In today’s world, customer service and reputation are the two key metrics determining a company’s success. Being linked to fraud of any kind can be disastrous. Not only does this mean heavy fines, it also makes customers lose faith in the business.
An easy way to limit a company’s exposure to fraud is by implementing stringent Know Your Customer (KYC) checks. When you are assured that your customer is who he/ she claims to be, the risk of impersonation is minimized thereby protecting the business and its audience.
KYC refers to a process followed by businesses in Australia to verify customer identities before facilitating any transaction or providing any services. It includes verifying the customer’s identity, identifying the customer’s source of funds/ wealth and assessing customer risk. This applies to individual customers as well as corporate entities. Compliance is especially important for financial institutions.
Verifying customer identities helps businesses minimize their exposure to fraud and financial crimes such as money laundering and identity theft. Compliance with Australia’s KYC regulations also protects businesses from penalties and legal consequences.
The terms KYC and AML (Anti-Money Laundering) are often used together. They are related but not synonymous. While KYC focuses on verifying customer identities, AML refers to laws and regulations aimed at ensuring customer identities are not used for fraudulent purposes. KYC is often considered part of the broader AML framework.
There are three key components to Australia’s KYC process.
CIP is aimed at ensuring that customers are who they claim to be by verifying the customer’s identity with a combination of documentary and database verifications. The key elements involved in verifying the customer’s identity include name, date of birth and address. In the case of corporate entities, CIP checks focus on the company’s full name, registration status with ASIC and Australian Company Number (ACN).
This refers to specific processes aimed at assessing customer risk. Simplified due diligence applies to low-risk transactions involving customers with known fund sources. Transactions involving large sums of money or individuals from countries with a high risk of money laundering may be subject to enhanced due diligence with additional checks.
Other examples of customers who may fall into a high-risk profile include people in positions of political power, people engaged in professions notorious for money laundering and those with a high net worth.
Ongoing due diligence procedures involve systematically reviewing transactions and accounts for the level of risk linked to financial crimes. To achieve this, organizations must maintain records of customer identification and transactions. This allows businesses to identify any deviations from activity, usage patterns, changes in status, etc. that warrant additional investigation.
The Australian Transaction Reports and Analysis Centre (AUSTRAC) is responsible for KYC and AML regulations in Australia. AUSTRAC was established in 1989 under the Financial Transaction Reports Act 1988. All businesses offering certain designated services in Australia must be registered with AUSTRAC.
There are 2 Acts governing KYC regulations in Australia. These are:
The AML/CFT Act 2006 outlines expectations, regulations, and penalties for non-compliance to combat money laundering and terrorism financing in Australia.
Australia’s Privacy Act covers the collection and verification of all personal information during customer identity verification processes.
Other important financial regulators in Australia are:
Document verification is a popular form of KYC verification. Along with entering details in a form, customers may be asked to provide a document verifying the information. Documents that may be used for KYC verification include:
Businesses in Australia are increasingly turning towards technology to streamline the KYC processes. After all, while identity verification is a necessity, slow processing can interfere with customer onboarding and limit company profits.
Automation is emerging as a popular solution. Rather than manually check details to verify identities, automated identity verification tools can be integrated with onboarding forms and checkout processes. This simplifies the process and delivers almost real-time results.
For example, address verification tools can be integrated with onboarding forms to extract relevant information from the form, compare it to data in reliable third-party databases and deliver a verdict on whether it is existing, deliverable, connected to the person named and complete within seconds.
AI and ML-driven tools are playing an important role in simplifying KYC processes. Tools leveraging AI are capable of handling vast amounts of data to detect anomalies and complex patterns indicative of fraudulent activity. By studying user activity patterns, it can help determine risk profiles more accurately while reducing the risk of false positives.
In addition to verifying identities through documentation, many businesses are also incorporating biometric authentication as an additional KYC layer. This is aimed at minimizing the use of stolen identities. For example, when creating an account, customers may need to upload a selfie of themselves holding a picture of the document submitted. This prevents impersonation and acts as a liveness check.
For Australian financial institutions, cryptocurrency exchanges, banks, bullion dealers, etc. KYC is mandatory. Failing to comply with regulations could even result in the company registration being suspended or cancelled.
On the other hand, implementing strict KYC policies minimizes the risk of fraud, protects the company's reputation, streamlines customer interactions and helps earn their trust. Leveraging technology to automate identity verification makes KYC compliance much easier. It’s not surprising to note that, even though it is optional, many Australian non-financial businesses are working on building stronger KYC strategies.