"Know Your Customer" is an essential part of the Anti-Money Laundering Act, which essentially aims to reduce economic crime and money laundering. The concept of KYC is quite straightforward, as it simply means that companies must be able to document the knowledge they have of their customers. They can do that by verifying the identity of their customers and examining their financial activities - just to name a few of the steps in the KYC process.
An effective KYC process is necessary to comply with the Anti-Money Laundering Act, and there are many ways to approach such a process. But, the manual kind entails several risks and challenges that companies should be aware of.
Human Errors
KYC procedures involve collecting and verifying customer information, such as social security numbers, information about their business, and its activities. Employees may make errors in validating information or perhaps overlook important details, which can lead to incorrect conclusions. Ultimately, this could mean that fraudulent activities are not detected in the data collection and verification process, and a low-risk assessment is given to a customer who actually belongs to a different classification.
Time and Resources
Collecting, verifying and updating documentation is time-consuming and challenging. It also requires resources to stay updated on new legislation and interpretations, which also have an effect on the KYC process. It affects an organisation internally to have time-consuming workflows, but it can also have a negative impact on customer loyalty. Customers expect efficient and streamlined processes, which manual procedures may struggle to live up to.
Security Breaches
KYC procedures involve the storage of sensitive customer information. Storing such information manually, without the right systems or security procedures in place, poses a significant security vulnerability. Hackers and fraudsters can exploit weaknesses to gain access to customer information. A security vulnerability can, in the worst case, lead to significant financial losses and damage to the company's reputation.
Costs
In addition to the mentioned risks and challenges of manual procedures, they are also costly. This is partly because it requires more working hours to perform KYC processes, and because ongoing training is needed to have updated procedures in place to comply with the law. Moreover, if manual procedures cause delays in onboarding, there is a risk of dissatisfaction from clients, which can potentially affect revenue.
Automation can be the Solution
Human errors, time-consuming processes, high costs, and security breaches are just some of the biggest risks of manual KYC procedures. To mitigate risks, procedures can be automated, allowing employee resources to be used for more value-based tasks.
Automation can take many forms, and there are several options for streamlining manual processes. For example, it's possible to automate dynamic questionnaires and the collection of ID documentation, as well as the continuous monitoring and updating of client data.