When we talk about financial institutions, we rightly picture a busy bank or an over-occupied insurance agency where the staff is extremely busy and the executives barely have time to meet their deadlines.
And it is because of this very reason, financial institutions are seen as easy targets by money launderers and fraudsters. Sure, financial institutions focus on the compliance front, but they also focus on the business aspects of the arrangement, which can shift their attention away from high-risk customers.
Since the KYC mandate and the European Union’s issuance of AML directives, the focus on customer identification has increased. This rampant increase in identity validation reduces the risk of onboarding high-risk profiles.
To put it simply, a customer identification process allows the financial institution to validate the real identities of a customer through a series of KYC procedures and segment the customer in accordance with their risk quotient.
Ever since financial institutions have incorporated the customer identification process (CIP) in some shape or form, especially in the U.S. because it is a requirement of the U.S. government, financial institutions have been able to build an invisible wall of fire, which helps them reject profiles that do not meet the financial and security requirements.
When a CIP is powerful enough, it can help you tell a good profile apart from the bad ones and vice versa.
The financial, lending, and banking industries embraced the perks of CIP as soon as the mandates were issued, and this future-first approach indicates that the financial ecosystem of the world’s economies is now stringent more than ever in its processes and can’t afford to be misused by fraudulent profiles pretending to be customers.
Customer identification is a massive subject. If you want to explore and learn more about the customer identification process, you can start here.
For contextual reasons, we will be focusing on the major reasons why financial institutions should not ignore CIP and how it benefits them.
So let’s get to it.
A powerful customer identification process allows you to streamline the onboarding process by obtaining the identity details of the incoming profile along with the proof of identification.
The obtained identity data must be verified against the government-authorized data lists to find relevant matches (For example, Social Security Administration or the IRS for TIN Matching).
Some additional identity verification investigations, such as OFAC watch list check, SDN (specially designated nationals) list, and more allow you to expand your due diligence.
All of these experiences can be included in just one step by obtaining the identities of the profile and checking their accuracy easily, eliminating repetitive checks.
2. Accelerated Risk Assessment
When the CIP is comprehensive enough to obtain all the required information about the incoming profile, risk assessment becomes a less daunting task.
Verifying the identities, validating the sources of identity proof, checking the legal standing status of the profile, and screening the financial background of the profile – all of these components will allow you to assess the risk of a profile, preventing you from onboarding profiles with an unreliable/high-risk background.
3. Customer Segmentation
The CIP protocol states that financial institutions must obtain enough basic information about the customer to validate the identities and establish a consensual business relationship with the customer.
However, when you enhance your CIP with due diligence checks and KYC mandates, your CIP methodology can even help boost the fraud-detection immunity of the institution.
This means when the incoming profiles have been screened and approved by your internal compliance teams, you must categorize the customer profiles in accordance with the risk they pose to your financial institution.
This further helps your teams to pay special attention to high-risk category profiles at all times and be prepared with timely measures should a breach occur.
4. Convenient Account Opening Experiences
With the rise of neo banking and digital lending, the digital account opening is now taking the front seat, pushing businesses to adopt hybrid account opening models. These digital experiences can be further enhanced with a mandatory customer identification process.
Digital experiences also give rise to the customization of the CIP in accordance with the user experience. This means your customers can provide the necessary identification details, proof, and digital authorizations through the virtual (yet secure) interfaces.
Customer identification is flexible enough to be incorporated into the digital world with ease. And if you have an identity verification powerhouse like Compliancely by your side, your CIP is basically giving you 10X the results you’ve been looking for, in terms of identity validation. Learn more
5. AML/ATF Compliance
One of the major concerns for financial institutions is the risk of onboarding profiles with a history of money laundering. Unfortunately, money launderers have evolved with time.
In order to hide from the validation scanners, launderers create a fool-proof identity, which on the surface, looks harmless and can be deemed low-risk by banks.
It’s when the profile has been onboarded and the account has been allotted, the profile engages in money laundering activities. This puts a significant risk on the banks and could damage the reputational assets of the entities.
What’s even worrisome is when the banks monitor the transactions of the account holder, they may even come across instances of terrorism financing, which is a complete breach of the bank-customer relationship, forcing the bank to freeze the accounts of the customer and submit the suspicious activity report to law enforcement officials.
A robust CIP will enable you to segment the high-risk profiles and simplify transaction monitoring, improving AML/ATF compliance and response. This, in turn, allows you to block customer profiles from further unlawful financial engagement and helps you stay compliant.
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