Hackernoon logoKYC Regulatory Compliance - The First Step for Businesses to Mitigate Fraud by@jeff-parker

KYC Regulatory Compliance - The First Step for Businesses to Mitigate Fraud

Jeff Parker Hacker Noon profile picture

@jeff-parkerJeff Parker

Tech writer specialising in digital trends. FinTech, Blockchain and AI enthusiast.

Identity theft, blackmailing, data breaches, money laundering, terrorist financing… All these possibilities of making illegal money are endless. White-collared criminals are roaming over the network to find loopholes in the online systems, and misuse them for their own malicious purposes among which money laundering is the most common.

The risks with fraudulent entities might appear low, but the returns are always high. 

Financial crimes vary from basic identity theft frauds perpetrated by ill-intentioned selves to masterminds operating at large-scales and hold a foot in every continent. Banks and other financial institutions are highly prone to such criminal activities in which the unusual transactions are hidden in complex financial systems. 

Serious criminal activities should not be overlooked because of their overall social and economic impact. Most of the financial crimes, after investigations and highlighting case studies, result in terrorist funding and money laundering activities.

In addition to this, other online financial frauds have taken a whole new dimension as a result of digital technology and innovations. 

Criminal groups are well aware of the underlying system functionalities of banks and other financial institutions and technologies they are adopting. For instance, with the advent of the Fintech industry, banking institutions have shifted to digital solutions to provide people with better financial services.

Fraudsters being smart and innovative are using the same technologies to beat the online privacy of these systems. 

These gangs operate universally to avoid detection and tracking of unusual money flows. Stolen funds and laundered money passes through various physical and virtual financial boundaries across the world to convert them into good money.

The source of money is covered to hide the identities of individuals involved behind the criminal curtain. This is where global regulatory authorities and their obligations come onto the surface.

Know Your Customer and Regulatory Obligations

As per the report of the United Nations Office of Drugs and Crime, it is estimated that the global money-laundering amount is between 2% to 5% annually. This immense increase adversely affects the global economy due to which global and local regulatory authorities across the world are all concerned.

Hence, evaluate the regions of the globe with respect to KYC and Anti-money laundering practices in their businesses. Regulatory regimes are getting stringent after the annual scrutiny and target various industries for the proper action plans and implementation of security walls in the systems. 

Steps of KYC Compliance 

There are three steps to effective KYC compliance

Customer Identification Program

Customer Identification Program (CIP) is the first step in the KYC compliance program. This process ensures compliance with the requirements of regulatory authorities that refer to your business model. CIP protocols, in most of the regions of the world, are the same.

In the USA, according to CIP, financial transactions are supposed to be verified along with in-depth identity verification against identity performing it. In CIP, risk assessment is done against individuals and business accounts. A risk rating is assigned to the clients based on identity verification results.

This helps financial institutions and other organizations to maintain a record of risk rating and identify if any high-risk customer is there. 

CIP was designed to combat illegal activities such as money laundering, terrorist financing activities from the financial systems. For this purpose, identity verification is done that collects identifiable information such as Name, Address, Identification number, and Date of Birth from the customers.

This step in KYC ensures that before making an entity part of the system, it is verified and risks associated with it are identified. In this way, banks and financial institutions can eliminate financial crimes and other frauds from the system.

Customer Due Diligence

In a bank or any other financial information, a crucial step is to determine whether to trust a potential client or not. Here, Customer Due Diligence (CDD) helps identify individuals and protect the organization from several financial crimes and fraudulent activities.

This process includes customer screening against several sanction lists, Politically Exposed Persons (PEPs) lists and criminal records to make sure that no criminal entity is facilitated through your business. This process helps deter the risks of money laundering and terrorist financing activities. 

The information collected from the customers is verified against supporting pieces of evidence in the form of biometric information, government-issued documents, and global watchlists.

In the case, an identity found related to some PEP or in the criminal record list, it is considered a high-risk customer. Moreover, Enhanced Due Diligence procedures are practiced on such customers. 

Ongoing Identity & Transaction Monitoring 

Verifying a customer once at the time of account registration is not enough. Continuous identity monitoring should be performed to keep an eye on the financial transactions of customers.

This helps eliminate the incidences of money laundering and other unusual transaction flows. Some other factors to monitor against an identity include cross-border activities, fraudulent transactions, transactions greater than the maximum threshold, a large number of transactions in less time, updated sanction lists and identity verification against them, etc.

Ongoing KYC and AML screening should be ensured to continuously monitor the customer and business accounts with new verification strategies and reduce financial crimes.

Especially, when it comes to KYC regulations for STOs, identity verification is mandatory. In this way, risk rating can be updated against each identity that further helps to recognize the risk associated with individuals against specified verification parameters. 

Business KYC

Know Your Customer is not confined to customer screening only. The verification of corporate business entities is also crucially important. To eliminate the risks associated with third parties and businesses, your business should first know who you are dealing with.

Whether your corporate services providers are registered or not, or whether they are blacklisted or whitelisted. Any ignorance can cost businesses heavy monetary and reputational loss. Therefore, along with Know Your Customer schemes, practicing Know Your Business procedures side by side is equally important. 

Challenges to KYC Compliance

The evolving KYC regulations when reach businesses, highlight the major concern of balancing regulatory obligations and customer onboarding experience.

To manage security and user experience at the same time is a challenging task. Banks and financial institutions, e-commerce and any online business can prevent fraud and payment scams by ensuring KYC standards. The question is how? 

Online KYC screening solutions for this purpose are used that are easy to integrate with the systems. Now online businesses can verify their customers seamlessly without compromising the user experience. KYC verification requires user information which is verified against some supporting document.

That document could be a government-issued ID card, passport, driving license or credit/debit card. Along with this, biometric authentication is performed that provides an additional layer of security and helps authenticate an online identity in real-time without compromising user experience. 


Connecting with new identities every day while combating fraudsters of this digital world is a challenging task. Also, being KYC compliance, a regulatory requirement, it cannot be overlooked as its non-compliance come up with hefty penalties.

Know Your Customer (KYC) process helps the identification and verification of online customers to reduce online fraud and payment scams. With a KYC API integration, online businesses can verify their onboarding customers and can ensure security as well as improved customer experience simultaneously.

A clean customer base lays the foundation of secure and well-reputed legitimate businesses.

Jeff Parker Hacker Noon profile picture
by Jeff Parker @jeff-parker. Tech writer specialising in digital trends. FinTech, Blockchain and AI enthusiast.Shuftipro


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