, secure your future commercial relationship and meet legal and regulatory requirements. This vigilance mechanism thus contributes to:

• fighting money laundering and terrorist financing;
• preventing identity theft;
• protecting the client’s interest;
• preserving your brand reputation.

How to optimize your KYC procedure

KYC represents a major issue for the establishments concerned. It is in their interest to prioritize security and digitalization to improve their processes.

Opt for secure KYC

The financial sector has been subject to the GDPR since 2018. This regulation guarantees the protection of personal information. The information collected during the KYC procedure must therefore remain confidential.

To meet these requirements, Treezor’s servers are encrypted and regularly audited by Information Systems Security professionals.

Choose a 100% digital KYC solution

The digitalization of the KYC process facilitates the automation of the data collection and verification steps. It accelerates the validation of the customer file and increases reliability.

Treezor offers a dematerialized KYC and KYB service with two levels of control:

1. automatic document analysis;
2. in-depth and random verification carried out by a specialized operator.

Furthermore, KYC Liveness video technology supplements this digital mechanism and renders face-to-face meetings unnecessary during the customer journey.

Ensuring compliance with legal and regulatory procedures is an essential issue for financial institutions. Treezor, as an Electronic Money Establishment, supports you in the authentication and knowledge of your customers.

Discover our KYC identity verification solutions:

• PVID
• QES
• Video conference 
• Liveness