Organizations dealing with payments are continually exposed to financial crime risk. However, genuinely understanding your customers can significantly reduce this risk. As you establish your business, it is crucial to invest in a high-quality customer identification program (CIP) and know your customer (KYC) processes to enhance the safety of your operations.
Financial organizations must adopt a comprehensive CIP and KYC program for effective compliance with anti-money laundering (AML) regulations, as these two processes are closely intertwined. The KYC procedure is carried out in accordance with CIP rules to ensure customer compliance. Criminals seeking to launder money often initiate illicit activities by opening accounts within financial organizations. By implementing regulatory checks, organizations can effectively prevent such financial crimes. CIP and KYC are two essential processes financial organizations employ to adhere to the government’s legal regulations.
This blog explores the differences between CIP and KYC, highlights their interconnectedness, and sheds light on their roles within financial organizations. By understanding these processes, organizations can better equip themselves to mitigate risks, protect against financial crimes, and ensure regulatory compliance.
CIP is an obligatory requirement for financial organizations to verify the information related to Us operating financial organizations. At the same time, KYC refers to a process used by financial organizations worldwide to verify a consumer’s identity before transactions begin. KYC comprises customer due diligence, a customer identification program, and ongoing monitoring.
In short, KYC procedures verify the customer’s identity, including all the CIP elements that must be fulfilled by customer due diligence and other ongoing processes. These procedures ensure financial organizations identify who their customers are, To follow reasonable procedures to verify their identities, assess their trustworthiness, and continue monitoring their behavior for any warning signs of malicious or fraudulent activity.
Financial organizations use customer identification programs (CIP) to implement the KYC verification process. The Bank Secrecy Act (1970) officially stated that financial organizations must maintain an internal CIP Program to help the government prevent money laundering.
According to the US Patriot Act of 2001, financial institutions must comply with heightened verification and reporting obligations. This act standardized the customer identification program (CIP) regulations for banks, savings and loans, and credit unions. As a result, if you intend to buy real estate for your business, you must undergo the same level of verification as when opening a bank account or applying for a loan.
Banks and different monetary companies have CIP verification software primarily based on size, customers, and location. Customer identification programs for id verification vary from bank to bank. For the implementation of the CIP rule, there are a few factors that every bank considers:
- The types of accounts the bank offers
- Types of information
- Different available methods of bank opening
In the US, every bank must have a CIP program to prevent financial crimes. CIP aims to verify a customer’s identity for good customer compliance effectively.
There are a few steps involved in CIP procedure which are as follows:
Data Collection: Banks must collect, at a minimum, the name, date of birth, address, and social security number. They also require additional documents, i.e., photographic identification attached with documentation identification.
Verification: Banks verify the customer’s identity by comparing against third-party databases, biometric verification, and identity assurance procedures.
Record Authorization: Banks must store and compare the customer against government databases to determine criminal activity.
Record-Keeping: Banks must document all the procedures for document verification and authorization.
Record Retention: Banks must store all the previous history of data after the accounts are closed.
Customer Notice: Banks must notify the customers about their document verification and identification processes.
A few steps are involved in the CIP verification process:
Name: The customer must provide their full name.
Date of Birth: The customer must provide their date and year of birth.
Address: Businesses must provide a primary office address, and individuals must provide their home address.
Identification number: In this case, the tax registration number applies. The business must handle this information as follows.
Verify: Sometimes, taking information at face value is not enough. The organization should verify the supporting documentation by reviewing it to ensure that they receive adequate answers.
Record: Information received by the organization should be documented.
Cheque: The bank should also review the government’s terrorism lists to ensure it is not cooperating with criminals.
Watches: In some cases, the bank may conduct additional research. The bank may look at the records again if, for example, someone makes a risky transaction.
In accordance with regulations made under the Patriot Act (2001) in the US, banks and other financial organizations use KYC and CIP processes. CIP is a customer identification program that includes the essential collection and verification of documents a financial organization or bank provides. In contrast, KYC is a broader term that involves the analysis of customers’ identification by analyzing their past and current business prospects before allowing the customer to open an account. CIP works under the KYC process in banks. Kyc procedures can automate KYC/CIP programs and approve up to 98% of customers by satisfying compliance, making onboarding easy for financial organizations.