Blog / What is KYC verification? Why do you need it?

What is KYC verification? Why do you need it?


Omatech Cloud


As you already know what KYC means, it will be easy to understand why you need KYC identity verification. KYC is a needed process to meet the increasing demand for the security of information. In this article, you will learn everything about KYC verification and the reasons for mandating it.

KYC verification process helps with identity theft

One of the main things that KYC addresses are identity theft. As mentioned in other articles on our blog, the KYC process provides valid proof to build your legal identity. 

Before KYC was created, you could use forged or illegal documents to open a bank account. This increases the rate of illegal activities and decreases the security of customer’s information.

The KYC verification process helps you know your customer

Not to mention, the perpetrators would not take responsibility for their actions, but the person whose identity was stolen. By using the most updated technology from KYC such as KYC pan verification, banks, and other institutions will find it easier to validate identities and prevent fake accounts.

This process not only keeps a record of each account holder but also ensures that only the right people offer their services.

It prevents terrorist financing

The urge to create the KYC process increased after the 9/11 attacks. The investigations found out that some terrorist campaigns were funded by various people and agencies. Since then, the U.S. Government started to stop terrorist activities by cracking down on suspicious operations. And KYC helps stop the funding for the terrorist camps.

The KYC verification process can link the names and accounts of the suspects when they send money to the terrorists via shell accounts. It also allows Government agencies to keep a track of the money when it’s generated and transferred.

It stops money laundering

Not only are banks used for terrorist financing, but they can also be used for criminal activities such as narcotics, racketeering, human trafficking, and more.

The criminals would use dummy bank accounts to put their money in, which would then be spread to different accounts to avoid suspicion. Afterward, the money would be transferred via illegal means to various states or countries for laundering.

The KYC verification process helps banks prevent transferring illegal money and turn them into legal monetary value. It helps the Government keep track of the accounts and means for transferring and storing these funds.

Prevent financial fraud

KYC verifications are also useful to detect financial fraud. There is a wide variety of financial fraud, including a person setting up dummy accounts using fake or stolen IDs. Once having their accounts, the perpetrator would then fill out a loan application and dupe the bank of the loan amount raised from the different accounts.

How is KYC verification used?

Although the main sector that KYC is the most useful is banking, today KYC is not only for banks and financial institutions, but it can also be helpful for businesses in different industries including online businesses. The four different approaches of the KYC verification process are Customer Acceptance Policy (CAP), Customer Identification Procedure (CIP), Transaction Monitoring, and Risk Management.

It can be used for different business sectors

For businesses and organizations, KYC can be used for pooling and scrutiny of personal identity documents. In addition, it matches identity documents against global watch-lists. And of course, the lists are generated by law enforcement agencies all over the globe.

Besides, KYC verification is used to identify and determine risks generated from the customer who commits illegal activities. Those illegal elements can be terrorism, money laundering, and identity theft. 

Also, it can create a customer profile based on the basis of the previous analysis and transaction history. Most of all, it can be used to observe a customer’s behavior and match transactions against expected behavior.

Methods of identity verification

Most of the time, financial institutions establish the legal identity of the person by scrutinizing identification documents issued by the Government. These documents must be valid and cannot be expired. The person can use any documents, including a driver’s license or passport, as long as they have a picture of them and display the nationality. 

If a person’s document doesn’t meet these requirements, he or she can use a document that is deemed fit by financial institutions to meet CIP standards and practices. In general, the documents that a person uses need to be reasonable enough to establish their identity.

Furthermore, banks and institutions can also ask for supporting documents in case there is any doubt that may arise. In this digital era, banks have a much better option. That is to use electronic identity verification. 

Hopefully, now you understand why we need KYC verification. As you can see, KYC verification is very helpful and much needed for the better world that we are living in. As a business owner, you should also consider KYC verification for a better customer experience and security of data, especially for online businesses.