What is a KYC Check, and How Can You Ensure You’re Compliant?

A KYC check is an essential part of sending money to individuals, yet many people don’t even consider it when they’re choosing how to pay their workforce. In this article, we’ll dive into what KYC checks are for, how to work out if you need to be KYC compliant when you’re authorizing payments, and even how to run a KYC check yourself. 

If you don’t want to end up KYCing yourself (#sorrynotsorry) we recommend you keep on reading!

This post is part of our guide on how to pay contractors

What is a KYC check?  

KYC Stands for ‘Know Your Customer’, and a KYC check is a necessary step when transferring money to individuals to verify their identity before payments. You might find the acronym KYC used indistinguishably with AML, which stands for ‘Anti-Money Laundering‘.

In reality, AML is a set of laws and regulations that was initiated after 9/11 to combat terrorist financing, while KYC is an important check that is part of the AML regulations. .Financial institutions use both AML and KYC compliance to maintain secure financial institutions.

Who needs to run a KYC check?

Many people make the mistake of thinking that only financial institutions are required to comply with KYC checks. The truth is that if you pay people – you need to be thinking about a KYC check. That’s because banks and other financial institutions hand down KYC expectations to the businesses that they work with, and in today’s dynamic workforce, almost all businesses either make payments, or hire other companies to make payments on their behalf.

In short? Whether you are expecting the bank to take the responsibility for KYC when you utilize wire transfers, (and in doing so perhaps opening yourself up to the risks of fraud), or relying on a solution such as a broker/dealer, private payment platform, or FinTech startup to make your payments, you need to be sure that KYC has been considered from the get-go.

Your bank will probably have robust processes in place for KYC checks, but there’s no guarantee that your payment platform does, so it’s well worth asking ahead of time. At Fiverr Enterprise, we bake the KYC requirements into our standard process, so that you’re fully compliant when paying freelancers around the globe.

How hard is it to run your own KYC check?

A payment solution that takes KYC requirements off your plate could end up saving you more than just the time it takes to run a background check, especially post-COVID-19. LexisNexis found that the tangible costs of remaining compliant against financial risk increased 33% in 2020, alone, and that many businesses are struggling to balance compliance with keeping business continuity happening as usual. s

Details of the report showed: n:

  • 42% of companies are finding it hard to access customer identification documentation that would allow them to complete due diligence for KYC
  • 41% have had to delay the onboarding of new accounts and,
  • 38% say it’s taking them longer than expected to complete the KYC process for new accounts.

These problems add less tangible costs, too. It should come as no surprise that delaying payments can easily cause customers or workers to churn, finding services or work elsewhere. However, businesses have no option if the alternative is to remain non-compliant with AML laws.

Let’s get practical! How can you run a KYC check before you make a payment?

Want to take matters into your own hands? Since 9/11, and once again after the leak of the Panama Papers, the rules around KYC have become a whole lot stricter, especially when it comes to paying international individuals. Just in case you don’t make the Patriot Act part of your bedtime reading, let’s break down your requirements into the three stages of KYC.

Stage 1: Identification

The Customer Identification Program (CIP) makes sure that the customer really is who they say they are. This is where your company or its financial representative collects identifying information from the payee.

How do I run this part of the KYC check? 

For an individual, you could request their driver’s license, passport or ID card, while if you’re working with a third-party company or a freelancer who has their own business, you might need their business license or articles of incorporation. Once you’ve asked the user to upload this information, make sure to check it for any signs of tampering or fraud, which may not be immediately visible to the human eye.

Stage 2: Due Diligence

Now that you have verified the identity of your payee, you are required to assess their trustworthiness. This is known as Customer Due Diligence (CDD). There are three levels of customer due diligence: simplified, basic, and enhanced. The simplified checks are run for low-value transfers (low risk), while enhanced checks are used for high-risk transactions and include a deeper understanding of the individual’s activity. 

How do I run this part of the KYC check? 

In most cases, you will need to use a third party to obtain information on the individual’s location, occupation, type of transactions, pattern of activity (transaction types, dollar value, and frequency), etc. These parameters will help you assess the risk of the individual. Your company is also obligated to ​keep records of all the CDD and EDD performed on each individual.

Stage 3: Ongoing Monitoring 

The most rigorous expectations around KYC will be when you onboard a new customer or payee. However, that doesn’t mean that the requirements stop here. Anyone who makes payments needs to make sure they keep an eye on an ongoing basis, to make sure nothing out of the ordinary occurs.

How do I run this part of the KYC check?

You can’t have eyes everywhere, so it’s important to automate monitoring and analysis of all transactions, with an alert system set up according to an expected baseline and your previous risk assessment protocol. Remember, if any unusual activities are found, you’ll have a responsibility to fill out a Suspicious Activity Report, and to alert the authorities, including FinCEN.

Written by
Fiverr Enterprise


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