How to get started with implementing KYC: Ten steps and best practices

Implementing Know Your Customer (KYC) procedures is essential for businesses operating in industries with products that are more likely to be used for financial crime, trading in countries and areas with sanctions, counterparties that increase the financial crime risk, or companies there regulated by AML / CTF regulation. KYC helps prevent financial crimes, protect the company's reputation, and ensure compliance with regulatory standards. 

If you're looking to get started with KYC, here are ten steps to guide you through the process.

Step 1: Understand regulatory requirements and your own risk

The first step in implementing KYC is to understand the regulatory requirements relevant to your industry and region. Different countries have varying regulations concerning KYC and anti-money laundering (AML) practices. Research the specific laws and guidelines that apply to your business. This understanding will help you design a KYC process that meets legal standards and avoids potential fines or penalties.

As a non-regulated company, it is very helpful to implement KYC using regulatory principles. This ensures that you meet the expected standards from your counterparties and makes it easier to explain it to them. It also increases the likelihood of designing an effective KYC process.

Another key component of this first step is that you need to understand what risk you are trying to mitigate before you design your policy. The best approach would be a Risk Assessment, where you would systematically identify, evaluate and manage risks that are likely for your business - in particular, the ones that would be potentially hazardous or negatively impact your organization.

Step 2: Define your KYC framework and policies

Once you are familiar with the regulatory requirements, the next step is to define your KYC framework and policies. 

A KYC framework is based on various levels of documentation. The starting point for the Framework is the Financial Crime Risk Assessment, which we have referenced in the previous step. If it hadn’t been completed yet, then it should be done first to identify the inherent risks that the company is exposed to and must mitigate. Based on the risk assessment, then a number of policies will be created which outline how the risks must be mitigated, and the roles and responsibilities which define who should do what across the organization. The procedures, guides, and templates are the practical implementation that make up this framework of how to comply with the company’s Kyc and financial crime prevention program. 

Your KYC policy should outline the objectives, scope, and requirements for KYC, screening, and assessing the counterparty risk. It should also detail the roles and responsibilities of employees involved in the KYC process. A well-defined policy serves as a blueprint for your KYC implementation and ensures consistency across your organization.

Step 3: Design the KYC process

Designing the KYC process involves mapping out the steps your company will take to verify customer identities and monitor their activities. This process typically includes:

  1. Data collection: Procedures for collecting and verifying your counterparty’s information, such as name, address, date of birth, and identification documents.
  2. Data Review and Risk Assessment: Using the collected KYC data, review and assess the risk level of your counterparties - based on factors like their business activities, geographical location, and transaction patterns.
  3. Enhanced Due Diligence (EDD): Additional scrutiny for high-risk customers, including politically exposed persons (PEPs) and clients from high-risk jurisdictions.
  4. Ongoing Monitoring / Perpetual KYC: Continuously monitoring customer transactions to detect and report suspicious activities.

Most companies will also build the sanctions, PEP, and adverse media screening into the KYC process. An effective screening process depends on quality KYC data, and the screening result is important for the counterparty risk assessment. 

Step 4: Select and implement the tool / technology that best supports your KYC needs

Implementing KYC manually can be time-consuming and prone to errors. Selecting the right technology solutions can streamline the process and enhance accuracy. Look for KYC software that offers features like automated data collection, identity verification, risk assessment, and transaction monitoring. Ensure that the technology is scalable and compliant with relevant regulations.

A tool should also make it easier to design your KYC process (step 3) since it should come with helpful workflows. 

Step 5: Train and educate your team

Effective KYC implementation requires knowledgeable and vigilant staff. Provide comprehensive training to employees involved in the KYC process. Training should cover the importance of KYC, regulatory requirements, your company’s KYC policy, and how to use the selected technology tools. Ensure that your staff is trained to recognize red flags and understand the reporting protocols. Regular training sessions should be conducted to keep staff updated on the latest trends and regulatory changes.

Step 6: Get started with your KYC as soon as you can

One of the most important of all the steps is to just get started. The previous steps are important as they provide you with the overall approach, strategy and procedure for your KYC, but all the planning in the world will not be useful if implementation is not started. So, we strongly recommend that as soon as you can, start collecting and verifying your counterparties’ information - and then assess and document their risk levels within your selected tool. 

Remember, even if the above steps seem very comprehensive, it is better to start small and mature as you gain more insight into your risk and process. The most effective control is the one that has been implemented.

Step 7: Clear Escalation Process with Identified Suspicious Activities

Part of an effective KYC process is the ability to detect, review and escalate suspicious activities, so establish clear internal processes for the reporting within your organization of such activities. Prompt and accurate analysis and escalation with concerning, suspicious or unusual behavior with your counterparties is crucial when it comes to compliance and preventing financial crimes.

Step 8: Maintain Accurate Records

Accurate record-keeping is a crucial aspect of KYC compliance. Ensure that all customer information and data are meticulously documented and securely stored. Maintaining thorough records not only helps in audits and regulatory reviews but also supports internal investigations and risk assessments. With the right tool and technology, it can serve as your reliable data management system to handle and protect these records, ensuring they are easily accessible when needed, while still meeting GDPR and other privacy requirements.

Step 9: Foster a Culture of Compliance

Creating a culture of compliance within your organization is essential for the success of your KYC program. This involves promoting awareness of the importance of KYC and AML regulations among all employees, not just those directly involved in the KYC process. Encourage ethical behavior and a proactive approach to identifying and mitigating risks. Leadership should set the tone by emphasizing the importance of compliance in all business activities. Regular internal communications, training, and incentives can help reinforce this culture and ensure everyone is committed to maintaining high standards of integrity.

Step 10: Review and Improve Your KYC Process

KYC implementation is an ongoing effort that requires regular review and improvement. Periodically audit your KYC processes to identify any gaps or inefficiencies. Solicit feedback from staff and customers to understand their experiences and make necessary adjustments. Stay informed about regulatory changes and industry best practices to keep your KYC procedures up-to-date and effective.

By following these ten steps, your company can establish a strong KYC framework that helps prevent financial crimes, protect your reputation and build trust with customers and stakeholders.

Relevant products

Avallone products and services that can help you

Immediate, secure and easy management of all your KYC efforts including built-in organization.
KYC Collector
Collect KYC - including information and documentation - from anyone outside of your organization.
KYC Responder
Quickly and easily respond to KYC questionnaires coming in from your counterparties - such as banks, law firms, auditors and more.