The Role of Re-KYC Process in AML Compliance

Last Updated on Nov 13 , 2024, 2k Views

Anti Money Laundering

KYC is a critical AML compliance requirement for regulated entities in the UAE. It lets you know your customers better and gauge the risks associated with their transactions. Nowadays, authorities are also stressing on the need for re-KYC of customers to keep track of updated information. Let us learn the role of Re-KYC process in AML compliance and strengthen our defences against money laundering and terrorist financing.

What is Re-KYC?

KYC must not be a one-time event. As customers’ details and regulations change, you must also update these data points in your database. That is why re-KYC of customers is essential. Re-KYC means periodic updates of the customers’ KYC details.

For a smooth conduct of the re-KYC process, you must invest your time, effort, and money in it. Recollect the information on customers, verify them, and add them to your database. This must lead to accurate and up-to-date details on all your customers. You also need to carry out sanctions screening and customer risk assessment to classify customers into low-risk, medium-risk, and high-risk customers and apply suitable countermeasures to fight against the risks they pose.

Why is re-KYC of customers essential?

Re-KYC of customers is essential for every regulated entity for the following reasons:

AML/CFT policy and procedures

AML/CFT policy and procedures mandate the KYC refresh. Depending upon the local rules and regulations and the risk-based approach adopted by the regulated entity, the schedule for periodic review is predecided and triggered. For example, the organisation may have a policy to conduct re-KYC every year for high-risk customers, once every two years for medium-risk customers, and once every three years for low-risk customers.

Industry transformations

Post-COVID, business models have significantly changed. Some of the old industries do not exist anymore or have undergone significant changes. The associated ML/TF risks have changed. Re-KYC helps understand customer profiles in the changed context, align risks, and take appropriate countermeasures to fight ML/TF.

Change in customer profile

Like fluctuations in your business, your client’s business or profile also witnesses changes. For example, they expand to a new territory, add a new product or service line in their offerings, have new owners, change the source of funds, or something else. These types of deviations in your clients change their risk profiles. To incorporate the amendments in their risk profiles, you must conduct a re-KYC of customers.

Internal shifts

Your business is unique, with its own set of requirements, business models, objectives, capabilities, and procedures. Based on these factors, you also define your risk appetite to tolerate money laundering risks. Any internal shifts in these factors lead to a change in your risk appetite. This leads to changes in your AML measures and compliance policies. In such situations, re-KYC of customers is essential.

Regulatory amendments

To keep up with the regulatory changes, you may be required to gather additional information about customers. Re-KYC helps gather that information and comply with legal requirements.

FATF Greylisting of a country

If a country is greylisted, you need to take a risk-based approach and require your customers to furnish additional information as to the source of funds and source of wealth. Re-KYC helps you do that.

FATF Black listing of a country

If a country is blacklisted, you need more information about your customers in high-risk jurisdictions, and hence Re-KYC or KYC refresh is required.

Due to all these reasons, it becomes essential for regulated entities to conduct the re-KYC process. Whether you conduct it twice a year or once every two years, the aim is to have updated information. Such up-to-date and accurate data facilitates the correct risk profiling of the customer. Based on this, you can take a risk-based approach for further AML compliance initiatives. Thus, you can prevent money laundering and terrorism financing activities.

Another benefit of the KYC process is a better understanding of your customers. You can tailor your services to their needs to improve customer satisfaction. Thus, you can also enhance your customer relationships with the re-KYC of customers.

Steps of the re-KYC process

You have the reasons and benefits of the re-KYC process. But what are the steps of conducting this process?

The re-KYC process involves the following steps:

Step 1: Client communication

The first step of the re-KYC process is letting your customers know you will conduct KYC again. Communicate to them the reasons for this exercise and its importance. Inform them about the documents you will need for re-KYC.

Step 2: Information collection

Once you have identified the customers for whom you want to repeat the KYC process, list the necessary details. You might need some past information as well as dig some new details. Collect all those data points from customers.

Step 3: Information verification

In the next step, verify all the customer details with the necessary documents received from them. You must ask them for proof of identity and address, beneficial ownership, sources of funds, payment methods used, and other necessary documents. Match the details submitted by clients with these documents.

Step 4: Screening

Screen your customers against lists of sanctions, terrorists, watchlists, PEPs, or any other local and international list of criminals. Moreover, check for adverse media or social media mentions of crime-related activities.

Step 5: Risk Assessment

Assess each bit of information on your customers. Examine every slight suspicion you have about them based on their behaviour, transactions, and profile changes. Based on these results of such analysis, update their risk profile. Keep an eye on those customers whose risks have increased.

Best practices in re-KYC of customers

For the smooth and accurate performance of the re-KYC process, avoid making the most common errors. You can imbibe the following best practices for successful re-KYC process and quality outcomes:

Establish Re-KYC procedures

AML compliance is not an easy journey. You have to manage quite a few procedures to ensure you comply with all the requirements. KYC is one such procedure. It helps you better know your customers to prevent or mitigate their risks. So, give it the importance it deserves.

Define a strategy for conducting re-KYC of customers. Mention the steps. List the timelines, resources required, and budget for the re-KYC process. Also, define the potential challenges you might face in this process, like customers’ disagreement, and the steps to deal with them. Such a strategy enables a seamless process.

Implement KYC software

KYC is a lengthy process. If you do it manually, it takes a lot of time. Also, it requires special skills to manage this exercise without errors and hassles. So, you need to spend money on hiring skilled staff as well. Also, the manual process has increased the chances of errors. All these can affect your re-KYC process.

So, the best solution to all these problems is automating the re-KYC process. Such a solution will lead to accurate results, faster processes, and customer ease. Also, these KYC solutions raise an alert when they detect an anomaly, suspicion, or shift from the usual behaviour. Thus, you are better equipped to fight money laundering risks.

Take a risk-based approach

AML compliance is all about a risk-based approach. You have to decide the next action based on your customers’ risk levels. The same is the case with re-KYC. For high-risk customers, the frequency of re-KYC is higher. So, you must know whether your customer is high or low risk and when you last conducted their KYC.

So, if the customer is high risk, conduct a re-KYC frequently. If the risk is low, postpone it for later. Thus, you can decide the frequency and depth of your KYC procedures.

Customer communication is key

Inform your customers about the re-KYC process. They must be aware of the purpose of such data collection and document verification. It is also a good practice to obtain their consent to this exercise. Inform them about the documents needed, the time taken, and other necessary details. Constant communication from your side facilitates better relationships with customers. Since it will be a disturbing and problematic exercise for your customers, explain its significance to them.

Allocate proper resources

Re-KYC is not an administrative process. It is not a scheduled thing that you do away with by just following the steps. It needs your complete dedication and sincerity. It will help you stay away from risky customers and transactions. Thus, it is a part of your business’s risk prevention and mitigation plan.

So, you must give it much importance. Don’t forget to allocate skilful resources, a reasonable budget, and specific timelines to this exercise. Also, ensure that you do not destroy customer relationships while managing this procedure.

Ensure proper record-keeping

You must document every result and finding of the re-KYC process. Since you are analysing the client again and rebuilding the risk profile, the rationale behind it must be saved and secured. So, maintain proper records of each data point on the customer. Save the documents. These records help you during audits or investigations by regulatory authorities.

These six effective approaches can help you with a successful re-KYC process. Ensure that you imbibe them and follow the step-by-step journey. Do not forget to conduct a re-KYC of customers to be doubly sure of their risks to your business. Only with such re-KYC and due diligence can you strengthen your AML measures.

The Role of Re-KYC Process in AML Compliance