The customer onboarding process serves as the primary and critical point of interaction between the company and its customers. It is considered the initial step that plays a vital role in safeguarding the company and mitigating risks. Notably, regulated financial institutions must adhere to AML/CTF (Anti-Money Laundering/Counter-Terrorist Financing) and KYC (Know Your Customer) regulations during customer onboarding. Ensuring compliance with KYC controls is of utmost significance, and closely monitoring financial transactions also stands as another pivotal aspect.
Customer Onboarding and AML
Regulators, both at local and global levels, have been established to ensure the stability of financial systems and combat financial crimes. Despite these efforts, financial crimes continue to occur worldwide. International money laundering transactions are estimated to represent about 5% of the global GDP. Additionally, an alarming $1 trillion global bribe is paid annually, while corruption costs are estimated to reach approximately $2.6 trillion globally. Furthermore, terrorist funding contributes to an increase in terrorist activities across the world. To address these issues, AML regulators have imposed specific obligations on companies during their customer onboarding processes to prevent financial crimes.
Many of these financial crimes take place through loopholes in financial systems and the failure of financial institutions to implement necessary measures. As a result, the stability of the economy is jeopardized due to the occurrence of financial crimes. Money laundering, for example, involves disguising the source of illegal income as legal income to conceal its origin. Regulators aim to prevent such crimes by enforcing regulations and laws. Among these requirements is the obligation for companies to conduct thorough KYC (Know Your Customer) checks during the customer onboarding process and to subsequently monitor their financial transactions. Companies that fulfill these KYC requirements can ensure compliance. However, regulators may impose fines on financial institutions that fail to meet the Know Your Customer obligations.
Customer Onboarding and KYC
As mentioned earlier, the initial step is to implement KYC guidelines in customer onboarding processes. Customer identification is the most crucial aspect of KYC, and the control procedures outlined in the KYC checklist ensure that the business obtains essential information to open an account for the customer while determining their risk level.
KYC involves conducting checks at the outset of the customer relationship to verify their identity and ensure they are who they claim to be. This becomes particularly vital for organizations subject to AML regulations. Prior to establishing the business relationship, this process typically involves gathering the customer’s personal data and identity documents, allowing for the creation of a customer risk profile.
Subsequently, Customer Due Diligence (CDD) is carried out to evaluate the accuracy of the information provided by the customers during registration, including their address, ID number, and date of birth. Furthermore, as long as the customer relationship continues, ongoing CDD checks are performed, necessitating transaction monitoring and regular updates. The Customer Due Diligence procedures encompass screening for enforcement, politically exposed persons (PEP), and adverse media. Individuals identified through these screenings represent high-risk customer profiles for companies. Hence, companies need to assess customer risks during the account opening process and proceed accordingly.
If a customer is identified as high-risk, the Enhanced Due Diligence (EDD) process is applied. In the absence of suspicious circumstances based on the checks conducted up to this point, the customer’s account is then opened.
It is crucial for companies to continue conducting these checks at regular intervals for their customers. In line with AML obligations, companies are required to monitor the financial transactions of their customers.
What are KYC Requirements and AML Regulations for Customer Onboarding?
Companies are obligated to adhere to KYC guidelines during their customer onboarding processes. The responsibility of overseeing and conducting these compliance procedures lies with the companies’ compliance officers. Customer identification stands as the most crucial aspect of KYC. Ensuring the accuracy of customer information is of utmost importance as any discrepancies may render the controls applied in AML, KYC, and CDD processes ineffective. Non-compliance with these processes can lead to penalties imposed by regulators.
Next, the company proceeds to investigate the customer’s history, starting with a review of their previous financial transactions. Suspicious activities from the past are thoroughly examined, and precautions are taken if any criminal transactions are found. Companies aim to avoid having guilty individuals as their clients, as such clients pose significant risks.
Following this stage, companies conduct risk assessments, often referred to as Customer Due Diligence procedures. These procedures involve screening against sanction lists, Politically Exposed Persons (PEP), and adverse media. Individuals found in these screenings are considered high-risk customer profiles, and companies should accordingly assess customer risks during the account opening process.
Factors considered when determining the Customer Risk Level include the accuracy of submitted documents, the customer’s industry of business, sanction and Politically Exposed Person screening, and their past financial transaction history.
In cases where a customer is identified as high-risk, the Enhanced Due Diligence process is applied. If no suspicious circumstances are found during the controls conducted up to this point, the customer’s account is then opened.
By implementing these processes, financial institutions demonstrate their compliance with AML and KYC regulations. Companies must continue to conduct these checks at regular intervals for their customers in accordance with AML obligations, ensuring control over their customers’ financial transactions.
Regarding merchant onboarding, it refers to the process of adding various merchants to a payment gateway policy, granting them access to the API and virtual terminal to test the payment gateway.
