Why are Know Your Client (KYC) & Customer Due Diligence (CDD) Protocols of Crucial Importance These Days?

Why are Know Your Client (KYC) & Customer Due Diligence (CDD) Protocols of Crucial Importance These Days?

Greater transparency and in-depth due diligence are here to stay.

A myriad of European and international regulations have bolstered and expanded compliance requirements for firms in the financial services world, making it more onerous to take on clients, open bank accounts and companies, receive payments and make investments.

Know Your Client (KYC) and due diligence procedures have become more extensive and cumbersome, requiring more time, money and administrative capacity from firms in this sector.

Despite the difficulties posed by these new rules, it remains paramount for financial service providers to delve deep and get to know their clients inside out.

KYC and due diligence requirements might vary for lawyers, accountants, tax professionals, bankers, investors and the like, but the concept remains the same across the board.

According to Investopedia, KYC can be summarized as “a standard in the investment industry that ensures investment advisors know detailed information about their clients’ risk tolerance, investment knowledge, and financial position,” which serves to “protect both clients and investment advisors.”

Here we offer you a few of the main reasons why implementing strong KYC and due diligence protocols is to the utmost benefit of your company.

Helps Better Cater to Your Client’s Needs

It might sound obvious but getting to know your client and running the necessary security checks will help you be better prepared to deliver on precisely what they require.

An in-depth look at your client’s financial history, professional status, business relations, personal life, etc., will provide you with ample information which you can then apply to tailor-make solutions for their immediate benefit.

Additionally, assembling a comprehensive profile of each one of your clients will help you communicate with them in the most effective and mutually beneficial way possible and achieve both of your objectives in a swifter and more efficient manner.

Legitimizes Your Firm by Avoiding Illicit Activities

One of the main reasons to implement and carry out stringent KYC protocols is to avoid engaging with suspicious and potentially criminal clients.

As explained by Katipult, a Canadian firm that develops technology solutions for the investment sector, KYC offers companies “vital risk management strategies to avoid getting entangled in business relationships with potential clients who have participated in shady dealings or other illegal activities.” For instance, in the banking sector, KYC protocols are crucial to prevent money laundering, financial terrorism and tax evasion, among others.

Subsequently, by helping your firm avoid doing business with wrongdoers, a strong KYC procedure will legitimize your firm in the eyes of current and potential clients, encouraging more legitimate businesspeople to hire your services while pushing away those who’re looking for shortcuts or engaging in illicit affairs.

Builds a Trustworthy Brand

Maintaining a clean image and being thorough with your KYC protocols will help your institution boost its brand and build higher levels of trust among both current and potential clients.

For instance, Bayometric, an American provider of fingerprint scanners and biometric technology solutions, refers to the banking sector and how “KYC-done customers results in higher level of trust, efficient monitoring of customer behaviour as per their risk profile and standardization of customer identification/authentication.”

Furthermore, Thomson Reuters explains how a strengthened KYC protocol can become a competitive advantage as a greater level of trust is found within law-abiding financial institutions.

Discussing the crackdown on institutions partaking in illegal activities, Thomson Reuters writes: “Regulatory action against non-transparent or delinquent firms may involve the auditing and disclosure of private client data from valid accounts that would otherwise remain undisturbed. This breach of client trust only compounds operational and reputational harm, causing some customers to close their accounts with the delinquent institution and seek new banking partners.”

Promotes Technological Savvy

One of the side benefits of a solid KYC protocol is that it has encouraged companies to embrace technology.

The fact is that current technological solutions have made it easier for financial services firms to strengthen, simplify and streamline their KYC and customer due diligence protocols.

For instance, Jumio, a company that focuses on AI-powered identity verification, explains that in the banking sector, for example, “emerging technologies for online identity verification are critical because KYC adds friction to the onboarding process as customers go through the necessary identity verification steps.” In many cases, customers are lost along the way due to additionally burdensome and lengthy application processes.

One technology that has made plenty of inroads in the development of KYC protocols has been blockchain or distributed ledger technology (DLT).

According to KPMG, “the immutability and transparency of blockchain provides a streamlined way for financial institutions to gain swift and secure access to clean and up-to-date customer data,” which “results in greater operational efficiency, increased trust between institutions and reduction of labor-intensive data gathering, processing time and costs.”

Furthermore, besides helping financial institutions with their KYC obligations, blockchain offers benefits to both regulators and customers.

KPMG writes that, in the case of regulators, this particular technology “provides a single source of customer data for better understanding and visibility of customer activity across financial institutions,” while for clients, “an institution’s use of a blockchain-enabled KYC utility could reduce onboarding wait times and eliminate the need to repeatedly provide the same information to their financial services providers.”

Overall, Thomson Reuters believes smaller financial institutions and service providers can harness current technological solutions to improve their services and comply more easily with the existing regulatory requirements.

Thomson Reuters concludes: “Smaller banks can leverage these new software tools to cover gaping regulatory blind spots and use state-of-the-art tech to detect illicit funds migrating to their remote branches. What’s more, smaller operators can leverage sophisticated tech to drastically reduce their rising compliance cost burdens.”

EIMF offers a variety of courses and certifications for individuals interested in KYC, transparency and due diligence issues.

Some of the EIMF Live Online related courses include the following case-based series and other related seminars noted below:

Financial Crime Under the Microscope: Case Study Refresher Series

Through a series of case studies, Samantha Sheen, an International Speaker and Financial Regulatory, Risk Management, Financial Crime and Legal Advisory Expert, will closely examine crucial practical strategies and lessons learnt to mitigate financial crime. Find more information


For further information about these offerings, please view the EIMF Training Calendar to learn more about the course(s) of your interest.

For any additional details on these offerings, please feel free to speak with an expert learning and development adviser at EIMF at +357-22274470 or info@eimf.eu.